I’ve been tracking the Great Australian Housing Bubble for a decade and more but I have never before seen what is transpiring today. We are in a true volcanic blowoff now as pro-cyclical fiscal, monetary and population growth explode prices higher. The epicentre is Sydney and Melbourne:
Where fiscal incentives and a variety of state sponsored fiddles are are driving an huge investor blowoff:
APRA and the RBA are far behind the curve yet are too terrified to tighten. There is no chance of RBA rate hikes as the economy withers in the shadow of this huge mushroom cloud. Unemployment and inflation do not allow it. Macroprudential is coming but it is too late and regulatory timidity virtually ensures it will not be enough.
Adding to the extreme asset inflation is an unbelievable and unprecedented flood of immigrants into the two eastern cities:
There is absolutely no economic justification for the people flood. It is purely an attempt to back-fill the property price and construction bubble, ironically enough.
We all know these things. What is less clear is that all three drivers are acting pro-cyclically as they play out their last:
- tax concessions favouring property are destroying the prospects of Australian youth. The politics have turned as Labor has committed to end the rort;
- monetary policy has just three cuts left (according to the IMF) and half of those will be kept by the banks;
- immigration is under intense political assault as anger rises in the community. Sooner or later it will be cut.
These three levers traditionally act as counter-cyclical policy. But all three are working pro-cyclically as policy-makers desperately aim see off a mid-cycle mining bust that has far yet to run. This is very atypical for asset price booms, which usually transpire into rising interest rates that enable debt relief and deleveraging as policy is eased into the bust, such as happened in the US and Japan:
As the bubble rages, forgotten is that in a year or two, as domestic politics plays out and the next global shock arrives (as the Fed hikes rates), the three pro-cyclical drivers will converge on a simultaneous reversal.
If that happens, the triple hit will see the great blowoff collapse into a pyroclastic flow that excoriates the east coast economy.
