Australian property bubble on a scale like no other

Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs:

Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included:

 the record run up in commodity prices and subsequent correction;

 the associated boom in mining investment and current reversal;

 record low bond yields;

 the boom in housing construction, specifically apartments, that was spurred by the low interest rates.

Housing indicators in the bubble meter are at record highs but interest rates remain at record lows. Typically monetary policy is well into tightening mode at this stage in the housing cycle. A destabilizing housing burst (both in activity and prices) is a clear risk, particularly the longer the upswing runs.


The size of the Australian property bubble is old news. It’s extreme in valuation terms:

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Underpinned by world-beating household debt:


And nose-bleed levels of foreign borrowing:


What is less well understood is how such a large and sustained bubble has distorted the Australian political economy.  The bubble has been running for twenty years (which some argue proves it is no such thing) and every time it has been threatened it was saved by luck or a bailout which sold off a little more of Australia’s liberal democracy.

In 2003, the bubble first threatened to burst as the Reserve Bank raised interest rates. But the bubble was rescued by the combined forces of demand side fiscal stimulus for first home buyers in the form of large cash grants, and the arrival the Chinese commodity boom that flooded the economy with people and income. The government of the day learned its lesson and economic reform has been dead ever since!

In 2008, the bubble was jeopardised again when the pipeline of offshore debt froze solid and major Australian banks were rendered insolvent given they could not roll over their enormous foreign debts. The government of the day rode to their rescue with guarantees to all offshore funding, directly bought mortgage backed securities (which it still holds), unleashed the largest proportional fiscal stimulus in the world, doubled the first home buyer grants, opened the spigots on foreign investor buying, and other measures. Almost all of it violated existing financial sector architecture and governance and virtually none of it has been wound back. No housing market in the world enjoyed such wholesale and limitless support.

In 2011, the bubble again faltered when the China commodity boom returned and raised interest rates. But, when threatened, the bubble was bailed out, this time by a central bank that desperately cut interest rates to all-time lows because it had over-estimated the durability of the commodities boom, and an influx of Chinese capital that was allowed to price-out local buyers with barely a word of protest from regulatory authorities.

While those three saves of the bubble have been widely admired as solid Keynesian policy-making, and have allowed Australia to claim a “miracle” economic expansion of 25 years, they have also transformed its economy and political economy.

The Australian economy is now structurally uncompetitive as capital inflows persistently keep its currency too high, usually chasing land prices that ensure input costs are amazingly inflated as well. Unsurprisingly, Australian manufacturing’s share of outlook has collapsed to 5.8% of GDP (even before the exit of car manufacturing scheduled for the next 12 months) half that of the supposedly “hollowed out” US and UK economies, and on a par with the financial haven of Luxembourg. Wider tradables sectors have been hit hard as well and Australian exports are now a lousy 20% of GDP despite the largest mining boom in history.

The other major economic casualty has been multi-factor productivity. It has been virtually zero for fifteen years as capital was consistently and massively mis-allocated into unproductive assets. To grow at all today, the nation now runs chronic twin deficits with the current account at -4% and Budget deficit of -3% of GDP.

But the damage is in some ways even worse in the political economy. How have Australian authorities responded to this growing crisis? By egging it on.

Not only are they running unsustainable deficits into looming sovereign downgrades, they have sustained historically very high rates of immigration to attempt to back-fill and support property prices. These levels have been so aggressive in the major eastern cities, which are now projecting a near doubling of their populations within 40 years (from four-plus to eight million), that elections are now routinely won and lost on issues of choked infrastructure, and a vehemently anti-immigration movement is afoot in the polity. Younger generations are also boiling over with anger at being locked out of housing markets. A full half of first home buyers rely upon parents for equity and their numbers have collapsed to just 12% of total sales.

Five prime ministers in six years have come and gone as standards of living fall in part owing to massive immigration inappropriate to economic circumstances and other property-friendly policy. The most recent national election boiled down to a virtual referendum on real estate taxation subsidies. The victor, the conservative Coalition party, betrayed every market principle its possesses by mounting an extreme fear campaign against the Labor party’s proposal to remove negative gearing. This tax policy allows more than one million Australians to engage in a negative carry into property in the hope of capital gains. In a nation of just 24 million, 1.3 million Australians lose an average of $9k per annum on this strategy thanks to the tax break.

The campaign against tax reform was led by former head of Goldman Sachs Australia, Prime Minister Malcolm Turnbull, who is a large Australian property-holder, and Treasurer Scott Morrison, who is the former head of research at the Property Council of Australia, the nation’s leading realty lobby. Australia’s 225 politicians hold a combined property portfolio worth over $300m.

The property corruption has even undermined the nation’s strategic outlook. The large wave of Chinese immigrants and investors have been accompanied by a hard-edged soft power drive from Beijing that is sorely undermining Australia’s commitment to its traditional US alliance partner. Chinese bribery scandals have erupted in the parliament, usually from property-based sources, and have clearly perverted policy-making. So much so, that Australia’s defence and espionage agencies are in a rising panic that Australia is literally auctioning its strategic outlook to Chinese property speculators.

How could all of this happen without the media holding it to account? As the economy gets ever more reliant upon its great foreign-funded housing ponzi scheme, and the political economy wraps ever more tightly around it, Australian media has been engulfed as well. Aussie media is a duopoly divided between a conservative Murdoch press and liberal Fairfax press. But both are largely loss-making old media empires whose only major growth profit centres are the nation’s two largest real estate portals, and Domain. Thus neither reports real estate with any objective other than the further inflation of prices. Indeed newspaper (print and online) operations are nothing more than loss-leaders for over-excited real estate eyeballs. In the event that the Australian bubble were to pop then Australians will certainly be the last to know and the propaganda is so thick that they may never find out until they actually try to sell!

Before the year 2000, the Australian economy was a vibrant mix of world-leading productivity growth, liberalised tradable sectors balanced between commodities, services and manufacturing, solid household wealth, a reasonable external position, a clean public balance sheet and reliable institutions.

Today, it is a wildly imbalanced propertocracy with enormous offshore debts, a polity soaked by a Goebbels-like property propaganda machine, and a government run by realty carpet-baggers willing to sell their children to Chinese communists so long long as they pick up a three bedroom apartment along with little Johnny.

In a world replete with bubbles, rarely has one been quite so complete!

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. Excellent article. This has really opened my eyes. How much more can this go to keep property rolling on? Must be getting close to the end now.

      • Jumping jack flash


        Underrated post!

        The Government guaranteed debt bubble is not going to burst anytime soon.
        Too many powerful players depend on it continuing.

      • Jumping jack flash

        AB, we’re different here.
        Same, but different, don’t you know?

        Of course its a bubble, but it isn’t a housing bubble per se, it is a debt bubble. A bubble in money itself that started, arguably, when money became super cheap after the dotcom bust and the US spent their way out of that recession.

        The debt bubble is now our economy.
        We just use houses to facilitate it, because houses are the most expensive thing, and banks don’t mind securing loans against them.

        Houses also have some interesting properties such as infectious capital gains and unregulated subjective valuation that are very useful for pumping up their price for literally no reason other than the house next door sold for more because some debt junkie (shrewd investor!) was able to come up with a few extra grand over the asking price – because the money is just so cheap!

      • Eastern coast of Australia is different not only from the rest of the world but also “different” from NT, North QLD, WA, and the Gold Coast. Why? Because we have low interest rates!

        Everywhere else there are high interest rates?

    • @Russell yes we are at the end….when we have China exporting Ice amphetamine in quantities unheard of to our shores to rott our children, we have China exporting super opiates to our shores that can kill instantly a user – this reminds one of the opium wars where the British decayed Shanghai society through opium export and proliferation, we have China attacking and infiltrating our supposed secure Government data, we have China debasing our currency and endevouring to reduce confidence in our fiat money supply by counterfeiting our $50 notes in unheard of quantities….

      and we have here our elected politicians and corporate saviors like Gina Reinhardt gifted the wealth of this previously magnificent country by their forefathers who must be turning in their graves selling great swaths of our public infrastructure, 1/3 of of the Kidman Cattle enterprise without a thought to what is really happening on the ground to the very people who make this country what it is.

      We do not have a leader who thinks and implements a strategy for the betterment of society, only neoliberal sycophants who think of nothing else but personal and political gain.

      • TailorTrashMEMBER

        ” and endevouring to reduce confidence in our fiat money supply by counterfeiting our $50 notes in unheard of quantities”………how much of this is going on ? funny but I went into a Chinese grocery store in Westfield ,Hornsby the other day and was surprised to see a big notice about trying to use fake $50 bills ….and warning that police would be called if suspected …………maybe all those “tourists ” are bringing their own made in China money

      • Yes.

        Re the counterfeit $AUD50, well that’s a new one for me but not surprising at all from experience in the place where they are being made.

        Now this;

        The genius of it all is that in five years time when the first one seems likely to be deployed there won’t be an environmental problem with the fish. There won’t be any fish! Their breeding grounds in the area (formerly known as coral reefs) will have been paved over and filled in with cement and the fish in the SCS will have all gone. I know, having seen what’s going on from very close quarters.

        “I can’t have a clean environment, so I’ll ruin yours”.

      • heads up people the fake $50 dollar notes have proliferated in the centres of Gold Coast, Brisbane, Sydney and Melbourne – the centres of China investment. I was talking to a coin dealer from the Gold Coast and very alarmed…..

        The RBA is panicked thus the release of the $5 dollar note, but too little too late – way too little.

        For those wise enough to read, the two main ways to undermine / attack an economy is to counterfeit the currency and cause a catastrophic loss in confidence of the money supply and the ability of the government or government proxy such as the RBA to provide this and you attack the health of the population – drugs and addiction. The Opium Wars of China is THE example of the last century and the British who employed these very methods on the Chinese people of the time who suffered greatly, and as a direct result in part contributed to the revolutionary movement there.

        The China exacts its revenge on the British colony Australia, and yes it is revenge of actions not forgotten from the British imperialists on the long suffering Chinese peasants who were the one’s to suffer most – the poorest and least able and most afflicted to addiction……meanwhile our politicians stand aside and whatch it unfold oblivious to the ROOT causes and effects of actions such as these on our population…..our governance is broken.

      • “undermine / attack an economy is to counterfeit the currency and cause a catastrophic loss in confidence of the money supply and the ability of the government or government proxy such as the RBA to provide this”

        While I don’t doubt this, TM, it is also worth remembering that the largest denomination of Chinese currency is the 100 yuan note (roughly equivalent to our $20 note) because money counterfeiting is a huge problem in China too.

      • blacktwin997MEMBER

        Maybe the counterfeit note problem might be another sensible driver for the AML/CTF second tranche? Who could legitimately object?

      • I’ll second your counterfeit $50 note problem TM. One of the Chinese places I eat at regularly on the GC has a few on the counter and they are pretty hard to detect. Chinese customers are the culprits the owner (Chinese) reckons.

    • “Must be getting close to the end now”…….

      Yes you’d think so, but we’ve been saying that for a while now. There are a few things that might keep it afloat for years to come….. low IR are one, Low(ish) UE numbers are another…. add huge population increases plus the biggest one of all, Aussies OBSESSION with all things real estate, and who knows? Oh, and also the willingness of interested parties to keep the whole thing going.

      • Turn
        The big driver e low rates is the FED and ECB printing in vast quantity. I don’t believe they will stop any time soon. As long as we have access to cheap offshore funds this thing will go on (in my view)

    • Yes, a great article but the longer we go, and the bigger the bubble grows, I can’t see an end. I could see more of an end when the bubble was only half the size it is now, back in the GFC days of 2008/9. How wrong I was.

      The problem now is that most young people are not so much enraged, as resigned. They know they are priced out of the property market (without help from wealthy parents) but they don’t realise that the whole bubble is entirely due to government policies on both sides. They don’t realise just how shafted they really are.

      And now we are in the most ridiculous situation where a $1M property is considered perfectly normal. In Sydney, it is downright cheap – you wouldn’t expect to get anything decent in a good area for less than $2M. Absurd.

  2. Absolutely agree and a great summation, but “Goebbels-like”? Bit off colour.

    This deserves to be read and debated far and wide, but this kind of rhetoric makes it too easy to dismiss out of hand for those who don’t want this kind of thing discussed.

    • GunnamattaMEMBER

      Goebbels like sums it up nicely for mine.

      You have a look around the Australian media – where else in the world will your weekend commercial news bring you the auction results complete with ‘best buy’ and ‘highest price’ or endless mortgage adverts?, where else in the world is commercial radio such an endless sea of ‘never been a better time to buy’ sentiments?, and where is in the world – running straight to HnHs point – does the local print media – both parts [News & Fairfax) run as an essentially loss leader type operation, and reliant on whoever is stumping up the cash – have such an inability to discuss real estate in the context of the wider economy?………..particularly its central role in sucking in foreign demand for exposure to Australian capital yield to pin the competing Australian sectors to the roof, its centrality as Australia’s prime money laundering environment for offshore corruption beneficiaries, and its centrality to defrauding future Australians while enabling a significant chunk of mainly older Australians to feel wealthy in an economy without sliding under the waves? Where else is real estate, and talking about the implications of it, such a ‘no go’ area for politicians? (would that be possible without the media functioning essentially as the marketing arm of the politico-housing complex?)

      Great read HnH..

      • The article above puts the presentation by ScoMo at the Lowy Institute into the right perspective:

        “In his third and final post-election headland speech, to be delivered at the Lowy Institute in Sydney on Friday, Mr Morrison will argue Australia has built its wealth on the back of freer trade and that, for two centuries, it has relied on the influx of foreign capital to fund domestic investment and grow the overall size of the economy. At the same time, the nation’s targeted immigration program has been a prime driver of population growth and, therefore, economic growth, while the “composition of our immigration intake has been equally important*. Our immigration program sets itself apart from other countries, as it is built on attracting people and families to Australia who want and are able to make a contribution**, rather than take one”.”

        *) i.e. cashed up Chinese or any other property buyers
        **) i.e. buy a house

    • Failed Baby BoomerMEMBER

      Yes, great read! Thanks for this essay.
      It is a masterful description and summary on the history and causes of the current Australian Propertyocracy Elite Class and Property-Economy-Media distortion and corruption.

  3. It’s interesting to see in towns on the mid north coast of NSW how house prices have risen to the top of what a local wages can support. Retail seems to be the first casualty as people cut back to afford the mortgage, with for lease signs everywhere on the high streets. Surely this is the canary in the mine?

    • Yes and how high is the youth unemployment rate in central and mid north NSW coast? Nevermind that though this can keep going on for a long time yet. Baby boomers are just starting to slowly retire. Bus-loads of tourists looking for places to buy. Only real requirement is it is cheaper that back home and there is clean air. Nothing stopping it for the foreseeable future.

      • Jumping jack flash

        Indeed, I live in northern NSW and far enough away from the coast so there is virtually no tourism.
        It is a retail wasteland.

        If the factory I work at ever shut down, there’d be all sorts of chaos.

    • There is also the impact of edge of town big box and category killer retail and shopping centres that are killing the old main street strip centres in the larger towns.

    • I’ve been making the same claim for several years (and I’m finally proven right)
      The “For Lease” or “closiing down sale!” signs on businesses in Melbourne have been slowly building and are surely reaching critical point.
      Chapel St which is or was a complete premium retail zone has anywhere from 30 to 60 empty stores along it’s path any given day of the week. There’s one small section with about 10 shops, of which 6 are empty.

      Commercial rent too high, wages (arguably) too high, goods can be imported from ebay, not enough sales and it’s a self perpetuating thing. Retail is getting smashed, small business is getting smashed.

      But hey! House prices are up, awesome.
      Fuck these governments.

  4. The bubble is beyond scary now , out where I live which is nowhere special prices seem to have doubled in last 18 months .
    Shit houses going for $800k, ones you could walks and and start living without spending $100k on renovations are $1.5m

    Then you look at CBA balance sheet and that thing is now close to $1Trillion

    Too big to fail and too big to save . When the next shock comes

    We are truly fucked !

    • Why is that surprising? Average income couple (60k each) could easily get 750k-790k loan, provided they lie about the purpose of purchase as investment (assuming $400/wk rent).

  5. It is a bubble that has made many hard nosed analysts look stupid. But will soon impoverish millions of FOMO numpties.

    • Soon meaning what exactly?
      This is the mother of all bubbles and it is well designed and excited by the government (both major parties) and its agents starting from RBA down to media, real estate, construction companies. The lot
      I don’t think it is soon, if ever this bubble is going to go, it has been in the making for many years and will not disappear that quickly

      • The bigger the bubble – the longer it takes to inflate. It makes sense that the largest bubble of all time has taken the longest.

        How long it takes to inflate has no bearing on how long it will take to deflate. There are only two options – let the air back out the way it came in and slowly deflate it. Or prick it and see it pop.

        There is absolutely no way we can reverse this bubble in a controlled fashion. The only options is to prick it.

        All bubbles collapse at the same speed when they are burst – instantly.

        This bubble will collapse faster than any other in history.


  6. reusachtigeMEMBER

    LOLOLOLOLOLOLOLOLOL! I can’t stop LOLing!!! Another loser jumps on the bubble propaganda, a bubble that’s never happened and never will. This is Aussie mate and housing only ever booms. Idiots gonna be idiots. Funny thing is the people using fancy math all the time to prove a bubble actually think they are smart but in reality they are dumb ugly scum who’ve just made the wrong choices in life and now want to bring everyone else down to their lost level. Sorry pals but there’s too many smart good lookers to fall for that! Boom times ahead for us property investors!

    • LOL! Couldn’t contain my laughter. Now I’m getting strange looks from the other passengers on my overcrowded train as we zoom past over priced townhouses, mcmansions and units (which are growing like topsy, BTW).

    • if you run for PM you have my vote. If not smartest we definitely will have the best looking PM in the world.

    • What I want to know Reus, is when this mother ends in whatever fashion, let’s say, with a bang, not a whimper, will you lay your spruiker persona to rest and party down with the rest of us?

      • If it bursts it will simply become a buying opportunity for smart sexy investers like Reusa. If it becomes everything we all expect it to be, only then could I see Reusa possibley changing his avatar.

    • And Reusa, you have been right longer than the rest of us.

      I’m really worn out waiting for the inevitable. Who knew that illlogic could deify the fundementals of maths for so long.

      • lol, you wonder why users around these parts wonder whether they’ve been banned, posts being deleted or just getting caught in the spam filter when you pull shit like this. You could at least do the courtesy of removing the content of my post and saying as such (so I know), though hardly see how posting a link once in a while is self promotion when it is specific to the discussion.

      • I know that place, likely bought for $300k 5 yrs ago, before the reno.
        those places are tiny.

      • I thought that 700-800k would have been the range, even then a stupid price but that’s what has been happening in Newcastle. But 1.725M LOL… It’s close to the Ocean but there is no ocean views. It’s just a weatherboard house. I was even going to go and inspect it when it was for sale.

        I would have been off the mark by about 1M LOL.

        Not sure who in Newcastle has that sort of cash…

    • Not only did the last seller lose plenty on the hammer price, they lost $66,500 in stamp duty and a further $25,000 or more on agents fees. Nice work dumb ass.

      • DomainFax wont’ highlight any of the losers in the property game, only the winners. That’s why we always see the folks who sold for $300k above reserve or the folks who made a motza, not the ugly folks who lose out trying to flip an acquisition a year later. Just like the Gambler who talks about their winnings and hides their losses.

      • And another ~80K on work done, electrics etc.

        The sales price in 1979 was 30K. The RBA inflation calculator puts that at 135K in 2015 dollars: 350%, or 4.3% annual inflation.

  7. House price-rent ratio is truly scary. If you listed this ‘investment’ on the stock exchange, it would get smashed. But as there is no self correcting mechanism with residential property (no short selling to correct prices) money will continue to be misallocated.

    Compare it to say the recent Viva Energy Petrol Stations REIT: (compare it to any other REIT in fact)

    Yield: ~5.5% vs <3%
    Gearing: 35% vs 80%
    Diversity: 425 properties vs 1
    rent: guaranteed 3% increases vs ?
    WALE: 15yrs vs typically 1yr

  8. Who has done more damage to Australian households over the past 20 years… spruikers who’ve said that prices are cheap, encouraging people to buy or those who’ve said Australian housing is in a bubble discouraging people from buying?

    • reusachtigeMEMBER

      Best looking comment ever! No one more deserves to be thrown in gaol than that “Don’t buy now” scumbag who deprived so many idiots from the joys of buying their own home, a home in which if they sold now they could probably retire on the profits. Put him in a cell with that Steve Keen faker, they’d make great cell-mates.

      The problem on this blog is that it has been infiltrated by too many communist pinkos disguised as “people that care” but they are actually extremely anti-profit and anti-making the most of the rules to get ahead. They want EVERYONE to be losers, they really do. That’s the problem with communism.

    • I don’t wonder. This site runs the most singularly liberal comments policy on earth next to ZH. You’ve got to be pretty nuts to get the chop. Your post is welcome back without the self-promotion but I’m not sure why it is my job to edit it for you.

      I should warn as well that your notion that bubbles are only bubbles if they burst was once the mantra of Alan Greenspan before he was thoroughly discredited so you’re not exactly painting yourself in glory.

      I’ve done you a favour.

    • IMO it’s actually (c), those who have made the spruikers “right” – RBA, APRA, Governments, FIRB, ATO, Banks, Developers, Mortgage Brokers, Real Estate Agents, Media, illegal and legal Foreign Buyers, investors who withhold rentals from the market, citizens who bought with debt for > 3x hh income, citizens who “got in” before the each new round of increasing unaffordability and reckon they’re the sh!t & alright now Jack, etc (too long to list everyone!). The “complete” bubble comment nails it.

  9. “The campaign against tax reform was led by former head of Goldman Sachs Australia, Prime Minister Malcolm Turnbull, who is a large Australian property-holder, and Treasurer Scott Morrison, who is the former head of research at the Property Council of Australia, the nation’s leading realty lobby. Australia’s 225 politicians hold a combined property portfolio worth over $300m.”
    Reusa must have wet himself when he read that!

  10. What is your definition of a bubble HnH (in a sentence or two) and how do you differntiate it from overpriced / expensive markets?

    When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely – at which point the bubble “bursts”. – Financial Times

    A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest. The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments. – Investopedia

    A bubble is an upward price movement over an extended period of fifteen to forty months that then implodes. – Charles Kindleberger

    • My view is: “..analysts, economists, bloggers, property commentators and perma-bears can rave on all they like about a housing bubble in Australia, but the proof of having had one will be when and if it bursts.”

    • One can’t compare normal economic cycling (without .gov intervention) and resuscitated cycle on a life support machine
      Aussie re overinflation will be taught at unis as a model.
      A perfect example of a play on greed (everyone landlord), stupidity (everyone think they’re smart investors because of longer re cycle), short-sightedness ($1mil is huuuuuuge money in low IR environment and unserviceability in normal inflation) and so on.
      For someone to buy their home and spend 1mil on a less than average home/land size that needs 100k’s in renovation is utter idiocy as it leads to lifetime debt shackles. It cannot be repaid, it can only rely of someone paying more for it in the future.
      Buying it as an investment may be more sound as it involves calculated risk and relies on prospects of capital gain but as any investment, risk of bankruptcy is assumed.
      But a lot of people are buying a home, not an investment and

      • Is Sydney a bubble with a million dollar median house price? Perhaps. That is not the argument being made. HnH is saying that Australian property has been a bubble for 20 years (i.e. since 1996). I disagree.

        I can buy around 2 and a half median properties in Adelaide for a million dollars.

      • BB,

        you are generally right.
        A bubble is something one can only talk in past tense.

        Perhaps 20y was oversimplification and inclusion of the very beginning of an up-cycle that was set to blow-off in early 2000’s (which did not take place). Is 14 years (2002.) more palatable as the year when home prices noticeably departed from historic median and cyclic fluctuations?

        How does Adelaide historic median compare to current median?
        If most of the areas across the country have noticeable distance from historic median…

    • Those definitions are too broad.
      Bubble is actually a technical term where the current market price of the asset reflects expectations of future capital gains which aren’t supported by a realistic forecast of the assets cash flow – ie. capital gains depend on greater fools.
      So investing for CG’s isn’t the defining characteristic. The price of every asset held for sale will reflect some expectation of capital gain/loss. But when the expected CG does not tie back to a realistic forecast of growth in earnings that the next buyer can expect to get, and this CG is reflected in the current market price. Then you have a bubble.
      It is easy to spot before the fact in housing because rents always just plod along with GDP. It is harder to spot in stocks because there are more factors at play. In the mid 90’s Greenspan was reluctant to call the stock bubble as productivity and the profit share were both surging. So when rental yields fall to stupid levels and houses aren’t the safest or most liquid asset in the country, by process of elimination there has to be a bubble.
      Here is a better definition from Kindleberger
      “The bubble involves the purchase of an asset, usually real estate or
      a security, not because of the rate of return on the investment but in
      anticipation that the asset or security can be sold to someone else at an
      even higher price; the term ‘the greater fool’ has been used to suggest
      the last buyer was always counting on finding someone else to whom the
      stock or the condo apartment or the baseball cards could be sold”

      Once you define a bubble correctly, it becomes obvious that they have to burst – because a correction in CG expectations feeds back into the current market price and buyer demand drops off. imo a lot of bubbles wouldn’t happen if people actually knew what they were. That’s probably why they happen in housing so much – so many idiots

      • “capital gains depend on greater fools.” That’s a bit too simplistic. I think it’s more about the price of land in relation to congestion(population ponzi) . Restrict the first and unleash the second and suddenly you have too many people after the same piece of land. And as per Pfh007, cheap money is adding more fuel to the bonfire…

      • If it was about release of land and population growth prices would be supported by fundamentals. Rents would grow faster than incomes and prices would grow at the same rate as rents. High expected CG’s would be justified as rents would be expected to grow quickly. So it wouldn’t be a bubble.
        Bubble as nothing to do with fundamental factors or affordability. It is purely a demand side asset/investment story. It doesn’t matter how it’s financed either. Although it’s always financed with credit, agree with that.

      • A “bubble” is simply something that collapses if artificial supports are taken away, and the asking price then doesn’t reflect the lower true buyers price.

        Voting Labor in lower house to kill off negative gearing and CGT concessions and Hanson in senate to kill off the immigration ponzi *will* pop the property bubble.

      • None of those things are responsible for the bubble.
        NG and the CGT discount lower investors required return so they are a real fundamental support. The population ponzi effects the rental side of the equation so it’s a fundamental support as well.
        You guys are playing into the property lobby’s hands by continuously pointing to real fundamental supports as evidence for the bubble. They do mean higher prices, they don’t mean bubble. Focus on the lack of return in housing v other assets, the low yields, flat rents, share of investor loans, what investors are saying about buying for CG; these are the things which scream bubble.

      • This is a great post and should give pause to all the zealots here

        House prices are high because the global yield environment

        Returns are quite reasonable relative to bonds

        Prices may be mildly speculative but very rational considering Australia’s attitude to migration and urban planning and also given the implicit backstopping of prices by the government and the numerous policy options open to them to boost prices

        No bubble unfortunately, prices are a rational response to irrational or self interested policy and planning

      • Also people tend to forget two things:
        – that >50% of RE market are investors. That’s way too much and simply unbearable.
        – RE is pretty much illiquid asset. It’s only liquid when it’s a boom and it takes years to sell with discount in a falling and even stagnant market

        Also just remember how oil was more than $100 for few years and investors were saying there’s a deficit, more cars and planes need more gas, China, India, cost of extraction is too hight etc so there could be no crash only up and up. And then suddenly it turned out that oil cannot even return to $60 and that’s a new reality.

      • The Moron side of the Force is a pathway to many abilities some consider to be unnatural.

        Anyways, a bubble does not always require a burst. Japan’s house prices have been gradually declining over a quarter century. One can argue that their falling population altered the investment fundamentals. Does this mean Japan never had a bubble? I don’t think so.

        A bubble or not, you know you have a problem when a buyer has no realistic plan to pay off the mortgage without selling the collateral.

      • Coming,
        Not sure if that was a response to myself. But just to clarify I definitely think housing is a bubble, I just don’t think pointing to fundamental factors as evidence is the best way to make the case.
        NG, CGT discount, population growth, poor planning, low interest rates all affect the instrinsic value, but they don’t drive the bubble.
        It’s only a bubble if the asset trades well above the instrinsic value (which it does imo) because investors are extrapolating unrealistic CG’s.
        Here is how I would make that case:
        10y bond yield at today 2.24%

        Median house rental yield in:
        Box Hill Vic 1.6%
        Glen Waverley Vic 2.0%
        Mt Waverley Vic 1.9%
        Camberwell Vic 1.8%
        etc. etc.
        There are only 3 ways this is possible without there being a bubble:
        1) never seen before rental growth is priced into these
        2) Houses are more liquid than government bonds
        3) cash flows of houses are safer than government bonds.
        It’s such an obvious bubble that it’s up to the deniers to make one of these three cases. Talking about NG etc. is a distraction which plays into their hands.

    • Thinking through that definition also probably answers why this bubble hasn’t burst yet.
      Define bubble as too many “investors” not understanding what a bubble is (that is my definition now). Then the length of the bubble becomes a measure of stupidity and financial illiteracy in the market (among other things). This is worse than “irrational exuberance” it is a chronic idiocy where investors are not even aware of their expectations or how these effect prices.

      • Pretty good definition though the idiots would do themselves much less harm if ADI credit was not so readily extended to them.

      • Ah, let me guess…..

        Dad; If you borrow money from a bank to buy your dream home you pay 6%. If you borrow the same house directly from a rental agent you pay 2%. Which is better?

        Kid; 6%!!

        Dad; Well done, son. I am so proud of you.

  11. “Before the year 2000, the Australian economy was a vibrant mix of world-leading productivity growth, liberalised tradable sectors balanced between commodities, services and manufacturing, solid household wealth, a reasonable external position, a clean public balance sheet and reliable institutions.”

    Great article that we should send fair and wide!!! Just this…This statement re before 2000 is incorrect. To adopt it misses the core issues that generated the problem. As I’ve often opined this problem is 60 years old…roughly! A Current Account Deficit signals things about your economy – most often it tells you that the economy is becoming unbalanced. We have run a Current Account deficit for 57 years continuous except for 1971 where we had a SMALL surplus. The great ‘reforms’ of Hawke and Keating were actually necessary because of hte distortions already present. Rather than reform they simply made it possible, by ‘freeing up’ the financial system, for this whole schmozzle to grow to the monstrous nation destroying level we see today. Prior to Hawke/Keating Whitlam set in motion the creation of a government duplication monstrosity as well as laying the foundation for a loss of individual responsibility that had all sorts of implications for saving rates into the future. Fraser, McMahon, Snedden et al were just plain weak and unwilling to grasp the nettle in any way.
    Like everyone I guess I have other ‘differences. I don’t think ‘negative gearing’ is the fundamental problem. The fundamental issue is interest rates running continuously at negative RAT rates for multi-decades while, at the same time, borrowing to the hilt from foreigners and underwriting that borrowing and an over-valuation of the A$, by flogging the assets of the nation, mines, factories, land and now houses, to any foreigner who had a few dollars to throw in here.
    So it isn’t just ‘since 2000’ This has been going on for so long that the whole structure, of the nation and its society, has been wrecked.
    As so often emphasised by MB we have over-populated for the economic base. As a result we have created a non-productive society with populations crowded into Sydney and Melbourne who, on a macro scale, can do nothing but consume. Consumption is our God! The resulting debt and asset sales are the milestone we’ve hung around the necks of our children.

    • Why bag out Whitlam for spending but fail to bag Costello and Howard for the super rorts and private debt growth (which in turn feeds foreign debt through the current account deficit)?
      It’s like bagging the pink batts but not the VET rorts which are worse as at least most of the pink batts save some money on heating and cooling and have a payback, and kept people working and money cycling through the economy during the GFC.

      • Explorer I wasn’t deliberately ignoring the Howard/Costello fiasco. I’ve been critical of it before and remain so. I was just thinking back in time so idiotic policies like that adopted by Howard/Costello, Rudd/Swan/Henry and Gillard/Swan didn’t enter the area of my argument – which is that the basis of this mess lies way back in time. Over the decades, instead of reform, each ducked the problems resulting in ever increasing distortion.

        Fair to say also where we are at is a result of serious flaws in modern (well 60 years to my knowledge) economics. This is now starting to get a little air-space in some places but the academis clowns have built their castles in the air and cannot let go without admitting they are a bunch of fools with no grasp of reality. This includes CB’s

    • Absolutely agree.
      By liberalising the funding side of banks and opening banks up to foreign competition, Keating set in motion this foreign borrowing binge, which when coupled with Keatings deregulation of credit (both qty and interest rates) set the seeds for this gigantic monstrosity. And he even boasts about it. About a month ago he was boasting how he created the biggest bank in the world CBA (which isn’t even true). Yeah great, You turned the country into pre 08 Iceland, well done.

  12. As a home owner, when do you switch from a variable loan, to a fixed 5 yr term, purely to stop the chance of the bank,…asking for their money back?

    • 8mill If I remember correctly, if you read the fine print, they can still ask for their money back. I’d be intersted to hear from someone closer to the action on that.

      • There were some changes made to the credit regulations in late 2009 when they got worried, but it is still a contract, they just stretch it out a bit.

        Not to worry, when things get serious the Federal gov. will have to insure or take over nearly every mortgage in Australia, just like the FHA in the US. If you have friends in the right places you will get the best houses cheap. The whole process will be politicised when it happens, there will be too many houses in trouble to let the market act.

    • Flawse is correct. They can ask for their money back at any time and for any reason.

      Its called debt peonage, you can be kicked out of the plantation at any time and still be on the hook for what you owe, thanks to full recourse loans.

      Not even the slaved had it this rough.

      • If you are talking about a loan over a residential property, hence regulated under the NCCP or the UCCC, then this is incorrect. There is a legal process that must be followed and the only way in which a lender can obtain possession of your property is if you default under the terms of the loan. Even then any legal action undertaken can be challenged via the two EDR schemes and/or the courts (durng which time all legal action ceases). The expiry of a fixed rate period on a loan which is not in default is not of itself an event of default under a regulated mortgage. The worse that can happen is that the loan reverts to the referenced variable rate.

      • Mander. I politely disagree

        Most loans will have a “unilateral variation clause”. Check the terms and conditions of your loan and you are very likely to find this clause in the fine print.

        It states that banks and finance companies can change any of the terms and conditions at any time without giving you any notice. Some of the things they are able to do is to increase the interest rate charged on your loan or even call in the loan at any time.

        Whether they will wants to do it is subject for another discussion, but they do have that privilege.

    • within the terms of the contract the banks have an embedded call option on the cash so they can demand immediate repayment in part or full, ie. can margin call you also.
      Your call, but I’d be considering a 5yr fixed the moment I feel the interest rate rising environment setting in. The RBA movements will not necessarily forecast that the best either. For instance, a number of the banks operating in -ve interest rate environments in Europe have had to RAISE mortgage rates because they have to recoup opportunity cost profits on the reserves sitting at the central bank that are now incurring losses (-ve rates). Hopefully that makes sense.

    • Succinct!!!
      A crash in the near future requires CB’s, mainly the FED and ECB, to openly say that all their policies of the past decade were grossly wrong and to radically change course! How likely is that? Even if they could admit to being wrong they are too late to change course.

  13. Also worth reading is the ABS on population growth:[email protected]/Lookup/4102.0Main+Features10Jun+2010
    and the historical figures are available at :[email protected]/Lookup/3105.0.65.001Main+Features12008?OpenDocument

    NSW population has grown at an average of 1.33% pa compound over the last 106 years but in the most recent years available from ABS tables above it is growing at over 2.00% pa for Australia
    The in time to double the population at 1.33% is approx 54 years
    The time to double at 2.1% is 34 years.
    The increase in population growth rate almost halves the time to double the population
    This is an indicator of how extreme the increase in growth rate has been over the last say 5 to 7 years.
    That means it almost halves the time to double our infrastructure!!!!!
    So how many hospitals, schools, libraries, parks, freeways, roadways, houses, apartments, train lines, garbage dumps, dams, water and gas pipelines, power stations, high voltage links, water desalination plants, universities etc do we need to build over the next 34 years, how much will we have to borrow? How much extra will each existing citizen have to pay?
    If we have to introduce new tolls on free roads as we have done on the M4 East and increase train fares to cover the new infrastructureinfrastructure, how much will our residual income decrease in real terms per capita after the new imposts?

    • +1 The self-destructive insanity of endless population growth in all its unsustainable stupidity

    • Nice project pipeline. Better get started…

      Sydney and Melbourne are stuffed. Literally. Visited Manly Food + Wine Festival a couple of months back – what a disaster, overcrowded hellhole, never again – I think Sustainability was tacked on to the end of the Festival name – it was anything but. Visit Melbourne a few times a year, still have a soft spot for it, but again, hellish. Both cities are traffic nightmares and people people everywhere, made worse by herd mentality if an ‘event’ is happening.

      Both these cities need major road infrastructure first and foremost but I just can’t see it happening, too many special interest groups naysaying anything and everything. Impossible to see a way through the morass?

      Makes Perth look like heaven, which of course it is 🙂

    • Re hospitals: as was well known to state and federal Labor and Liberal Governments since 2000, Sydney needed to have online and functioning by 2015 3 new teaching hospitals with a capacity of > 650 beds each, just to maintain wait times / admission lists at year 2000 standards. As of today, none are even on the drawing board and you can thank the dithering, deceitful politicians of all colours for that.

      Now, back in 2000 waiting times were considered pretty bad – but pretty much everyone in the healthcare sector and most patients would happily go back to them, compared to what we have now.

  14. Jumping jack flash

    Its not a bubble, its the new paradigm, the FIRE + Services economy.
    It IS the economy. The growth of debt creates the economic growth.

    Its the most efficient way to create money:
    Use debt to inflate house prices, which causes infectious capital gains in surrounding houses, and then secure more debt against all of them.

    Its the easiest way to get rich. Forget working. Forget shares or any other kind of investment:
    Throw a house to someone willing to take on a debt mountain, get a houseload of someone else’s debt in your bank.
    Instant riches! You just can’t get that kind of instant riches from anything else nearly as easily.

    Bubble? Pfft!



    This is the link for a story regarding the massive population pressures now impacting schools with demountables of not one storey but three storeys being rolled out to cope with the large numbers of children entering the school system. It is a Fairfax story but it does mention population growth as being the cause of the problem. However no mention of record levels of migration at all is made in the article. And remembering of course that The Age has supported this massive increase in population in its editorials for at least the last six years. They [email protected] mention that in their story either. Here is the first line of the story and then the only quotes about population growth being the main cause in the entire article:

    “”One million students. Victorian schools will hit this milestone in just three years, with new three-storey portables being rolled out for the first time to ease the overcrowding…………….

    “”Education Minister James Merlino said Victoria was experiencing a population boom and that new “state-of-the-art” three-storey relocatables would provide a flexible and fast way of managing that growth…………………

    “”Peter Goss, the Institute’s school education program director, said new models of school design – like vertical schools – should be explored over the next decade to see how they impact learning. He said pressures from the 2006 baby boom were starting to hit high schools.”” ……………….that’s the only cause mentioned, the “2006 baby boom”.

    • Three storey portables, fantastic. Can they play footy on the balconies (if fitted)? Starting to see a few new schools opening without a skerrick of open area for physical play. Many others are cannibalising their spaces for this madness. Ah well, Jenny Craig must be rubbing her hands. Is there a Jenny Craig Junior program (‘Jenny-J’) I wonder?

    • Prefab relocatable classrooms may have some efficiency dividends just because of changing demographics. Schools grow and shrink as an area is populated by young families who then grow old. The kids go through primary schooll so you need big primary school, then they go to high school so the nature of the schools needed changes, then they go to TAFE (well they did in the old days) or uni so the need in the same area changes again, then the kids are largely gone and the area starts to need aged care. Prefab relocatables mean the classrooms can be moved to where they are needed and the cost of production is reduced. On the downside it may also mean lower longevity, but that doesn’t matter if they would be knocked down for something else in 20 years as needs change.

  16. rob barrattMEMBER

    “How could all of this happen without the media holding it to account?”. The media (as in the ABC) is currently very busy discussing the gay marriage issue and of course Donald. Naturally it doesn’t have the time to talk about boring economic facts. Anyway, even if they mentioned some of them in passing, the purpose of being in opposition nowadays is to prevent any legislation being passed, no matter how important. You see, any wise legislation being passed would be seen as a tick for the party in power. Simple really..

  17. The problem is grossly overpriced housing
    A cause is record mortgage debt
    The answer is obviously lower interest rates

  18. Why support the economy through increased taxes and income redistribution slowing the rate of increasing wealth of the top 10% when you can run tighter fiscal policy that otherwise, force the Central bank to cut rates by reminding them of their legislated obligations and thereby juice the price of assets through the sustained lower interest rates translating into higher PE rates of most lasting assets like shares and property, thereby dramatically increasing the wealth of the already wealthy top 10%.

    • +1 As predicted 3yrs ago, cutting interest rates to record lows has dangerously inflated a giant malinvestment bubble and delivered a massive wealth transfer from the working poor to the rich.
      ….and some here are still calling for lower interest rates

      • It (lowI/R) won’t last, despite the RBA saying that rates will remanin low for the for-seeable future. There are rumblings in the US.
        When they go up …

      • rob barrattMEMBER

        In the end it will just go the way it has to:
        More QE
        More population-related stressors (which include RE prices)
        Less jobs
        Finally – Debt implosion…

      • The only hope for interest rate policy to be correct for the first time in a decade+, is for the Fed to raise and therefore cause the RBA to raise accordingly to maintain the positive yield differential. Not holding my breath!

  19. I’m just going to leave this here.

    John Howard (war criminal)
    In office: 11 March 1996 – 3 December 2007

    • Mining BoganMEMBER

      I’ve preempted things by nominating myself for both juror and firing squad member at his trial should justice win.

      As I’m facing unemployment I’m willing to let these spots go for a modest sum. Get in early.

    • bolstroodMEMBER

      Up at Richmond Hill, near Lismore, houses were 500K+ at the begining of the year.
      Lately a property sold for $1.3 mill., highest on record. Asking prices now in the high$700K

  20. Nice work gentlemen. I wish this could be made required reading in every year 12 classroom in the land.

  21. An excellent summary of where we are and how we got here.
    It made me think that we need a poster to celebrate this supersonic and stratospheric mortgage machismo. Perhaps someone with the know-how could Photoshop Howard, Costello, Rudd, Swan, Stevens and two others onto the movie poster for The Right Stuff.
    Reusa could put it up in his home cinema.

  22. ..”Australian property bubble on a scale like no other”
    Not true when putting it in historical context along with Tulip mania, South Sea bubble, Japan RE bubble..
    The same driving forces are at play.. just a different time, different focus..
    There’s no telling when this will unwind, but unwind it will..

    What I find fascinating is that 10,000 people demonstrated last weekend in Sydney against lockout laws, but, so far as far as I know, not a single demonstration against the property speculators and the government policies that are making home ownership beyond the reach of new buyers.. It’s either people gave up on this or are actively playing the speculation game.. I suspect it’s the latter..

    • ErmingtonPlumbingMEMBER

      “What I find fascinating is that 10,000 people demonstrated last weekend in Sydney against lockout laws,”

      Well the Ruling class cannot expect to keep the Plebs under control, if they take away their “bread or circuses”

  23. We just lost out on buying our first home due to the other bidder offering to buy outright and pay cash. Love the baby boomers and foreign investors!

  24. Yep.
    Australia…..she’ll be right mate. It doesnt matter that our kids will be poorer than previous gens. It doesnt matter that we sold off their future to every Tom and Jerry Chinaman just to make a killing. It doesnt matter that we have no assets. It doesnt matter that we will end up another Greece. Our kids will be just fine.
    And, we wont lose any sleep about it either, since we can just handball responsibility onto someone else.
    What a pathetic, lazy, self-obsessed lot Australians now have become, with no backbone, no identity, no fight left.
    It makes me disgusted that this once great nation is now filled with consumerist sheep that fight for nothing, not even their kids’ generation’s propserity.

    Phuck this country.

    Bring on a bust.

  25. I think the bubble could still have quite a long way to go given that we haven’t gotten to 50 year mortgages or negative interest rates yet. It’s important to remember that >50% of the population are home owners (or paying off a mortgage) and would have everything to lose by voting for anti-bubble policies.

    The best way to deflate the bubble is to do it by stealth. Advocate for projects like Clara, which will can build entirely new smart cities, linked by high speed rail and funded by value capture. This could provide much more in the way of the vaunted ‘jobs and growth’ than changes to tax or immigration policy. It might be more likely to gain popular support as a result..

    Watch the video guys, it’s pretty inspiring.

    • I totally agree with your first paragraph, Kipron, but in your second paragraph it looks as though you are assuming there is a desire to deflate the bubble. There are plenty of ways to deflate the bubble. All the government has to do is remove some of the bubble-inducing policies that have been put in place specifically to keep the bubble inflated. And therein lies the problem – no side of government, and no politician wants to deflate or burst the bubble. And most Australians, given that most Australians own property, want the bubble to pop. So there is no will, and therefore no way. It will take at least another generation before the bubble pops properly, if it is to pop at all. At least not in the foreseeable future.

      • ^ Yes, I think the motivation to pop the bubble just isn’t strong enough for most voters yet. Perhaps that might change once a majority of kids are forced to live at home well into their 30’s..

    • (1) I haven’t seen prevalence of the likes of 99 year loans. So the bubble still has a room to grow.

      (2) A bubble rarely deflates or bursts before it exhausts all its growth potential.

      (3) Then the bubble collapses due to its own weight. What policymakers may or may not do at this stage is irrelevant because they are utterly powerless in making any difference.

    • Oh I see, the rate of change was higher in selected U.S. cities over a period of 5 years, therefore I guess you are suggesting that there is no housing bubble in Australian cities.

      • I don’t think there is a bubble in all Australian cities. Sydney and Melbourne are the most likely candidates if there is one. Irrational exuberance was clearly more insane at peak of US housing bubble than the one here (if there is one).

  26. ErmingtonPlumbingMEMBER

    So are we Calling the Top,… Now?

    I asked the MB commentariat, whether or not I should sell, about 2 years ago now and am glad I didn’t follow the MB consensus back then,…but NOW, It kinda feels like it can’t go on.
    It’d be nice to pay off the Mortgage and rebuy my house or one like it a year or two down the track, mortgage free!
    But considering that i’ve lived here for 18 years (rented it for 5 years before buying) and intend to live here for another 20 to 30 years, I just don’t want to risk not being able to buy back in.
    If prices Drop 60%,…. what’s the real difference to someone planning to live in, a lifelong family home for decades to come?

    I say let the market Crash, for the sake of Friends, family and fellow citizens who are yet to buy,… A HOME.