From our Jessica today:
Believe me, no one is keener than me to see a property bubble burst.
But sadly – for would-be buyers, at least – I just don’t see it happening.
…ultimately, the defining thing about bubbles is that they inevitably must pop.
But where is the trigger for a widespread home price collapse?
In a world of low inflation and growth, the Reserve Bank is likely to raise interest rates very gently, cushioning households.
Widespread job losses would be a trigger, but there is no talk of that. With record low wages growth, labour is hardly expensive at the moment.
Bubble proponents point to very high household debt levels relative to incomes. But the structural lowering of interest rates in the late 1990s and again after the global financial crisis has increased the amount of debt households can afford to service from a given income.
Bubbles form when asset prices disconnect completely with market fundamentals.
But there are very good reasons to expect housing to be so expensive.
Forget the Cayman Islands, housing – owner occupied and investment housing – offers the best tax shelter around, from negative gearing and the capital gains tax discount on investment housing to the complete exemption of the family home from capital gains tax AND from the pension asset test.
Meanwhile, rapid population growth has been met by sluggish increases in housing supply. Incompetent state governments have created a premium for inner-city housing, where buyers can avoid paying the indirect costs of long commutes.
Somehow, Jessica, I don’t believe you at all. If you were so in favour of seeing the end of bubble then you’d have long ago stopped cheer-leading tearaway immigration. After all, as you say, it’s in part to blame.
On the contrary, it is my view that you’re happy to promote Domainfax ahead of the public interest.
Just a few points in riposte:
- bubbles don’t “form when asset prices disconnect completely with market fundamentals”, they form when exuberance extrapolates perfect fundamentals into endless gains. Looks to me like Jessica has a long list of perfect house price fundamentals;
- if you don’t see the risk that immigration is going to be cut then you’re blind;
- in 2003, the Aussie cash rate was 5%. Today it’s 1.5% and has nearly run out of cuts, leaving the market exposed to future external shocks;
- in 2003, Australia was entering a once every century mining boom to boost income growth, it is now exiting the same with no replacement in sight and that’s killing the Budget, leaving housing exposed to future external shocks;
- Labor has already committed to ending the tax rorts, yet Irvine does’t even mention it.
The sad transformation of Jessica Irvine into the very thing she once despised continues.
