Australian Real Estate Bubble Bursting?

The land of Oz is called the Lucky Country, and it could not have been clearer during the past two years as the Great Recession barely touched the shores down under. In the past two months, however, the real estate market has taken a sharp dip, and may be signaling the beginnings of trouble. Could there be danger lurking just below the surface?

This drop has been essentially ignored in the global business press as the travails of the Euro, the fall of stocks and the repudiation of Obamanomics by G20 have led the headlines. Softness in the Oz property market began earlier this year as the central bank raised rates, causing a slight drop in price of 2.7% in Q1. Recently home sales have dropped and a glut of homes has emerged in major cities, including Melbourne and Brisbane, although not in Perth, the center of the resource river to China.

The tenor of these stories is still positive, and it seems the newspapers down under got more animated over a rainfall of drunken parrots than the potential drop in housing. Such should be expected in a Lucky Country – bad news needs to slap them in their faces to be taken seriously. But I have heard anecdotal evidence of sharp drops in the 15-20% range, such as from this recent comment, and the softening of the market is leading to predictions of a “record fall in house prices” in Q3 and Q4. A similar fall is also seen for the other Lucky Country, New Zealand.

There have been warnings, such as a warning reported in early May in The Australian. The most interesting debate has been between the Roubini of Oz, Steve Keen, and plenty of glass-half-full property pundits. Keen has been very visible in Australia warning of a housing bubble as early as 2008, and has suffered the Chicken Little fate of being premature in his calls. He lost a bet on the price collapse and had to endure his Walk of Shame recently. He may now be getting ready for the last laugh, as his predictions seem to be starting to be realized.

Keen notes how Jeremy Grantham just pricked the Oz real estate bubble, and uses the following chart to show how bubblicious Oz property has become:

It is clear that Oz property has been on a tear, but the cause is not the Lucky Country so much as playing catch-up with US mortgage debt levels. Since 1990 Australians have increased mortgage debt as a percent of GDP three times faster than the US, and have now reached similar levels to those of the peak of the US bubble in 2006. It is clear that not all the drunks are parrots – the whole country has been on a bender:

Steve Keen attributes the rise in part to gimmickry of each new Prime Minister: first the Hawke government (Labour) in 1988 pushed an incentive for homebuyers that spiked sales; then the Howard government (Liberal) repeated this in 2001 (not, however, as a way to launch his new government since he had been in power for a while by then, but as part of post-dot-com reflation policies), and now Rudd (Labour) began his short regime with a similar giveaway to create happy voters following the change of government:

The last twelve months have shown, however, an accelerating fall in loans to homeowners (vs landlords), meaning real demand is falling below actual supply. Rudd’s incentive last year cleared out the buying interest, and along with those drunken parrots the sky may be beginning to fall on the Australian property owners:

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