Australia’s Real Estate Bubble Will Burst in 2020

The Australian real estate and the property market have become significantly overpriced and due for a significant downturn followed by collapse.  

All capital cities have seen strong increases in property prices since about 1998. Sydney and Melbourne have seen the largest price increases, with house prices rising 105% and 93.5% respectively since 2009. These massive increases in house prices coincide with record low wage growth, record low-interest rates, and record household debt equal to 130% of GDP. This clearly shows unsustainable growth in property, driven by ever higher debt levels fuelled by the RBA’s then-chief, Glenn Stevens who began cutting interest rates beginning in 2011.

The Housing Affordability in Australia – Good house is hard to find report stated that “the average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s.” Some factors that have contributed to the increase in property prices include:

• greater availability of credit due to financial deregulation.
• low-interest rates since 2008, increasing borrowing capacity to borrow due to lower repayments.
• limited government release of new land (reducing supply).
• the average floor area of new houses has increased by up to 53.8% in the 18 years from 1984–85 to 2002–03.
• a tax system that favors investors and existing homeowners, with policies such as negative gearing and capital gain tax discounts.
• government restrictions on the use of land preventing higher density land use.
• government restrictions on greenfield development designed to encourage “urban densification”.
• high population growth (now about double the world average)
• 2008 foreign investment rule changes for temporary visa holders.
• introduction by local councils of upfront infrastructure levies in the early 2000s.

RealVision’s Grant Williams highlighted a video that says Australia’s economy looks like Ireland’s just before the 2007 housing collapse.

The parallels are a bit spooky.

“Australia’s household debt to GDP was 120.5 percent as of September last year, according to the Bank for International Settlements, one of the highest in the world. In 2007, Ireland was sitting at around 100 percent.”

“At the same time, the RBA puts Australia’s household debt to disposable income at 188.6 percent. Ireland was 200 percent in 2007, while the US was only 116.3 percent at the start of 2008.”

“RBA figures also show more than two-thirds of the country’s net household wealth is invested in real estate. In 2008, that figure was 83 percent in Ireland and 48 percent in the US. Meanwhile, 60 percent of all lending by Australian financial institutions is in the property sector.”

“In 2007, the International Monetary Fund gave the Irish economy and banking system a clean bill of health and suggested that a “soft landing” was the most likely outcome. Last month, the IMF said Australia’s property market was heading for a “soft landing”.

House prices in Sydney and Melbourne have fallen nearly 14 percent and 10 percent from their respective peaks in July and November 2017, coinciding with a sharp drop-off in credit flowing into the housing sector both for owner-occupiers and investors.