A classic debt-financed speculative housing bubble: Lindsay David
The opening statement made by Lindsay David for the House of Representatives Standing Committee on Economics Inquiry into Home Ownership.
To be frank, the evidence suggests that on the back of irrational exuberance, Australia is experiencing what can only be described as a classic debt-financed speculative housing bubble with every metric that evidenced the bubble in the US and Ireland present within our economic system today.
To put things in perspective, between the June quarter 1996 (when real housing prices first began to rise) and the December quarter of 2014, real housing prices rose by approximately 131%.
But over this same period, inflation rose by 60%, our population grew by 30%, real GDP by 79%, real rents by 21% and real household income by 39%. In short, the growth of housing prices has completely outstripped all economic fundamentals except for the expansion of household debt.
Over the same period, total household liabilities boomed from 54% relative to GDP to 118%. And today, Australian households now owe creditors close to $2 trillion and rising. Never has our household sector been as indebted as it is today.
Between 2002 and mid-2015 the mortgage books at the Big 4 banks, NAB, ANZ, CBA and Westpac grew by 388%, 435%, 475% and 554% respectively.
In 2002, just the size of the mortgage books at the Commonwealth Bank and Westpac combined was equivalent to 18% of GDP. Today, its stands at 44% of GDP and continues to rise.
In 2002, the mortgage book of Westpac suggests that for every dollar it had loaned to an owner occupier, it had lent 45 cents to property investors. By April 2015, the proportion rose to 81 cents.
It is truly surprising these patterns of rapid growth have not been of profound concern to the RBA, APRA or Treasury over this thirteen-year period for where data is freely available and states the blatantly obvious.
Australia has spent the better part of fifteen years avoiding the primary reason as to why house prices have boomed above fundamentals such as rents, incomes, inflation and GDP – which happens to be debt-financed speculation.
Our grossly undercapitalized, overleveraged, foreign funds-reliant banking system has artificially stimulated demand for real estate in what is an unaffordable market by consistently lending irrational sums of debt to owner-occupiers and investors. The public is also caught up in a mania of irrational exuberance, which combined explains why housing prices across Australia are as high as they are today. The evidence outlined in our submission suggests this to be the case.
To put it into perspective how expensive land is across Australia, you can find cheaper blocks of land per square meter on the hills of Malibu, California with a view of the Pacific Ocean than you can find in locales like Alice Springs or St Marys. Representatives, this is not normal, and quite frankly, laughable if the matter was not so serious.
For too long, Australian policymakers with authority and regulatory power have ignored all the warning signs pointing to a credit-fuelled housing bubble. Yet, over the years have implemented various policies to stimulate the price of housing and the rapidly growing risk home owners and property investors accumulate in order to keep house prices abnormally high whilst making various interventions that stick out like a sore thumb every time household credit expanded below a perceived comfort level.
LINDSAY DAVID is the author of Australia: Boom to Bust and Print: The Central Bankers Bubble. David holds an MBA from IMD Business School and recently founded LF Economics.
