Professor Vernon Smith, an expert on housing bubbles and recipient of a Nobel prize for Economics for his work, told the Australian Financial Review earlier this week, “You have a pretty good [property] bubble in Sydney and Melbourne.”
“It is hard to believe it is very sustainable.”
On Thursday, Professor Smith addressed a Macquarie Graduate School of Management dinner on global house prices.
Data to be released on Monday by CoreLogic RP Data will confirm Smith’s views. The Australian reports CoreLogic RP Data will show Melbourne house prices surged 4.8 per cent in July, up from 2.9 percent recorded in June. If the 4.8 per cent result were annualised, it would top 57 per cent!
Sydney house prices are expected to rise 3.2 percent for the month.
“It is amazing how people get carried away in the bubble,” Professor Smith told the AFR. “Then all of a sudden it’s over and they are petrified.”
The out of control house price growth in Australia has the banking regulator concerned about the inevitable crash. Fearing possible bank collapses when the bubble bursts, APRA has instructed our big banks must bolster capital.
In recent weeks the regulator has forced banks to increase mortgage rates for investors getting carried away in the bubble, in a bid to slow the dangerous market. The ANZ and CBA were the first to announce rate increases of 27 basis points for investor mortgages. NAB has increased rates on interest only loans by 29 basis points, while Westpac – plagued by IT problems, only today announced investor interest rates will increase by 27 basis points.
For AMP, irrational property investors are just too risky. It has decided the cease lending to property investors altogether, effective immediately while it hikes rates for existing investors by 47 basis points on the 7th September.
» Housing bubble could burn investors, warns Nobel Prize-winning economist – The ABC, 30th July 2015.
» ‘You have a pretty good bubble in Sydney and Melbourne’: Nobel-winning economist warns property buyers not to get ‘carried away’ as AMP Bank cracks down on investment loans – The Daily Mail, 30th July 2015.
» Westpac jacks up interest rates for housing investors – Sydney Morning Herald, 31st July 2015.
» AMP slaps ban on loans to property investors as expert sees end to housing bubble – The ABC, 29th July 2015.
This bubble reminds me of Dean Moriarty from On the Road by Jack Kerouac.
It’s impressive to watch, and a hell of a lot of fun too, but it’s just a matter of time before it keels over and dies of a combination of too much sauce and exposure to the elements.
It really is starting to fell like a frenzy. Wait for the lull and then ka-boom… massive consumer pull back, businesses closing, job losses, mortgage defaults, insolvent banks, tax-payer funded bail-outs, bank deposit holder bail-ins and finally, interest rates to zero. But by then it won’t matter.
Prof Vernon Smith obviously does not understand the banking system. He talks about the banks getting into trouble when they hold bad assets. For starters bank loans are entries in a computer. Secondly they get to keep all the deposits/payments plus costs. Thirdly when default occurs they sell the collateral which cost them nothing and get a government bailout/bail-in if there is a shortfall. These intellectuals are a laugh a minute. He should be asking why are the undercapitalised banks so enthusiastic about continuing to lend money on housing when it is obviously in a Hyper Bubble.
Meanwhile, in Canada ……..
http://www.zerohedge.com/news/2015-07-30/liar-loans-pop-canada%E2%80%99s-magnificent-housing-bubble
Morpheus,
Good points and I don’t know for sure but he probably does know this regarding the banks. I think today when someone as credible as Smith say too much then they risk a backlash of criticism and therefore only say so much. Even I know it’s a game but they have taken all the kings and aces from the pack. Just being general and just my opinion but you could very well be right.
@ kika
Good article on Liar Loans in the Canadian banking system.
Just wait until the our banking system rolls over exposing millions of dollars worth of loans with falsified incomes and valuations. A whistle blower from WA tried to expose it a couple of years ago but was quickly silenced. Most originate from independent brokers who are fed acceptable figures by the major banks. The original figures are changed and submitted for automatic approval. Bank fraud pure and simple that will use the unsuspecting applicants as scapegoats when the SHTF.
I believe ASIC is about to release a report this month on subprime lending practices:
Flaw in credit lending standards to be revealed by ASIC
An official review of lending standards in the red-hot investor property market is set to reveal serious flaws in how lenders have been assessing customers for credit.
“If the 4.8 per cent result were annualised, it would top 57 per cent!”
Actually, 4.8 annualised properly (compounded) would be 75%!
Don’t be fooled into thinking false application details are new.
I’ve had friends over the years who have:
1: Been told by real agents “That offer’s an insult: If you can’t get the money, go and see *this guy*”
2: Added potential rental income on a property into their income: Even though it’s to be their PPOR!
3: Outright lied about their financial position, eg. doesn’t allow for child support payments that MUST be paid under the law.
4: Provided a statement of their finances that only presents their arrangements with banks directly, not including their low/no interest assets/items ie. cars, electrical goods, furniture, services etc….
It’s all a sick joke, and it is far from new: This has been going on for 10+years on a massive level.
All you can do is prepare yourself and sit back and watch. This is clearly an out of control train that they just keep putting more and more power and speed into.
And yet it continues … 25 years now? How much longer can it go on? I thought for sure it would crash after the GFC but nope … got larger. Same with China. Anne Stevenson-Yang saying the China bubble must collapse within 12 months which would surely cause the collapse … and yet …
Is this evidence of the expression ‘the market can remain irrational longer than you can remain solvent.’
With all the fraud scandals going on in the Big Four banks in recent times, for any banking apologist or vested interest to suggest it isn’t happening with mortgages is ridiculous. I don’t know of a person who doesn’t have a story of a dodgy lending situation. It’s all fine whilst prices rise and employment remains healthy. But…..
@ 10. BurstGodamnIt, I couldn’t agree more. There was talk of a bubble back in 2003, when prices had already had a big run up, and it had already, by then, gone for too long. Who knew then, that the bubble hadn’t even started?
By 2007, there was much talk then in the media, and on forums that the bubble had to burst. Prices were setting records, as they jumped to new highs every week.
And then, in 2008, when finally the bubble did start to burst amidst the GFC, who could have predicted that Rudd would do absolutely anything and everything, and he did, to get that bubble back in place, and then grow it to new heights?
And here we are now, where, especially in Sydney, anything under $1 million is a rock-bottom bargain.
Where wages might have doubled or tripled since the 80s, yet prices have skyrocketed by 10, 15, and in many areas 20 times!
And how much longer can it go? Unfortunately, while I could see that the bubble was going to burst back in 2007; now in 2015 all I can see is two sides of government who still have the power and the will to leave no stone unturned in their determination to keep this bubble going. And it’s not enough to keep it going – it has to be growing. So, if it means selling out the whole country to foreign buyers, and pushing Australians out to the fringes, then that’s what they’ll do. You have to be lucky to have parents who bought lots of properties when they were cheap, then win the jackpot as their properties have gone up higher than they ever could have dreamed, and then inherit a windfall portfolio, or the proceeds of it to compete.
Even if the Chinese bubble did collapse (whatever that means), an increasing amount of newly minted Chinese millionaires are squirreling their money in Australian real estate, and whether it is legal or not, makes absolutely no difference in our government’s eyes.
So it’s more than a permanently high plateau – it’s an ever growing, all-encompassing, permanently growing bubble.
Morpheus is correct. The Prof does not understand the ‘framework’ within which the banks here operate. It is a framework that encourages risky behaviour as there are no consequences – the idiot politicians have agreed to bail them out. The bubble will drive still higher. A Forbes report a number of years observed that Australian loan books looked like the US banks prior to the property bust in the US. No need to worry though as it is all different here.
Why buy a million dollar investment house when you can buy a Coal Mine for $1. There will be no jobless recovery. On the contrary news like this will lead the way to the implosion of the housing market and the economy. Afterwards the politicians (and their banker owners) will say they didn’t see it coming.
http://www.zerohedge.com/news/2015-08-01/commodity-collapse-comes-full-circle-coal-mine-valued-630-million-2011-just-sold-one
No doubt this is interesting…life is easy….if you believe it will continue then keep buying and adding to your portfolio or if you think it will collapse then stay away and wait.It really is that simple. You just need to have the balls to stick to your decision rather than do as others do. Most of the problem is people just don’t have the balls to wait because they panic and don’t want to miss out regardless of who is buying, Chinese or Donalt Trump. Seriously who gives a shit and let them buy them all. It will be the first time in history that the banks and governments have fooled the people while the system is broken. The world is drowning in debt and everyone believes that Australian Real Estate will save them. Please. I cant even hold a straight face when I say it. Not aimed at anyone here but just needs to be said, just watch the show guys. It takes a whole life to know if you have made it, not a handful of years in a market.
The foreign buyer orgy has a long way to go yet.
I thought many years ago that the Government will shut hospitals and close schools to keep the property market ticking along – sadly I was right.
You can probably afford a house when your income is 5, 6 times the value of the house. If you push yourself and manage to get an increase in your wages you can probably push yourself into a multiple of 7. But what’s happening now is a mania. I’ll give you one example. Rents in Sydney at the moment is much much cheaper than mortgage payments. Perth real estate is in a free fall. However the issue is whether the banks and the other lending institutions can grow their ‘assets’ on their balance sheets any longer. Total Outstanding mortgage debt is now about 1.4-1.5 trillion dollars. It’s been growing at more than 10% per annum since 1996. During 1990s recession Sydney house prices came down by about 20-30% and commercial sector
collapsed by more than 50%. However the household debt as % of GDP was
minor. Now it’s collosal – banks assets (big four) is in excess of 200% of GDP. Lehman brothers assets to US GDP in 2007 was about 5%. CBA assets to Australia’s GDP as of 2015 is 50%. Someone above said ‘sit back and watch’ when this unravels. The bubble will pop with an unbelievable bang just like it did in Ireland ( the biggest housing bubble, bigger than USA).
If I wasn’t so conscious of my eating habits I would sit back and eat popcorn…relax and enjoy the show. As with any market in the world…stocks…bonds you name it…. rinse and repeat. Lets be realistic …millionaires and wealth in general has come and gone…bricks and houses don’t discriminate. Imagine the history books a hundred years from now saying this
“and due to the Central Banks Interventions world wide and market manipulations, bailouts, deficit spending etc everybody just bought a house in a land down under called Australia, they all prospered and lived happily ever after, everyone else died because they missed out”. Hope I live that long. I want to order a copy.
John, you might get through several buckets of popcorn before it does actually pop. We have had real estate cycles before, but this one really does seem different.
Never before have we had two sides of government hell-bent on selling out this country, and never before have we had ore Chinese who have the ability to outbid Australians than there are Australians. Never before have we had such an “open for business” policy when it comes to selling Australia to the world, and never have we had laws so openly flouted for so many years with the government turning a blind eye to, in many cases, illegal purchases with corrupt funds.
If the bubble bursts, it will be a doozy, but that’s a big if, at the moment.
Sounds easy then…just buy more and follow the Chinese. …it’s that simple..
The Chinese are gamblers who can be fickle. They react to, rather than lead the market. I vividly remember an open for inspection inner Melbourne in late 2009 where at least three separate Chinese buyers were savaging an agent trying to buy this property. They were literally grabbing him. Six months later they were nowhere to be seen until about two years after that. Looking back at it, the dollar was close to its bottom circa 2009 then steadily rose to top out in 2012. Since then it’s tumbled and not surprisingly the foreign buying recommenced. I reckon it’s a dollar play and those who bought in when the dollar was at $1.10US have gone nowhere, despite the 30-40% growth in values. Question is where’s the bottom for the dollar in this cycle and will they be spooked once it starts rising again, despite the fact it’s actually in their best financial interest to buy in when the dollar is rising!
Can someone tell me if the changes to bank property investment loans are nation wide, or do they just apply to property in Sydney and Melbourne….?
The rest of the country is flat, I’m sure other bank branches would not be happy to be told to increase rates for investors.
There are two important player’s proping this bubble up…..Chinese investors looking to park their I’ll gotten gains, coupled with a weakening dollar. Bad Domestic news is irrelevant.This Bubble will keep on going so stop wasting ur time wishing it to end.
Damian…
Happy to watch it continue….doesn’t matter who from overseas is driving it….Australian could find out the day before that it was going to crash and they still wouldn’t sell. I’m watching and happy to keep watching but your wrong to assume that this is bulletproof. History tells many lessons and this is just a repeat, just different characters and scenery.