The Sydney Morning Herald today has run an balanced article on the Housing Bubble and the level of household debt. It gets the views of several experts including Morgan Stanley’s Gerard Minack, the University of Western Sydney’s Associate Professor Steve Keen and Michael McNamara, general manager of APM.
People aren’t stupid. If housing is unaffordable, buyers will stay away, regardless of the lack of supply. “My view remains that property prices can fall 30 per cent across the board,” says Minack [Gerard Minack, from Morgan Stanley]. This includes big falls in the top end of town.
“But all I can say is that we’ve got a housing sector that’s far more indebted than America’s, with a housing stock that’s far more expensive than America’s. We may have avoided a subprime crisis but we could be heading for a prime crisis.”
A recent speech by Tony Richards, the head of the Reserve Bank’s economic analysis unit, illustrates the comparison between the US and Australia. Richards showed a graph illustrating that, at their peak, US home prices were a bit more than triple average yearly income. In Australia, house prices equal six times annual average earnings.
Steven Keen says :
Indeed, Australian households now devote 11 per cent of after-tax income paying interest on debt. In the late 1980s, when interest rates hit 17.5 per cent, interest payments chewed up 6.7 per cent of income.
» Heads in sandcastles – The Sydney Morning Herald, 28th June 2008.