Comparing Australian and US housing

Central bankers would have copped the blame for the financial and economic fallout, which would not endear them to political and economic elites, or the general population. Economists in the central bank are not going to put their substantial six-figure salaries and secure job placements on the line, including being subject to an immense amount of flak from the FIRE sector, for correctly stating the perfectly obvious that anyone with a modicum of knowledge of the financial and real estate markets would realize.

The majority of economists, especially those prominently placed in institutions like the RBA, Treasury, universities, the banking, financial and real estate industries, reject the notion that a bubble exists in the residential property market. This is unsurprising, given the poor track record of establishment economists in identifying asset bubbles and crises.

The Dot-Com bubble that formed in the stock market during the late 1990s and the GFC of 2008 are but two examples where the vast majority of economists missed the obvious, even though some did accurately predict these events and attempted to warn the public of impending danger. Thus, the analysis and commentary of mainstream economists, especially those within leading policy-making positions, tell us little about the future of the housing market and general economy, and their unwavering optimism should be greeted with a great deal of scepticism.

Ryder goes on to claim the US housing market was sunk by "a recessed economy, high unemployment, a major oversupply of dwellings and an unregulated lending sector (pretty much the opposite of Australia on every count)." The first two reasons are back to front. The bursting of the $8 trillion-dollar bubble caused the 'Great Recession' and subsequent high unemployment.

A collapse in demand from a formally strong private sector, combined with an external account deficit and the US government's attempted austerity, pushed the US economy into recession. It is the bursting of asset bubbles that cause recessions and high rates of unemployment, not the other way round.

That the US had a major oversupply of dwellings was obvious to the mainstream only after the bubble had burst. Meanwhile vested interests constantly claimed there was a considerable shortage of dwellings. The shortage argument, however, is not new. Every country that has suffered through a housing boom and crash in recent years had so-called 'experts' claiming prices were based upon fundamental valuations due to dwelling shortages.

Take the US as a case study. Leading institutions such as the Federal Reserve, National Association of Realtors, California Building Industry Association and Harvard University's Joint Center for Housing Studies produced sophisticated studies to show that the housing boom was caused, in part, by dwelling shortages. These studies were authored by professors, PhDs, and businesspeople, all with extensive knowledge and experience but with conflicts of interest that could fill a small book.

Their expertise was as illusory as the shortage when the housing market crashed. In this way, Australia is not different because there is no housing shortage here. High housing prices are not set by the forces of supply and demand but by banks' willingness to lend, which leads to the next issue.

The leading cause of the US housing bubble was a privatized and deregulated financial system lending absurd amounts of credit to every Tom, Dick and Harry that would take it, regardless of their financial standing. This gave rise to the term 'ninja' loan, borrowers with no income, no job and no assets.

Loose credit was used to speculate on the property market, generating easy profits until the bubble peaked and then collapsed the financial sector in 2008. As early as 2004, the FBI testified before Congress that there was a significant amount of fraud taking place around the banks' lending to borrowers. These concerns were dismissed by the Bush administration.

Similar to the US, Australia has a deregulated and liberalized financial sector, having undergone numerous reforms during the 1980s and 1990s, ending the government's heavy involvement in ownership and management during the social democratic period of the 1950s to 1970s. Unsurprisingly, the amount of credit the banking sector extended to all parts of the private sector has increased dramatically. Mortgage debt has more than quadrupled from 19% of GDP in 1990 to 84% in 2012 to a higher level that of the US at its peak.

According to Denise Brailey, the President of the Banking & Finance Consumers Support Association, an organisation dedicated to protecting the public against predatory financiers, there is some evidence to suggestmortgage fraud is far more wide-spread than previously thought. Having worked in this field for the last twenty years, criminologist Brailey has seen first-hand the financial and social wreckage wrought by a multitude of scams and predatory lending.