With wages stagnant and the cost of living climbing ever higher (electricity, gas, etc) many Australians will be likely caught if interest rates rise from current record lows. They will be required to sell to prevent payment defaults, and ultimately, the mortgagee's power of sale.
The problem, of course, is that interest rates will then be higher, and new generations of first home buyers will be unable to borrow as much as those before them. When this is combined with a glut of homes on the market, prices – particularly in over-inflated metropolitan and outer-metropolitan areas – will inevitably fall by some margin.
The bubble will burst.
Advertisement
Does it sound farfetched? Think again. Seasoned and savvy financial analystshave been cautioning about a significant price correction for some time.
Speaking before a Senate estimates committee in June 2015, the Treasury Secretary,John Fraser, suggested that Sydney and "higher priced parts of Melbourne" were "unequivocally" in a bubble.
In an interview with Sky News in December 2016, the ex-Chief Executive Officer of the Commonwealth Bank, David Murray, cautioned that the Australian economy was "vulnerable" due to a "bubble" in Sydney and Melbourne house prices.
In April 2017,the Founder and Chief Investment Officer of Montgomery Investment Management, Roger Montgomery, similarly cautioned, "[w]ith the IMF, the RBA, ASIC, APRA and David Murray all suggesting property is in a bubble and at risk of crash, ignore them at your own risk."
Could anything have been done previously to diminish the risk of a rout on house prices? Equitable tax reform, such as quarantining negative gearing to new housing and reducing capital gains tax concessions, would have eased much of the inflation if implemented two or more years ago. This would have dampened investment in existing housing, thereby stabilizing prices. It would have also assisted young Australians to enter the housing market.
So why was nothing done? Three explanations loom large: first, politicians, many of whom have enormous negatively geared property portfolios, were making millions. Second, the Australian economy was less than effervescent, and the construction boom was used to replace the mining boom. A sensible stabilization of house prices via equitable tax reform would have increased the likelihood of anaemic, flat or even negative economic growth. Third, with the 2016 federal election approaching, older voters – who typically own their homes outright and often have one or more investment properties – were crucial to disproportionately underpin the Coalition's (faltering) electability. Why? Because statistically, young voters disproportionately support Labor and the Greens. The Coalition thus chose a "hands-off" approach to negative gearing and capital gains concessions to keep house prices on an upward trajectory, and decrease the chances of an election defeat.
Advertisement
Australia's housing prognosis is grim. Unless interest rates rise, Australia is certain to become a two-tiered society, divided between those who own real property, and those who do not. However, if rates do rise, many Australians seeking to avoid mortgage default will be forced to sell in a bear market.
A two-tiered society, or the bursting of the property bubble? Take your pick.
Discuss in our Forums
See what other readers are saying about this article!
Click here to read & post comments.
10 posts so far.