Is the Australian real estate market just another massive bubble?
The bubble will burst, and the consequences will be enormous.
Those who have bought over-priced houses will be laden with a crippling debt for years and years to come.
Those currently priced out of the market will find their patience rewarded.
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Signs Of The Australian Real Estate Bubble:
Price to rent ratio: The Economist recently ranked the Australian real estate market as the most over valued in the world, estimating that the ratio of house prices to rents is 56% above its 1975 to 2010 average.
Dizzying growth: Price growth has been ridiculous, to say the least. Prices rose ~18% in the 2009/2010 period. Further, prices have increased 6X since 1986 while the US market, at its height, reached only 3.5X. Prices have risen over 200% in the last 13 years. Is the average Australian really making twice the income now that he or she made in 1997? Which brings us to...
"Unaffordability": This is the most damning and obvious factor in demonstrating the unsustainable nature of the Australian real estate market. One survey found that 22 out of 23 municipal areas were ranked as "seriously unaffordable". Houses now cost ~7 times annual average salary. The guidance always given to responsible adults is to go no higher than 3 times annual salary. How is it possible to pay these mortgages without using most of your income just for housing? Which brings us to...
Debt fueled: Since prices are unsustainable based on real incomes, what is pushing the air into the bubble? Easy access to debt, of course. Although the typical socialist policies of throwing money at people to buy houses have contributed somewhat (as they did and still do in the U.S.), most of the debt, of course, lies with the home owners themselves. The average Australian's debt to income ratio has risen 800 percent since the 70's. Banks are not scared, as Australia's economy has escaped the mortgage debt reckoning due to China's hunger for Australia's resources. Which brings us to...
Economic dependence: While the statement that Australia is now "just a colony of China" may (for now) go too far, Australia's economy has truly been fueled by China's own debt/construction binge. When that binge ends, as all binges must, so too will the party in Australia. And the housing house of cards will be among the first to fall. Which brings us to...
Foreign investment: Once you see foreigners trying to get in on something, your bubble meter should start showing red. The situation with Australia is all too analogous to the situation in the late 80's with the Japanese investing in California real estate. It didn't turn out so good for the Japanese, and it won't for those Chinese doing the same 20 or so years later in Australia.
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