I’ll have to get used to the quirks of this blog!

Here it is again for those who want to have a read:

http://www.demographia.com/dhi.pdf

Hopefully those who are interested in reading it can still follow it.

But it is no suprise that it is “severely unaffordable” to live in our capital cities — they are great cities, and we’re not building any new land in the middle of Sydney. And for some reason, we’re not building many new houses in the major population growth corridors in s/e Qld.

But John, as I said above – it’s not just the major cities. It is pretty much everywhere. The Demographia report (actually great reading – very much recommended states for example that Adelaide has had very low population growth, and yet it is also severely unaffordable.

Ultimately when prices get way out from their long term trend relationship with wages, something has to give. Given the massive level of personal indebtedness and the stress this is already causing now, at historically still very low interest rates, it is not hard to see where this is likely to lead should the economy slow or interest rates increase further.

I read recently that at present mortgage levels, should interest rates rise to their average levels attained over the last 30 years, the average family would have to find extra $800 a month! It won’t have to get anywhere near that level before many of these people go broke.

There is nothing wrong with having higher debt. We also have higher incomes and therefore a greater capacity to finance that debt.

Real incomes apparently have on average increased by about 88% since 2000. Debt levels have over the same period increased by some 250%. What will happen if this debt can no longer be serviced?

As for the “new economy”, I can’t see how anybody can doubt that. The fact that there was a dot com bubble doesn’t mean there weren’t also dot com successes. Indeed, there were many.

When the housing bubble bursts, it won’t mean everyone will go broke. Many investors will have made a packet. That still does not excuse the fact this is a bubble – like the dot com one was – and even more investors/mums and dads will lose their shirts.

Every time a bubble arises, it is said that “this time it’s different”. One can understand that – even though not agree with – when it comes from the average punter.

However, how it is not possible for someone with economics training to ignore all the warning signs painted by fundamental data is beyond me. People are prepared to borrow what amounts to telephone numbers to buy property, believing it will continue to always go up; with no regard to serviceability or general affordability.

The other day I spoke to a client, who is a 37-year old single female, on $85,000 annual salary. She is interested in purchasing a unit in Palm Cove (Cairns Northern Beaches), which she can buy for $700,000 plus costs. She has saved $100,000, so would need to borrow approximately $635,000 to complete the purchase. She has, believe it or not, secured a lender who is prepared to forward this amount – provided the loan is taken on an interest-only basis. She will therefore have to pay at least $54,000 p.a. in interest (assuming 8.5% commencing interest rate). The unit can apparently be let for $550/week (a gross yield of around 3.9% – net yield is likely to be closer to 3%). The client would then have a shortfall of at least $26,000 (or over $17,000 after allowing for the tax deduction) to cover from her own pocket.

Is this a wise strategy? — On her income, it can be said it is affordable.

However, what happens if the unit is not rented for some time? What happens if the value drops? What happens if – as is likely – there is no capital gain of note over the next decade? Wouldn’t it be more prudent to invest elsewhere, with less debt?

The fact that somebody in that situation is seriously contemplating borrowing such large sum of money, and that she can actually obtain it, is to me enough of a proof that this is the worst property bubble/some of the most loose lending standards I can remember.

And John, you are correct – many people have been predicting that this bubble would burst for a while, and it hasn’t happened yet. Alas, bubbles can inflate to sometimes spectacular proportions – witness the original tulip mania in the Netherlands several hundred years ago. Eventually though they must collapse. This happened in the late 80s/early 90s and it will happen again.

John Bayley

Ending mispricing of credit and equity due to monetary policy, cpaital controls and moral hazard would be more worthwhile.

The sort of regulation I think is *most* likely to be effective is that which prevents the dissemination of wrong information (fraud) and the deliberate withholding of correct information.

Most speculation is to some degree irrational, as there can only be one correct price for an asset. The more we have, the better the guessing becomes and smoother the price changes are. You are right, there is no way stopping it with a net benefit. What I am implying is that you don’t want to get rid of it because it has benefits anyway.

Let’s agree that speculation is a net good. And that there’s probably nothing that could productively be done to reduce bad speculation.