Now Australia Housing Bubble To Collapse ???

In a bearish note to clients in late August, Morgan Stanley’s chief strategist, Gerard Minack, warned that

a housing bubble in Australia could be pricked if the banks tightened credit or middle-class landlords started losing money and decided to sell.

He believes owner-occupiers have too much debt, and that investors are riskily relying on capital gains to repay their loans and interest.

Compounding the problem was ill-advised policy such as the government’s first home-buyers grant,

In a bearish note to clients in late August, Morgan Stanley’s chief strategist, Gerard Minack, warned that

a housing bubble in Australia could be pricked if the banks tightened credit or middle-class landlords started losing money and decided to sell.

He believes owner-occupiers have too much debt, and that investors are riskily relying on capital gains to repay their loans and interest.

Compounding the problem was ill-advised policy such as the government’s first home-buyers grant,

which had the effect of lifting house prices 40 per cent above their fair value, Mr Minack said.

“Buying an asset that’s over-priced never ends well,” he said.

“The real return on residential property over the next decade is likely to be negative, in my view.

Owner-occupiers have played a game of financial chicken, competing for property by taking on increasingly imprudent amounts of debt.

“Investors have become Ponzi borrowers —

Hyman Minsky’s term for borrowers who rely on capital gains to repay debt and interest —

in the belief that housing is a sure-fire long-term investment.

History shows it isn’t.”

Australian Bureau of Statistics figures show overall average house prices rose 18.4 per cent for the full year to June,

with Sydney prices rising 21.4 per cent — the most since the bureau began recording the figures in 2002.

But the rate of growth has been slowing in recent months

as rising interest rates feed through the national economy.

The Commonwealth Bank, Australia’s largest bank by market value, warned last week

it could be forced to raise rates independently of the Reserve Bank.

And CBA’s full-year results showed some key business units were struggling with higher costs.

On the positive side, Mr Minack said the most plausible trigger for a sharp correction in the housing market —

broad-based job losses — was unlikely in the short term.

However, the national jobless rate rose from 5.1 per cent to 5.3 per cent last month,

as more people decided to look for work and full-time employment fell for the first time in 11 months.

The RBA is one of the few central banks in the developed world to have raised rates since the global financial crisis hit,

but has kept rates on hold since May as the six rises since October feed through the economy.

The official cash rate stands at 4.5 per cent, according to this article from The Australian, via our friend and reader Jonathan Baral.

But Mr Minack said the fact Australia had avoided the worst effects of the global slump did not mean there would be no risks from the housing bubble.

“I’m not persuaded by arguments that houses are sustainably priced,” he said.

” I’m not persuaded by the view debt is not a problem,

and I’m not persuaded policymakers could prevent collateral damage to the banks.”