Australia's property bubble

There is a huge and angsty debate in Australia at the moment about whether the country is in the grip of a property bubble or not. One of the most prominent real estate bears in the local blogosphere is walking to the top of Australia's highest mountain next month, as punishment for losing a bet with a more bullish counterpart about the direction of the property market. Most mainstream commentators (such as the great Ross Gittins) seem to think the current boom is sustainable and reflects the fundamentals.

I don't have nearly enough expertise and knowledge to challenge that position yet, but there seem to me to be an awful lot of very clear warning signs that something is awry in the market:

• Loan multiples are at truly scary levels. I can remember the anxious headlines in the UK in 2006 and 2007 when Abbey started lending out five times the principal borrower's income. In Australia at the moment, the most cursory mortgage search turns up a host of lenders offering seven times joint income, ie up to 14 times principal borrower's income. And this is in a country whose GDP growth, inflation and interest rates are traditionally substantially higher than in the UK, so that over-extended borrowers will be much more vulnerable when interest rates return to more normal levels, let alone if they overshoot.


• The range of mortgage products on offer looks like UK circa 2007, or Florida circa 2006. Commentators routinely state that "Australian lenders don't make subprime loans". They do, however, have lots of self-certified loans, where you don't have to prove your income and pay a higher interest rate as a result; non-conforming loans, where the borrower's credit history is patchy and again commands a higher rate of interest; and they do often combine these products with low introductory rates which disguise the real cost of borrowing. Whether Australian lenders name these products subprime loans or not, they have exactly the same features that made subprime loans so risky.


• The attitude of consumers is distinctly frothy. I was in a bookshop the other day and had a look at the real estate titles in the personal finance section. With the exception of a lone book from the "For Dummies" series, literally none of the titles were plain guides aimed at explaining the complexities and pitfalls of the real estate market to ordinary homeowners. They were all "How to become a property millionaire in six months" or "Secrets of real estate tycoons" - ie property investment guides, not property buying guides. The imbalance is what stands out: if the "investment" view is so much stronger than the "place to live" view, then people are likely prepared to take on bigger risks (such as a 14x income mortgage) because they're convinced rising prices are a one-way bet and will bail them out of whatever debt they take on.


• The normal arguments trotted out by the bulls seem, to me, to be based on classic bubble logic: that we haven't had a property crash in years so we must have somehow escaped that cycle; that *current* homeloan default rates on mortgages are fairly low (as they were in America in 2006); that demand from population growth is outstripping supply (as it has in Britain for the past two years). And they seem to utterly ignore the importance of mortgage finance in all of this, ie that if lenders start raising their credit standards, as they did in Britain in 2008, prices will not be able to maintain their level. To me it's quite telling that decent information on mortgage credit standards is extremely hard to come by, and not closely watched.

This doesn't mean that the whole thing will collapse tomorrow. Unlike the UK, for instance, Sydney has already experienced a real estate slump from 2003-2007, so the current hot market is in some ways just making up for lost time. But price-to-income ratios are still among the highest in the developed world, and it's genuinely quite scary to see the sorts of loose lending practices that proliferated in the UK and US before the crash being embraced wholeheartedly in Australia, with very little concern about where this will lead.

Of course, we have a vested interest in prices coming down, at least to London levels. The nicely-done up two-bed house next door (in a suburb pretty much like our old neighbourhood of Hornsey, and in a city where the median income is about $37,000) just sold pre-auction after about a fortnight on the market for $820,000. Our incomes (well - Kate's current income and my expected income) are much higher compared to median incomes than they were in London, but the level of indebtedness that most people seem prepared to take on here means that at the moment we could easily be outbid by someone earning half as much.

That makes one think that maybe it's time to just bite the bullet and pay more than you would normally think you could afford. And of course, it's the moment that the arch-sceptics like us start thinking like that, that asset price bubbles tend to burst.