Australia’s residential property market (specifically land market) is vastly overvalued, driven by debt-financed speculation and the relative non-taxation of land rent. While land bubbles have been a continual feature of the Australian economy, what separates this cycle is the relative enormity of the boom in both land values and private debt. A smaller private debt to GDP ratio during the 1880s and 1920s was enough to produce two devastating depressions, including a number of recessions during the mid-1970s, early 1980s and early 1990s.
The question is often asked why housing prices are so high. Instead, the real question is to ask why prices are so low. The banking and financial system is ready to lend absurd amounts of debt to the willing army of “greater fools,” and has constructed an elaborate chain from mortgage brokers’ offices through to the business development managers (BDMs) at the banks in order to commit extensive fraud by manipulating loan application forms. This is the “six degrees of separation” Denise Brailey has uncovered. Consequently, the only determinant that prevents the banks from lending more credit is debtors’ ability to finance repayments out of current income. Only when it becomes difficult to finance repayments will the housing and land markets finally capitulate.
It is often claimed “this time is different.” It certainly is, but not for the reasons usually given: Australia has not experienced a land bubble of this magnitude in its history. 70% of adults own property, solvency of the FIRE sector is dependent upon ever-increasing capital values and the governments’ addiction to housing-related tax revenue and votes, it is none too surprising bubble deniers have been out in full force, asserting housing prices are based upon fundamental valuations. Also unsurprising is that all bubble deniers have conflicts of interest, and in an age of the secular equivalent of religious fanaticism and greed, facts and history are conveniently dispensed down the memory hole.
The only option left to policymakers is to continually kick the can down the road, hoping the bust does not occur on their watch. The result, as seen with the Rudd government’s additional First Home Owner’s Boost, was precisely that. This intervention restarted the debt machine, re-inflating housing and land prices to a new, higher peak in 2010. The overarching private debt bubble, which began in 1964, will likely come to an end once and for all when the government runs out of fuel to throw on the fire.