Australian economy ‘dangerously overheated’
By Kirsten Aiken in LondonOne of the world’s most respected economic journals has delivered a sombre assessment of the Australian economy, saying it has alarming similarities to the United States economy during the boom of the 1990s.
A doubling in productivity, an unsustainable increase in consumer spending and an extraordinary borrowing binge have placed Australia on the precarious edge of a sharp downturn, according to the London-based Economist magazine.
The magazine’s economics editor, Pam Woodall, says Australia has seen one of the fastest growth rates of any developed economies over the past decade.
“That growth has been genuine,” she said.” It’s been due to structural reform, sound monetary and fiscal policy.
“But when I look at the Australian economy now, I see an awful lot of similarities with what the US economy looked like in the late 1990s, just before its stockmarket bubble burst.”
Mr Woodall says rapidly climbing house prices are one sign of Australia’s bubble.
“The problem is that after long economic booms, there’s a tendency for people to get carried away,” she said. “They start to believe that the economic cycle has been eliminated – and it hasn’t.
“The list of similarities between the Australian economy at the moment and the US economy in the late 1990s is quite alarming.
“For example, Australian households now have a negative savings rate, they have been spending more than they earn. Household debt in Australia has actually been rising even faster than in the United States and maybe most worrying of all, Australia has also had its own dose of irrational exuberance, just as the US stock market rose to unsustainable levels in the late 1990s.
“In Australia, it’s house prices that have risen to unsustainable levels. It’s clearly a bubble and at some stage I’m afraid, house prices are likely to fall.”
Ms Woodall says that even if action is taken now, reining in that exuberance and preventing a crash will be difficult.
“I suspect it’s going to be very hard now to have a soft landing,” she said. “That’s clearly what the Reserve Bank is praying for by increasing interest rates slowly. But when you look at the level of house prices in Australia relative to incomes, or relative to rents, they’re just at record levels.
“I think the most worrying thing about the Australian property market is the huge role that’s been played by investors, buying homes to rent out. It’s so much higher than in other countries around the world and the amount of debt they’ve taken on.
“If house prices were to start falling in Australia, then I think some of those investors could be forced to sell and then prices could fall even further.”
She says when the bubble will burst is a “difficult question”.
“My experience with bubbles is that they always go on for longer than you expect,” Ms Woodall said.
“I understand that the housing market is weakening now in Australia. But in terms of national average of house prices, they could easily go on rising for another year. But the further they climb, I fear the further they will fall.”
— adapted from a story for The World Today
So when the bubbles burst there will be more bargain to be pick up by creative investors.
Kind regards
Chan Dollars
[Retire Young, Retire Rich] [strum]Well it makes you wonder –
I recall that back in Oct 2000, I borrowed $10k and put the money into a BT Time (Technology)Fund. Do you remember those days when everyone was making heaps of money out of IT stocks.
In March 2004 its worth $3300.
I am not saying property will go down by 60% but it could go down 5-20% or remain flat for a very long time – some say 4-10 yrs.
This is just an example of the herd mentality and I was part of it….
Hi Guys,
im not to concerned about what the media or some so called gurus, who have only been in the market for a short time, but theory is one thing, but reality is a whole different thing…
how many times have we heard “when a boom occurs a bust follows afterwards” thats in theory, but in reality this is the opposite in the properyt market…
… instead it will look like this…. boom, slow down to a steady out, and slowly rise to a higher steady out or increased boom again….
theory vs reality are 2 different things, nothing to be to concerned about….
… by the way, listening to the radio this morning, the RBA released this is the 13th year of growth consecutive in Australia…
Cheers,
sisOriginally posted by Still in School:Hi Guys,
im not to concerned about what the media or some so called gurus, who have only been in the market for a short time, but theory is one thing, but reality is a whole different thing…
how many times have we heard “when a boom occurs a bust follows afterwards” thats in theory, but in reality this is the opposite in the properyt market…
… instead it will look like this…. boom, slow down to a steady out, and slowly rise to a higher steady out or increased boom again….
theory vs reality are 2 different things, nothing to be to concerned about….
… by the way, listening to the radio this morning, the RBA released this is the 13th year of growth consecutive in Australia…
Cheers,
sis.
Hi SIS
I don’t know how long you have been in
the Property Investment scene
do you remember late 80’s early 90’s????
I personally think the market will go down
5-15%in some areas and will recover in 5-6 years
I have been wrong before just a gut feeling talking to agents I KNOW WELL and are currently not able to sell for a couple of months the same property that would have sold within a couple weeks l;ast year and at a premium priceSIS
So you are one of the people who believe that there cannot be a bust? You have obviously come up with some good reason why this time it cant happen when it has been happening all around the world for hundreds of years?I remember the late 80’s and early 90’s… what similarities are you drawing?
As for the busts that have been happening for 100’s of years… this isn’t exactly a Tulip boom market that we are talking about. The biggest conclusion you can draw from looking back 100’s of years is that property is a scarce commodity that on avergae always goes up.
Extensive list of new Perth property available for sale.Alternatively, become a joint venture partner in one of our property development partnerships – contact me to find out why our developments are unique. John – 0419 198 856
Originally posted by HousesOnly:SIS
So you are one of the people who believe that there cannot be a bust? You have obviously come up with some good reason why this time it cant happen when it has been happening all around the world for hundreds of years?Read what SIS wrote again! The way I interpreted is slow down to steady out not bust!
how many times have we heard “when a boom occurs a bust follows afterwards” thats in theory, but in reality this is the opposite in the properyt market…… instead it will look like this…. boom, slow down to a steady out, and slowly rise to a higher steady out or increased boom again….
Kind regards
Chan Dollars
[Retire Young, Retire Rich] [strum]Hi all,
Hmmmmmm – then there is this opinion.
http://www.theage.com.au/articles/2004/03/25/1079939765464.html
Derek
“SIS
So you are one of the people who believe that there cannot be a bust? “Of course you are partly right in that property busts are more mellow than share busts.
but still,
I think its’ selective ‘believing’. Of course everyone who owns property in Aus doesn’t want there to be a bust. the ones who are the highest geared and therefore are most vulnerable will want it least!!
i think a lot of negative gearers wouldn’t be looking forward to paying in to a property for six years while it loses CG or stays the same (still a loss, compared to inflation)
I think everyone who does not own property in Aus but wouldn’t mind, will be selectively listening to the ‘data’ and ‘opinion’ that says that prices will soften, crash, flatten, drop, correct, or whatever jargon you want.
i think if serious ‘softening’ does start to occur, it will occur in Sydney first, then Melbourne, then Perth, then Brisbane last, in exactly the same order as those regions boomed.
Has Sydney already started ‘weakining’?
or should that be ‘melting’???Mini,
I reckon the oversupplied apartment unit will be first to be under pressure- it already is by many reports. And the oversupply occurred in Melbourne more than sydney. If you look at Docklands/southbank- god, i was surprised when I saw that area recently. Tall towers standing by themselves- not really fitting in with the area, and as we know, many of them marketeered with in-house valuers. That HAS to be an area of great risk. Sydney doesn;t have distinct areas of oversupply like that- at least not ones that stand out like a sore unit!
Sydney has huge migration (50,000 people per year) and I believe Melbourne has less migration. One of the articles I posted on the forum says the brisbane areas have 47,000 net migration each year, which makes me think my “qld may be the new melbourne” proposition might have some weight.
But then, everyone is speculating right now- about everything- re the RE market. Guess by the end of this year, we’ll see what markets have eased off a bit.
I think the australian population borrowing less (as is evidenced by all the media reports) is a good thing. WE all did well during the boom, and people got into RE, probably inreasing prices at a mega rate, and now people are chilling out a bit more, possibly due to relative inaffordability in the major markets.
I don’t see the market crashing in a big way (sorry folks- I know I’m supposed to remember history!) We’re still way cheaper than manhatten, new york, paris, austria (hugely expensive), vancouver, montreal, london etc. We may be “over-valued” but compared to what?
I have serious doubts the sydney market will have a median price value of $250k in the future, or the bris market will ever have a median value of $125k median ever again.
Although I am sure people will beg to differ [goatee] [thumbsupanim]
kay henry
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