Australia faces debt levels higher than those which prompted the Reserve Bank of New Zealand to issue a warning about a major price correction.
The RBNZ in its annual report on Thursday warned that a severe housing correction would pose substantial risks for financial system stability and the broader economy.
“The banks are heavily exposed to housing, with mortgages making up around 55 per cent of their total assets. Household debt, at 163 per cent of household disposable income, is at a record level.”
By comparison, in Australia, the household debt to disposable income ratio is currently over 180 percent and the share of banks’ portfolios in mortgages is currently 62 percent.
Former Reserve Bank governor Glenn Stevens said recently that Sydney house prices gave him “some discomfort” .
Current RBA boss Philip Lowe said this month that despite reductions in official interest rates the Australian housing market was less of a risk than a year ago thanks to a crackdown on loans to investors.
Despite the statistics, most but not all economists, say that talk of a housing bubble is misplaced.
“Prices are sort of high, but expensive doesn’t make the market a bubble,” Market Economics’ Stephen Koukoulas said.
“The various price dynamics are sensible. There might be frenzied buying to some extent but buyers are not rushing for no reason.”
“Population growth is well above average. One of the best clues is the vacancy rates, closer to the 2 per cent mark than 3 per cent,” CommSec economist Craig James said.
Most economists and experts stand by Sydney’s housing “fundamentals”.
Prices are high for two reasons: low supply, high demand.
Demand is high because the cost of money, interest rates, is low and Australia, as an immigrant country, has a growing population.
Conversely, the supply of new housing has not kept up with demand due to the slow pace of development and because sellers are holding onto their now high-value assets, unwilling to sell.
Bubble doesn’t mean a crash
The key thing about bubbles is they burst. But people have been talking about a Sydney “bubble” since about 2003 and it hasn’t, AMP Capital chief economist Shane Oliver said.
“[The bubble] probably started about 2003 and this debate is still raging. It sort of wax and wanes, cools off a bit,” he said.
“Just because Sydney is in a bubble does not mean that a crash is coming.”
“Each one of these bubbly episodes was relieved slower … it has been bubbly on four occasion in the last 13 years but we haven’t had a crash. To get a crash you must get higher interest rates and unemployment and a massive rise in supply.”
“And maybe if it never bursts then maybe it was never in a bubble, that it was fundamentally justified.”
But economist Steve Keen is a strong supporter of “bubble theory” citing debt levels like those mentioned by the RBNZ as the most obvious clue. He also anticipates the bubble will burst within the next three years.
“Is Sydney in a bubble? Absolutely. It is the most obvious bubble on the planet apart from China and Canada,” he said.
“What bursts high price bubbles is not the level of debt but the change in debt.”
“At this rate, we will have an infinite debt to income ratio. We will reach 170 per cent of GDP and the highest the world has ever seen is 140 per cent.”
Looking back at history, Mr Keen says Australia is already emulating the US sub-prime crisis of 2007.
“[Like Glenn Stevens], just before congress in 2006 Alan Greenspan said there was no national bubble but if you look at the index, it was standard deviations above the long term average.”