Property excesses are often found at the heart of financial crises.
And there are many who believe Australia is suffering from one of the worst excesses imaginable.
"Australia is one of the countries closest to recession and financial crisis," says David Levy, an American economist and author and chairman of economic consultancy Jerome Levy Forecasting Center in New York.
US household debt was 98 per cent of GDP in 2008 when the market crashed.
Australia's current household debt to GDP is currently at 123 per cent of GDP – the second-highest in the world (Switzerland has the highest debt to GDP at 128 per cent).
The Aussie debt binge is aided by generous tax concessions – negative gearing and the capital gains tax discount – which encourage housing investors to acquire more property.
But as house prices climb rapidly in Sydney and Melbourne, wage growth is stagnant, meaning the household debt-to-income ratio has climbed to an all-time peak of 189 per cent.
Mr Levy says Australia's "housing bubble is extraordinary" and "its dependence on mining extreme".
"Australia will go through a contained depression – the RBA and rest of the government will not let its banking system collapse – but it will still be a relatively tumultuous process."
Contained Depression..........Who would have thought.
Quote:
Steve Keen, Professor of Economics at Kingston University in London, a long-time doomsayer on Australia's mortgage binge, says simply: "It's dangerous".
He says the Reserve Bank and Australian politicians ignore the dangers of private household debt today just as former US Federal Reserve chairman Ben Bernanke did before the GFC.
Keen says the risk of recession is even higher now that APRA has slightly tightened lending standards.
"It's inevitable," he says, sticking to his bold prediction that it will happen before year's end.
The team at LF Economics – a research firm founded by Lindsay David and Philip Soos – have also been sounding strong warnings of a crash.
David, author of Australia: Boom to Bust, says, "I don't believe there is another mortgage market globally where a banking system leveraged their household sector as much as ours is without a systemic collapse."
He says Australia's debt profile has a strong resemblance to Ireland's debt profile in the lead-up to the GFC, whereby public debt levels by global standards were relatively low but household debt is extremely high.
"The mistake we have made in Australia's is that we essentially copied Ireland's pre-GFC paper wealth creation model by allowing banks to over-lend and engage in Ponzi finance," Mr David says.
"That is, lending ever-larger amounts of mortgage debt to owner-occupiers and investors to increase leverage and outbid other speculators."
Aussie sub-prime
Another firm warning of an impending housing crash is JCP Investment Partners. It issued a report recently noting that mortgage loans to over-extended borrowers amounted to more than six times household incomes and could wipe out 20 per cent of the major banks' equity base.
JCP's report also accuses banks of hiding the risks.
"We suspect the old three-times-gross-income rule has been fundamentally breached," Matthew Wilson, head of financials research and senior portfolio manager, says in the report.
"Indeed, we believe gross incomes could have been capitalised to well over six times, which would partly explain the rapid increase in Melbourne and Sydney house prices."
The JCP report says interest-only loans could be Australia's sub-prime since "interest-only households tend to have lower incomes and higher amounts of credit outstanding".
Ahh.....Good Times........There's more there in the Article for those inclined to want to know whats coming....
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