Australia: Bubble Trouble

Last Updated: 4 August 2011
Article by Daniel Minihan

There has been much talk in recent times about whether the Australian property market is currently in the midst of a bubble. There are those who strongly believe this to be true, whilst there are others who point out that the rising prices is merely a reflection of current factors, including supply shortages and increasing demand from migration. Many have been quick to make comparisons between the Australian market and that of the U.S. in the lead up to its crash, and whilst this is useful it must be done with caution as no two markets are alike.

The U.S. housing market is very different to Australia in two main ways.F irstly, when a bank originates a loan in Australia it retains that loan on its balance sheet and is exposed to any loss incurred if the borrower defaults. In the U.S., after originating a loan most banks sold these loans on where they were bought by fund managers and pension funds.

Secondly, U.S. loans are generally nonrecourse, that is, a borrower can simply send the keys to the house back to the owner of the mortgage and walk away. It severely impacts the person's credit rating, but once sent back they are no longer liable for any shortfall on the loan if the proceeds from the house are less than what is owed.

Whilst this is a key difference between the two markets, it doesn't necessarily reflect in people walking away, with recent data from CoreLogic showing that at the end of 2010 just over 23% of all properties in the U.S. with a mortgage were in negative equity (meaning the house is worth less than what is owed).

Many also point to a direct comparison of the indexes that measure the property markets in each country and point to the correlation of these figures.

In the U.S. the Case Schiller index is used to measure property prices which include a sample of capital and regional cities, where as in Australia the Bureau of Statistics collects information on capital cities only, with regional areas not included. So it is not a fair comparison to begin with, but I acknowledge it still provides a broad indicator.

This article however is not going to add any further to this debate as we will only know if it was a bubble after the event. So with that in mind let's take a look back at some of the stranger bubbles of times past and reflect on whether the Australian property market might be added to it at some point in the future.

Roaring through the Tulips

Spare a thought for the poor Dutch people who at one time were trading their houses for Tulips. Having fallen in love with tulips the Dutch initially had very little supply due to the 4-7 years it takes for these flowers to mature which saw the price increase 20 times in the space of one month. Not long after this, and unfortunately for those who had traded their houses, the prices fell to mere hundredths of the boom level within weeks leaving many people severely out of pocket (and a home)

Rhodium Anyone?

Rhodium is a member of the platinum metal family and is mostly used as a catalyst in the three-way catalytic converters for motor vehicles.

In 2004 it was trading at around $500 per ounce, but by the middle of 2008 had increased to $9,500 per ounce, an astounding increase of 1,800%. It soon fell back to $1,000 and the spike was believed to have been partially the result of a Wall Street speculator.

Romanian Property

If you think our houses are expensive, then look no further than Romania where prices rose by 1,000% between 2002 and 2007. Interestingly it is believed that the establishment of anti money laundering laws restricted the activities of corrupt businessmen, forcing them to invest into property which when combined with poor supply set off a bubble.

Its always sunny in Florida

Today, Florida is the home to millions of people and a large number of sports stars who can train all year round in warm conditions.

But in the early 1920's Florida was almost completely undeveloped and ripe for developers who swarmed in. Firstly ordering building supplies which clogged railways who subsequently banned them, then after a boat sank blocking access to Miami harbour, developers struggled to fulfill their promises. After a Hurricane in 1926, many went bankrupt and nobody returned until well into the 1950's.

Dot Com Mania

The current frenzy today surrounding Facebook and Twitter is reminiscent of the dot com bubble of the late 90's/early 2000's. These were the days of building hits, branding and growing the business and when worrying about the profit later. Slowly it dawned on investors that profits were unlikely to come and the bubble officially burst on March 10 2000. This had a lasting affect as many 'Mum's and Dad's' got caught up in the euphoria which coincided with an explosion of easy Nasdaq Index through the dot com bubble online trading. Following the bust many countries fell into recession as spending dried up to cover losses.

The Poseidon Adventure

Set against the backdrop of the Vietnam War, Poseidon NL discovered a lucrative nickel deposit in the outback of W.A. The world's largest supplier of Nickel, Inco, was experiencing industrial action which constrained supply so the news of this discovery sent the share price soaring, and dragged other mining stocks with it. By the time nickel was produced from the mine, the price had dropped and Poseidon went broke a short time later, ensuing Australia retained a place in bubble folklore, which brings me back to Australian property. Only time will tell for the Australian property market, but key factors to watch for are a surge in supply, higher interest rates and anything that sharply affects unemployment.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

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