Australia’s housing bubble would defy worldwide trends and all historical evidence if it did not burst, a US investment fund has said.
Jeremy Grantham, co-founder of Boston-based GMO, said Australian home prices continued to rise because the Reserve Bank’s rapid interest rate cuts during the financial crisis “protected” the nation’s housing bubble.
“But if they (home prices in Australia and the UK) don’t go back to … the old trend line multiple of family income, which should drive house prices, it will be the first time in history that such a bubble is not broken,” Mr Grantham said in a recent interview with the Financial Times.
“Now we have to see what happens when interest rates rise.”
The RBA, after cutting rates to a 50-year low as it moved to spur economic demand, began lifting the official cash rates in October, its most recent move coming earlier this month when the cash rate went to 4.25 per cent.
A consensus of economists is tipping another 25-basis-point rate increase next week, according to Bloomberg. Credit markets are pricing in a 50-50 probability of such a move when the RBA board meets on Tuesday.
Australian home-price growth has shown signs of flagging in the most recent quarterly price data. The national median house price rose 3.1 per cent to a record $542,800 in the March quarter, after a 4.8 per cent increase in last three months of 2009, according to figures from Australian Property Monitors that were released yesterday.
The average income-to-loan-size ratio was 3.5 times in 1998 but is now almost six times, based on mortgages today, according Fujitsu consulting data.
The nation’s home home prices have been supported by a growing population, a strong economy, a low unemployment rate and a chronic shortage of affordable housing, estimated by the government to be about 200,000 units this year.
In the interview, Mr Grantham also pointed to a bubble in the UK housing market.
House prices there, after dropping by almost 18 per cent in the year to February 2009, are now up 10.5 per cent in the year to April 2010, according to the Nationwide Housing Price Index.
Of the 34 bubbles GMO researched, including the US housing bubble and the dotcom stock bubble, 32 have returned to the trend that existed before the emergence of the bubble, Mr Grantham said.
GMO, a privately held global investment management firm, has $US107 billion under management.