Aus bears scary resemblance to pre-collapse Ireland

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An analysis of the shattered Irish housing market published Tuesday by unconventional economist Leith van Onselen has raised serious concerns for Australia.

Ireland’s house values have collapsed by 50%, on average, since 2007 and the island nation’s home owners have collectively lost the equivalent of A$315bn.

Van Onselen notes that in 2004, Ireland was the ‘toast of Europe’, a country with a GDP per capita roughly 20% above the European average.

“How things change… As is the case with most housing bubbles, Ireland’s was fuelled by a number of inter-related drivers: easy credit, speculation, and unresponsive supply.”

In 2007, the Ireland Central Bank’s Financial Stability Report showed lending restrictions on investor mortgages were relaxed in the mid-1990’s, enabling property investors to borrow at the same interest rate and on similar terms to owner-occupiers.

“This led to a surge of property investment... In fact, as at June 2007, investors accounted for around 27% of total mortgage lending – slightly below Australian investor’s share of 32% of total mortgage lending.”

The sharp rise in property prices prior to the GFC forced rental yields down as well.

“As such, recent investors were cash flow negative in 2007, since rental income nowhere near covered holding costs. So just as property investors in Australia rely predominantly on capital appreciation to make ends meet, investors in Ireland were doing the same.”

The Irish planning system also contributed to the bubble, he argues, by creating a system of supply that was unresponsive to market demand. Governments granted planning permits ‘too late’, resulting in the building of large numbers of standardised, small, poor-quality homes in satellite locations far from city centres – something van Onselen believes is currently happing in certain parts of Australia, including Melbourne.

There are, of course, significant differences between the Irish and Australian economies and van Onselen believes that an Australian housing bubble, while certainly possible, wouldn’t likely be as dramatic as the Irish one.

“There are some pretty big differences. Ireland’s exchange rate and monetary policy is set by the ECB, while Australia has control over its own economy.”

Ireland also doesn’t have Australia’s mining sector, but van Onselen warns that, if we were to experience a mining bust, ‘that could be our catalyst’.

“There certainly are a lot of similarities, but I don’t think we’d have nearly as big a bust as Ireland; we’ll have a similar, less drastic fate.

“The risk for Australia is it basically hinges on the mining boom. If we had a big, big drop-off in mining, we could have a pretty big drastic adjustment. But it’s hard to say what the price adjustment would be if that happened. I couldn’t see Australia being anywhere near 50% [reduction in home values] but 20% could be possible.”

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  • andy garcia says on 12/04/2013 02:10:32 AM

    there wont be any bubble we have an intake of 150 thousand migrant plus all undocumented visitors i cant see any bubbles

  • Nostradoomus says on 15/04/2013 08:32:17 PM

    A correction within the Australian Hosing market is getting closer by the day... A lot of "experts" argue that Australia went through the GFC with little damage... But the reality is that the so called GFC should be renamed to the US-FC and its domino effect is just starting to pass by the Eurozone... Asia and Australia are next on the game...
    To expect a simultaneous economic fall out both in the USA and in other economic areas of the world is naive and a clear example of economic ignorance, and so is to keep believing that Australian property prices are set to keep rising... Just do a simple exercise yourself: Search for rental properties in Sydney's Easter Suburbs and those ones close to the CBD. More than 800 properties are available and ready to be leased, but the ridiculous prices push tenants to queue for the cheapest options in the markets (those rentals under $550)... If you bought an "investment property" in the aim to rent it around the $600+ mark, be ready to have it empty for a while...
    This is just the beginning, and pretending that nothing will ever happen here is a very irresponsible move. To compare the US housing market to the Australian Housing market is something like comparing Japan's Motor Industry with India's car industry... The only thing that makes us different to any developing nation in the world is our (more equal) distribution of wealth. Even Mexico and Brasil have, today, a stronger manufacturing sector than ours... The Bulls take pride on our interrupted 21 year period of economic growth... So it has been in places like Chile, Colombia, Peru and Mexico, but only for the people with money and influence in industries such as mining and real estate. And as the distribution of wealth is so precarious in those countries, chances are those wealthy chileans have made even more profits that you!

  • June says on 12/10/2013 02:34:57 PM

    andy garcia - you may want to rethink your comment. Most the of the immigrants are poor and cannot afford housing anyway, so they won't save the over-valued housing market. Crash!

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