Australia in for a property "bloodbath" economists predict

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While the heads of two major real estate agencies believe there is no housing bubble in Australia, two economists believes Australia is in for a “bloodbath” caused by a sharp correction in prices.

In a submission to an upcoming parliamentary enquiry into home ownership on behalf of real estate and financial services research house, LF Economics, economists Lindsay David and Philip Soos have accused politicians and the housing industry of having their heads in the sand over the current real estate situation across Australia.

“Contrary to the analyses of the vested interests, the data clearly establishes Australia is in the midst of the largest housing bubble on record,” Davis and Soos said in their submission.

“Policymakers are caught between a rock and a hard place, as implementing needed reforms will likely burst the bubble, causing severe financial and economic fallout as residential land prices revert to mean.”

While many property and construction observers and lobby groups have argued that an undersupply of housing stock has played a major role in the current growth cycle being seen in Australia, David and Soos argue that Australia is over supplied to the tune of around 160,000 dwellings.

The two economists believe the claims of undersupply are similar to those voiced before the market collapse in the United States in the lead up to the global financial crisis.

Rather than the issue of supply, Soos and David believe the price growth in Australia is the result of uncontrolled lending.

"What these housing markets experienced was artificial demand generated by their banking and financial systems, having lent colossal sums of private debt to speculators to bid up housing prices which led to the entry of ever-more buyers.

“It is during this period these institutions claim a dwelling shortage is the cause of record high housing prices.
“The failure of the RBA and government to identify the oversupply of mortgage debt in the household sector as the real culprit has now left the housing market and economy exposed to financial instability and a severe downturn.”

While they did not say when the bubble will burst, Soos and David believe it is only a matter of time before house prices fall.

“Australian economic history and recent international events illustrate collapsing housing bubbles can quickly increase the number of unsold properties (stale stock), shattering the pervasive myth of a deleterious dwelling shortage. Should this occur alongside rising unemployment and underemployment, reduced aggregate demand and falling net overseas migration, the combination of declining population growth and an oversupply of investment properties would place further downwards pressure on rental prices. Falling housing and rental prices, including sales, would be a doomsday trifecta for investors as they suffer losses in both capital prices and net rental incomes,” they said.

"Housing prices across all capital cities remain grossly inflated relative to rents, income, inflation and GDP. What event or set of events triggers the beginning of the end of the housing bubble is not yet known. A bloodbath in the housing market, however, appears a near certainty due to the magnitude of falls required for housing prices to again reflect economic fundamentals. The largest residential land market bubble on record is truly incomparable and dwarfs earlier speculative episodes in the commercial and industrial land market."

According to their research, Soos and David believe Melbourne would be the market hardest hit by the predicted collapse.

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  • Paul says on 24/06/2015 09:35:23 AM

    And even more economists have ridiculed this prediction.

  • Jerry says on 24/06/2015 01:13:02 PM

    Where is the reduction in net migration?...we are in the middle of the Big Australia Policy with 35 million population. A lack of infrastructure has seen prices really jump in Sydney. Otherwise prices are increasing below the historical norms on average. New Hospitals and new train stations increase demand and prices...but that's normal. Demand for property is not the problem...high unemployment is a much bigger problem...Low Coal prices are really the biggest problem for keeping the welfare state going.

  • Terry says on 25/06/2015 05:14:06 PM

    The bubble will burst no doubt just like it has in the last 100years of bubble and bust. But to what extent? Markets like the Gold Coast always suffer badly with extreme swings. The Sydney market however tends not to fall as much and a fall over 15 percent would surprise. With falling full time employment masking the unemployment figures I tend to agree a fall will occur. If you can sustain your low cost mortgage hang on and don't sell especially in the Sydney market which recovers some of the loss quickly other markets may take many years. If negative gearing ends a drop of up to 25 percent is definitely on the cards.

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