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The Housing Bubble

  1. bbm

    2,264 posts.
    Interesting Read.

    Beware the housing price bubble
    8 May 2002


    From Money Magazine, May 2002
    Prime Minister John Howard told his Liberal colleagues the other day that the economy was “going gangbusters.”

    It was a phrase that resonated with me.

    I remember back in 1980 meeting with Paul Keating at the Wentworth Hotel for a drink. In those days Keating was a junior shadow minister. More importantly he was the president of the NSW branch of the ALP.

    It was wearing this hat that he had been around the corner in Macquarie Street talking with the then NSW Premier, Neville Wran. He was in good spirits when we met, opening with the remark: “That Nifty is a character. He says the economy is going gangbusters. He doesn’t know why. But he is taking full credit.”

    In fact 1980 wasn’t a vintage economic year except for one thing. House prices across Australia boomed. The median average price of an established house climbed by 16.1% following a rise in the previous year of 13.5%.

    There were almost certainly the best two years on housing price performance even seen in Australia. They were not to be eclipsed until 1987-88 and 1988-89 when housing prices rocketed by 19.2% and 35.6%.

    These two episodes had a number of features in common. The boom in housing prices was fuelled by a combination of a strong rise in exports and by a lower interest rate regime. They also shared the common denominator of being followed by recessions.

    They are worth remembering because once again a serious bubble is developing in the housing market. In the 12 months to December the average median price for an established home rose by more than 15% across Australia.

    The lift in prices was not uniform across the nation – it never is - but the surge in prices was far and away the strongest since 1989. Furthermore, it appears to be gathering momentum.

    That is the nature of an asset bubble. It feeds on itself. As prices rise, people use the increased value of their existing asset to leverage themselves up to a higher asset bracket.

    Such bubbles are dangerous for a number of reasons. In simple economic terms they encourage a misallocation of investment and that inhibits potential growth.

    They also set up a debt-deflation scenario when they collapse, thereby pushing an economy into recession. Japan, which experienced one of the all- time monumental asset inflations of history in the 1980s, has been struggling with the pain of debt-deflation ever since.

    Asset bubbles have another important characteristic. They are popular. The holders of assets, and most of us are home owners, enjoy a free lunch in the form of achieving greater wealth for no effort. This increase in wealth underwrites expanded consumer spending, and before you know it you have an economy “going gangbusters”.


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