The Bubble

This post is largely unreferenced, though I've been reading a number of sources in recent days, including Business Spectator, and the highly recommended Bubblepedia, and these are my reflections.

Banks, property developers and governments, State and Federal, have been colluding to keep the housing market inflated. This has failed in the top end of the market, where housing prices have already dropped significantly (good news for those who need a bargain house in Toorak), but has kept the lower end of the market (often defined as reaching $400 or $500k!), dominated by first home buyers, in a bubble.

Everybody, from real estate spruikers, to government ministers, has been saying that now is the time for first home buyers to jump into the housing market, as the market has hit its 'bottom', and will only be going up.

The behaviour of these people belies their words. For instance, the government has struck an agreement with banks to guarantee mortgages for 12 months, in the instance of the borrower being unemployed. Banks themselves appear to be tightening their lending criteria. The first home buyers grant has been extended until June 2009, and lobbyists are campaigning for it to be continued, and even extended to other parts of the market.

So why are first home buyers being asked to sign themselves up for a mortgage now? The answer is greed. With all other home buyers and investors slowing down their purchasing activity, first home buyers are being asked to play the patsy for property developers and banks, perpetuating the housing bubble.

All this would be one thing if we held to the belief that housing prices will rise forever. If they continued to rise at about 8% per year, as they have, until recently, then nobody would have anything to lose. The borrower would have no negative equity, and the banks would not be exposed to any great risk in the event of a default, as the house would have risen in price anyway.

Despite the Pollyanna attitude of some industry spruikers, there are some good reasons to believe that the market will not continue to magically inflate.

For starters, the RBA has already dropped the cash rate to 3.25%, a discount which the banks are not passing on in any case. Whilst in theory, the RBA can go even lower than this, it is difficult to see the use of monetary policy if the RBA is at odds with the banks.

Secondly, the much-mooted housing shortage is, at least in part, a fabrication. Yes, there is a dire shortage of housing for those sleeping rough, or couch-surfing, or living in caravans, or on the years-long government waiting lists. These people, however, are not like to be purchasing a home in the near future, and the shortage of housing for them is not pushing up housing prices for everybody else. A recent stat in the Age's Good Weekend stated that 77$ of Australian homes have a spare bedroom. I'll believe there is a genuine housing shortage when I see shanty towns on the outskirts of Melbourne.

Unemployment rose half a per cent in March 2009, to hit 5.7%. This doesn't take into account under-employment. For years, governments have considered you 'employed' if you didn't receive benefits, or if you worked an hour a fortnight. Unemployment is tipped by many forecasters to hit around 7.5% by the end of the year. Some have said it will double from current levels. All of this will eat into demand.

The first home owner's grant is due to expire, and arguably, has not actually increased demand at all, but rather, brought it forward by placing an end-date on the handouts. Even if this waste of money is extended, it is unlikely to be able to keep house prices afloat indefinitely. Housing in Australia is among the least affordable in the world, when considered in relation to income. Virtually every developed nation has suffered massive drops in housing prices since the GFC. It is difficult to see how Australia can escape the same outcome.

In view of this, first home buyers who purchase now are exposing themselves to enormous risk, and are propping up the housing bubble at their own expense. Many of them will be among the most vulnerable to unemployment in the coming recession.

It is in the interest of banks, therefore, to pretend that the bubble cannot burst, and to keep the housing market inflated. Should you have deflation in the market, coupled with rising unemployment and defaulting borrowers, the housing market will crash even further. Banks will face severe losses, mortgage guarantee or no. This is especially so when we look at the risks some of the big banks have been taking. I read recently that about 20% of all first homeowners have a loan-to-value-ratio (or LVR) of between 95-100%. Anotyher 25% have a LVR of between 90-95%.

In short, Australian banks have been gambling, and have exposed themselves to something akin to the sub-prime fiasco in the US. (Of course, the big banks in Australia have fewer 'toxic assets', as I understand it, because they have been less inclined than their US counterparts to bundle loans into securities). If it were simply a matter of a few banks failing, most people would allow their passing to go unlamented. After all, the deregulation of the Keating era, supposed to bring greater competition, and therefore better prices and service, has failed. The punter on the street knows that if you walk into a bank and blink, you get hit with 17 different kinds of fees.

The problem is that, by now, we know how this tune goes. If banks go bust, the Australian economy will be held to ransom. Government and taxpayers will become a utility of the banks, rather than the reverse. Banks will have gambled, and lost badly, and the taxpayer will be left to foot the bill.

So whatever happens, there are no winners. Either we have the rather unlikely outcome of the housing bubble continuing, in which low-income earners are barred from ever owning a home. Alternatively, we have a crash, and the greed of banks and others will be paid for by ordinary Australians. Naturally, this is an over-simplification, and there are some other complexities, but these are the basic parameters of the current situation. And yes, the speculation on the part of banks, and the greed of develops and investors, acting as parasites on first home buyers by gamlbing on assets is part and parcel of neoliberalism.