“All the signs of a bubble are there,” says ex-CBA CEO

by Miklos Bolza12 Dec 2016
Australia’s property market is showing similarities to one of history’s worst market crashes, Dutch tulip mania, says one former Commonwealth Bank CEO.
In an interview with Sky News, David Murray said that the Australian economy was “vulnerable” due to overvalued property in Sydney and Melbourne.
“All the signs of a bubble are there. Many of the signs are the same as the Dutch tulips,” he said.
He was referring to the collapse of 1637 in which the price of Dutch tulips plummeted after the price was initially bid up to significantly high levels.
While drawing comparisons between the Dutch event and what was happening in Sydney and Melbourne, Murray said we may yet avoid the same fate.
“If the economy tracks along okay, it might turn out that this thing sorts itself out. But when those risks are there, something needs to be done about it in a regulatory sense, and the Reserve Bank and APRA need to stay on it,” he said.
This is the latest in a long line of warnings from the ex-CEO who told Sky News that the uncorrected prices in Sydney and Melbourne are a further cause for concern.
“When we get a momentum in a market like this, when you get these self-amplifying price spirals, the fact they keep going on and on longer than expected is another sign that it’s not very healthy.”
If a crash does occur, it will be spurred on by a large volume of landlords forced to sell their investment properties at the same time, he said.
“We have more investors in the market than we’ve had historically and those investors typically, even people on lower incomes, own multiple properties and those properties are often collateralised in the system. So they’re the people who become forced sellers, and that’s the risk to the system.”
While a crash would make it easier for first home buyers to enter the market, Murray was pessimistic about the effects on the property market.
“If home prices fall significantly, there’s a wealth effect on the economy and a constraint on consumption and that doesn’t help everybody, it doesn’t help jobs, so we don’t want that.”
Related stories:
RBA called to reign in an overvalued market
Property danger zones back in spotlight
Sydney among world leaders for housing bubble risk