The Australian property market is in the midst of the largest housing bubble on record, two economists have warned the government.
In a submission to a parliamentary inquiry into home ownership, LF Economics economists Lindsay David and Philip Soos have blamed
“Contrary to the analyses of the vested interests, the data clearly establishes Australia is in the midst of the largest housing bubble on record,” the submission states.
“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 industry commentators have put rising house prices down to a shortage of supply to meet growing demand, including Mortgage Choice
chief executive John Flavell
, David and Soos argue that Australia’s housing shortage is fictitious.
“Central to this argument is that a continual deficit of dwellings across Australia’s capital cities has been a major cause of the structural rise in real housing prices. Government and the FIRE (Finance, Insurance and Real Estate) sector are adamant that a housing shortage is responsible.”
In fact, economic modelling by LF Economics suggests that Australia has an overall oversupply of housing, to the tune of 165,000. According to David and Soos, Australia’s ever-rising house prices are a result of artificial demand and an oversupply of mortgage debt.
“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 – and it will be disastrous.
“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,” the submission states.
“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.”