Melbourne, Sydney witnessing Australia’s property bubble: Ben McEvoy

By Jit Kumar
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At a time when the global economy is slipping towards Covid-induced recession, property prices in Australia have been ballooning. And this property bubble is predominantly located on the eastern coast, particularly in cities with higher population growth such as Sydney and Melbourne, says Ben McEvoy.

In a recent podcast interview with Digital Finance Analytics on his upcoming book, ‘As Unsafe As Houses’, McEvoy said that these cities on the eastern coast of Australia have been witnessing a property bubble that “we saw into about 10 or 12 years ago”.

According to him, properties in these cities are beyond the reach of many people and that’s evident from several surveys. “For example, the International Housing Affordability Survey ranks Sydney as 3, Melbourne 4 and 10 other Australian cities in the top 50 of the world’s most unaffordable markets.”

Apart from increasing unaffordability, he said that the other two major influencing factors involved in this Australian property bubble are loose credit underwriting standards and excessive private debt. These are a big worry “as these could impoverish a generation when the property prices fall apart”.

“Banks make their money by issuing debt. However, there’s a trade-off of the property bubble between the amount of credit that is issued in competition for market share and the probability of bad debt being placed on the bank’s balance sheet.

“The residential mortgage loans, as a percentage of total loans in Australia, we’ve seen 60% of total issued loans have been to the residential sector, now that’s double the amount of the US and it’s triple the amount of the UK.

“The Reserve Bank of Australia has cut interest rates far too low and they’re being held there for far too long. In the Western world in particular, I feel that it’s created the housing bubble, which will subsequently lead to an inevitable bust”

“So, our lenders have a higher appetite for consumption and speculative purposes as opposed to investing in sustainability such as small business manufacturing entrepreneurialism that help create a stable economy into the future and thus create increased wages and increasing jobs,” McEvoy said.

The ramification of this factor in itself is acceptance of excessive private debt, the other major factor, the economist said.

“Australia has a severe private debt problem now… we have the second highest household debt to GDP ratio in the world. The important point with household debt is that a lot of it is consumed in mortgages as mortgages are essentially one of the largest purchases people will make in their lifetimes,” he told host Martin North.

“Some 37 percent of people have a mortgage, which means that a lot of that household debt is concentrated to the 37 percent and we know by empirical evidence that financial crises are often catalysed by marginal burroughs’ inability to pay their financial obligations which is amplifies the risk that Australia currently has now,” McEvoy added.

Interestingly, he has blamed the central bank and policy makers for the property bubble.

“The Reserve Bank of Australia has cut interest rates far too low and they’re being held there for far too long. In the Western world in particular, I feel that it’s created the housing bubble, which will subsequently lead to an inevitable bust,” the author said.

Also responsible are the policy makers who have enticed incentives such as negative gearing and capital gains tax exemptions and things that lead to rising housing appreciation, he added.


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