Citigroup Chief Economist Willem Buiter says Australia is experiencing “a spectacular housing bubble” that needs to be addressed with tougher regulatory measures – something we’ve noted time and time again.
A shortage of housing, coupled with record-low interest rates, has made Sydney the world’s most second-most expensive property market. The city’s home prices jumped 16% in the 12 months through April, stoking record household debt and putting home ownership out of the reach of many.
"It had better be focused on immediately, to try and tether a soft housing landing,” Buiter told reporters in Sydney Wednesday, according to Bloomberg. “Clearly if these things are not managed well they can be a trigger for a cyclical downturn.”
Australia’s biggest banks have been tightening their lending standards under pressure from regulators, making home loans for investors and interest-only mortgages more expensive, Bloomberg reported.
The Reserve Bank of Australia, which has cited the east-coast property markets and their impact on financial stability as a key concern, is in a tough spot. While it’s reluctant to cut the benchmark interest rate from 1.5 percent and stoke prices even higher, lifting borrowing costs would place a greater burden on households saddled with debt already at 189 percent of gross domestic product, Bloomberg reported.
Investors, for their part, are starting to come around to the dangerously overvalued nature of Australian stock and housing markets. Earlier this week, Australian asset manager Altair Asset Management made the extraordinary decision to liquidate its Australian shares funds and return "hundreds of millions" of dollars to its clients according to the Sydney Morning Herald, citing an impending property market "calamity" and the "overvalued and dangerous time in this cycle".
Parker said he wanted "to make clear this is not a winding up of Altair, but a decision to hand back client monies out of equities which I deem to be far too risky at this point."
"We think that there is too much risk in this market at the moment, we think it's crazy," Parker said with a candidness few of his colleagues are capable of, at least when still managing money.
"Valuations are stretched, property is massively overstretched and most of the companies that we follow are at our one-year rolling returns targets – and that's after we've ticked them up over the past year. Now we are asking 'is there any more juice in these companies valuations?' and the answer is stridently, and with very few exceptions, 'no there isn't'."
Parker outlined a list of "the more obvious reasons to exit the riskier asset markets of shares and property". These include:
- the Australian east-coast property market "bubble" and its "impending correction";
- worries that issues around China's hot property sector and escalating debt levels will blow up "later this year";
- "oversized" geopolitical risks and an "unpredictable" US political environment;
- and the "overvalued" Aussie equity market.
But, to Parker, it was the overheated local property market that was the clearest and most present danger. "When you speak to people candidly in the banks, they'll tell you very specifically that they are extraordinarily worried about the over-leverage of the Australian population in general," he said. He flagged how exposed the country's lenders were to a correction.
"If they get a property downturn anything similar to 1989 to 1991 then they are going to have all sorts of issues," Parker said.