ABC finance host Alan Kohler has shared a “scary” housing picture, after Australia hit a grim milestone dating back to 1989.
ABC finance host Alan Kohler has shared a ‘scary’ chart to illustrate Australia’s property bubble – comparing the current situation in Japan before the ‘lost decade’ crash that saw prices plummet by 70%.
“And finally another scary and depressing way to look at property prices in Australia,” Kohler said at the end of Wednesday’s segment.
“As a percentage of GDP, all residential land in Australia is now worth more than all land in Japan in 1989 – and it was one of the all-time great bubbles, followed by one of the all-time greatest crashes .”
He added: “But this time it will be different, of course.”
During Japan’s housing bubble, the ratio of residential land value to GDP hit a record high of over 330%.
“We just broke that record in Australia, which is not a good start,” said Dr Philipp Hofflin of Lazard Asset Management. Livewire Markets this week.
“It certainly didn’t work well in Japan.”
Dr. Hofflin also noted that in the run-up to the global financial crisis in the United States, real estate prices rose by the equivalent of 60% of GDP.
“Well, we just did more than 100% laziness in three years,” he said.
“Residential values have increased by $2.5 trillion over the past three years, reaching over $10 trillion at the start of this year. And you can see that really dwarfs any other asset price in the country.
Japan experienced a major boom in the early 1980s that saw the value of stocks and real estate soar, with soaring asset prices blamed on “easy credit and rampant speculation, coupled with a lax central bank “, as AVATrade notes.
Land and real estate prices rose nearly 170% between 1985 and 1990, while stock prices doubled between 1987 and 1990.
The bubble began to burst in late 1989, when the Bank of Japan (BoJ) began raising interest rates sharply in an attempt to curb runaway prices.
Asset prices then crashed, leading to a period of economic stagnation from 1991 to 2001 called the “lost decade”.
The Japanese stock market was wiped out, losing 60% of its value between 1989 and 1992.
Despite the equity bloodbath, the BoJ continued to aggressively raise rates due to the resilience of house prices, which finally began to decline in 1991.
In June 1991, the BoJ quickly reversed course and began to cut interest rates dramatically again, and the following year the Japanese government launched a series of massive and ultimately ineffective stimulus packages.
But by then it was too late – the economy was already in a downward spiral.
Japan has been plagued by both a credit crunch – with banks cutting back on lending despite the BoJ’s rate cut – and a liquidity trap, with households and investors holding onto cash.
Land and property continued to plunge over the decade, finally falling 70% in 2001. The Nikkei index fell below 8,000 points in August 2003, from a high of just under 40,000 at the end of 1989.
Property declines as RBA offers shock hike
The Reserve Bank of Australia shocked markets on Tuesday with a bigger-than-expected increase of 50 basis points to take the official exchange rate to 0.85%.
It came after Australian house prices marked their first decline since September 2020, falling 0.1% in May, according to CoreLogic.
Annual price growth has fallen from 24% just six months ago to 14% today.
Several banks had already forecast declines of between 5% and 15% by the end of 2023, but Tuesday’s shock move led some experts to warn that prices could crash by up to 25%.
Writing for news.com.au, David Llewellyn-Smith and Leith van Onselen of MacroBusiness noted that prior to this week’s decision, most economists expected the cash rate to peak at 2.5% by the middle of next year.
They are now predicting another 50 basis point hike in July.
The futures market is even more hawkish, predicting that the RBA will raise the spot rate to 3.5% by May 2023.
“With mortgage demand and consumer confidence facing steep falls due to rising rates, the RBA stands to drive house prices down if it rises as aggressively as economists, let alone the market. , provide for it,” they wrote.
“Futures market forecast of 3.5% OCR would ‘crush’ the housing market, with real house prices falling by around 25% in real terms and more than 30% in nominal terms according to the modeling of the RBA.”