According to a Morgan Stanley strategist, Australian home owners and property investors are taking part in a “Ponzi” scheme which will backfire. The expert claims that our property is overvalued by as much as 40% and will show negative growth over the next decade.
This is further talk of an “Australian Property Bubble” that we have heard of all too many time of late.
Morgan Stanley claims that owner-occupiers are in too much debt and investors are taking a risky approach by relying on capital gains to repay their mortgages.
The expert claims that the First Home Buyers scheme was not a healthy policy for the local property market as it has only put further steam into an already overheated market.
“Buying an asset that’s over-priced never ends well,” he said. “The real return on residential property over the next decade is likely to be negative, in my view.
“Investors have become Ponzi borrowers — Hyman Minsky’s term for borrowers who rely on capital gains to repay debt and interest — in the belief that housing is a ’sure thing’ as far as long term growth is concerned. The overseas expert is saying that historical analysis of prices contradicts this belief.
However anyone who has lived in Australia for the past 4 decades at least (as has the writer of this blog) would have witnessed plenty of historical evidence that will blow the ‘overseas expert’s’ theories out of the water.
Australian Bureau of Statistics figures show overall average house prices rose 18.4 per cent for the full year to June, with Sydney prices rising 21.4 per cent — the largest since it began recording these figures in 2002. While this may be true, there was a drop of between 10% and 25% in property values in 2009 – the most significant value losses were experienced by Sydney. Now that we are seeing 20% increases, no one seems to take a broader market view , say over the past 5 – 10 years..instead everyone is focusing on the past year. Certainly if one was to consider home values over a longer term there would be clear evidence that we have not seen more than 15% increase in these over the past 2 – 3 years.
Furthermore the rate of growth has been slowing in recent months as rising interest rates feed through the economy.
Commonwealth Bank of Australia, the nation’s largest bank by market value, also warned last week it could be forced to raise rates independent of the Reserve Bank. CBA’s full-year results showed some key business units were struggling with higher costs.
The RBA – one of the few central bank’s in the developed world to raise rates since the global financial crisis — has been on hold since May as six rate rises since October feed through the economy. The official cash rate stands at 4.5 per cent.