The Financial Times has an interview with Jeremy Grantham, founder and chief strategist at GMO, on bubbles.

Mr Grantham has identified over 34 bubbles over the years based on the 40 year event based from price and volatility. At present 32 of the 34 bubbles have moved back to trend before the bubble existed, with the Japan asset bubble, Tech Wreck and more recently the U.S. housing bubble included in these. He says the U.S. housing bubble was a good example of an ideal bubble.

He says two bubbles remain in play at present. These are the Australian housing bubble and the U.K. housing bubble. He believes mortgage rates came down significantly to protect these two bubbles and now we have to wait and see what happens when interest rates rise. If they don’t come down to the trend line multiple of family income, it will be the first time in history that the bubble hasn’t broken. (I guess property speculators here, do say Australia is different and it won’t happen here!)

He also identifies potentially forming bubbles as commodities and emerging market equities. Commodities could come as another blow to Australia.

Watch the interview here - Apr-19-Jeremy-Grantham-on-bubbles.

According to Veda Advantage, Mortgage applications plunged 15 percent in the March quarter compared with the same time last year or 8 percent from the previous quarter.

Last Saturday, the Federal Government reversed changes to foreign investment legislation which saw a flood of foreign buyers, typically from China make up the shortfall in demand. This tightening, coupled with plunging mortgage applications is expected result in a weak market housing market and softening of prices.

» Mortgage applications plunge - The Sydney Morning Herald, 28th April 2010.

The China Daily today published figures from the China Index Academy (CIA) showing the China residential property market is beginning to cool.

Of the 35 cities the CIA monitors, 21 showed a fall in the number of sales last week.

Hangzhou suffered the largest drop in transactions with a fall of 72.6 percent in the past week. Beijing fell 45.5 percent, Shanghai 32.9 percent and Shenzhen - 63.9 percent.

General Manager of property agency Centaline China, Mr Li Wenjie said he predicted property prices to fall 30 percent in the third and fourth quarter this year.

» Realty sector cooling off - The China Daily, 27th April 2010.

The Rudd Government has today announced a crackdown on foreign property investors reversing many of the changes it made hastily in 2008 under the umbrella of “Administrative Changes” and imposing tougher penalties on anyone breaking these laws.

With house prices in decline in 2008, Wayne Swan made changes to the foreign investment legislation, allowing foreigners to more easily purchase property in Australia and underpinning the weak market. However, this lead to a surge of foreign buyers bidding up prices and locking many Australians out of purchasing their own homes.

Under the streamlining of the Administrative changes, temporary residents such as students didn’t have to notify anyone of their purchase. This made the problem extremely hard to monitor and measure with the government admitting they had no idea just how many foreigners were purchasing property in Australia. Real Estate agents are suggesting as many as 30% of purchases are by foreigners. This change and many others have been reinstated, and temporary residents must once again notify the Foreign Investment Review Board of their purchases and sell when they leave the country.

With a rapid decline in mortgage approvals in Australia since September last year, it has been thought foreigners have been filling the gaps. Any reduction in foreigners participating in Australia’s property market could lead to a fall in house prices over the coming months.

» Crackdown on foreign property ownership - AdelaideNow, 24th April 2010.

» New curbs on foreign home buyers - The Australian, 24th April 2010.

» Foreigners face tighter rules on property ownership - The Sydney Morning Herald, 24th April 2010.

» Australia for Sale - Who crashed the economy?, 27th March 2010.

» Government has no idea - Who crashed the economy?, 21st April 2010.

According to The Economist, Australian housing is now 56.1% overvalued based on the long run average of price to rent ratios. The price to rent ratio is seen as similar to that of the PE (price/earnings) ratio used to value shares.

Australia is in 1st position on the leader board of overpriced property. In close 2nd is Spain at 53.4%, Hong Kong at 49.1%, France 39.7%, and Sweden 37%.

Japan had a huge house asset bubble in 1990 and has yet to recover, with the economist calculating prices 33.7% undervalued.

» You can’t keep ‘em down - The Economist, 15th April 2010.

The federal government has no idea how many Australian properties are being snapped up by foreign buyers. According to the Sydney Morning Herald, a government analyst confirmed that no data has been kept on purchases since the administrative changes to the foreign investment laws opening up the flood gates to overseas buyers.

In Victoria, the State Revenue Office records buyers’ addresses in stat declarations for title transfers, however a spokesperson for the State Revenue Office said the data was not compiled.

» No data: foreign buyer property puzzle - The Sydney Morning Herald, 21st April 2010.

In a bid to further restrict the speculative housing bubble in China, the central government has raised the LVR for families purchasing a second home from 40 to 50% and set the minimum LVR for First Home Buyers purchasing property that is larger than 90 square metres at 30%.

Further restrictions were made on Saturday paving the way for commercial banks to refuse loans to people buying their third home.

The changes lead to a 4.8% fall in the Shanghai Composite today, the biggest fall in eight months.

» Chinese shares plummet nearly 5% over tightening moves - China Daily, 19th April 2010.

» China ups war on property prices - The Australian, 19th April 2010.

» China moves to prevent property bubble - CNN, 16th April 2010.

According to data released from the Real Estate Institute of Victoria, the Melbourne median house price fell two percent in the March quarter. This comes amid claims the market was glowing white [hot].

On Tuesday this week, the Sydney Morning Herald said buyers were retreating from the Melbourne property market at a rate of 600 a month, causing real estate professionals to predict an “exhausted market”.

On Wednesday, Westpac Boss, Gail Kelly joined the growing group of senior bankers warning of an overheated property sector. “It seems things are just a little bit too hot in Melbourne just at the moment, but I suspect that will moderate in a rising interest rate environment.”

Despite the overheating market, the Real Estate Institute of Victoria has this week called for the First Home Buyers Boost to be re-introduced and even increased.

» Housing market to weaken as buyers retreat - The Sydney Morning Herald, 13th April 2010.

» Property too hot in southern city, says Gail Kelly - The Australian, 14th April 2010.

The China Daily has reported on a 467 percent increase in trading volume for Shenzhen second hand houses in March as speculators headed for the exits. The report from the Wuhan Even News on Friday even suggested that some investors have hundreds of homes for sale.

» Speculators leaving Shenzhen housing market - China Daily, 16th April 2010.

Figures from the Reserve Bank of New Zealand show the number of mortgage approvals in the first quarter of 2010 was down a record 30 percent over the same time last year. The overall value of loan approvals fell 25.2 percent to just $578.2 million.

» Home loan approvals take record tumble - NZ Herald, 15th April 2010.

» NZ Housing Bubble said to be on verge of collapse - Who Crashed the Economy?, 8th March 2010.

Official figures out today from the Australian Bureau of Statistics show home loan approvals fell 1.8% in February, the fifth consecutive fall. This has prompted some economists to forecast house asset price falls in the next coming months.

According to the Sydney Morning Herald, Matt Robinson, an economist from Moody’s Economy.com said based on the trends over the past three years, there was a high correlation of loan growth over 2 per cent a month and house price appreciation about 3 per cent quarter on quarter.

”Because we’re seeing five months now of declining housing finance, based on those trends, we would likely see slowing house price appreciation if not some kind of plateau or decline in house prices in a couple of months’ time.”

» Loans slump may point to house price fall - The Sydney Morning Herald, 12th April 2010.

» Australian home loan approvals fall of a cliff - Who crashed the economy?, March 10th, 2010.

» No ‘pent up’ demand for Mortgage Approvals - Who crashed the economy?, February 10th, 2010.

» Shock plunge in home loan approvals - Who crashed the economy?, January 12th, 2010.

The Adelaide Advertiser today published figures from the Valuer-General showing the medium house price in Adelaide is now $405,000.

The Advertiser expresses concern of its sustainability, writing “Property owners have benefited from the 243 per cent increase in housing prices over the past 10 years, but those seeking to enter the market have fallen further behind as wages have increased only 35.5 per cent over the same period.”

Historically, House prices normally only rise in line with wage growth and inflation. If it didn’t, the power of compounding would see future generations priced out the market, and worst still unable to make basic interest only payments.

It has only been the last ten years, that this have deviated, spelling disaster for the rest of the economy such as retail and small business as more and more money is required from household budgets to support spiralling housing expenses.

» Adelaide homes crack the $400,000 mark - The Adelaide Advertiser, 8th April 2010.

Last week, the China Daily reported that predictions of China’s housing bubble crashing in 2011 had flooded the Internet after a comparison was made between China’s runaway property market as that of Japan in 1991. The correction in Japan’s market caused a depression and 20 years of pain.

According to a survey released on the weekend from China’s central bank - The People’s Bank of China, approximately 42 per cent of buyers have suspended plans to purchase an apartment this year. Most have done so on the expectation prices will drop.

The survey shows over 14 percent expected house prices in Beijing to drop in the next three months with another 13 percent expecting drops within the year.

According to China Reality Research, property sales have already started to take a turn. In survey results published in Property Monthly, China Reality Research, February 10, 2010 nearly a fifth of all recently sold properties were kept vacant. In China, like has been the case recently in Australia, property speculators buy with a view of capital gains rather than rental yield. Apartments in China generally loose value if rented out.

In a GMO white paper, titled “China’s Red Flags”, author Edward Chancellor writes Beijing now has a house price to income ratio above 15 times. In contrast, prices of Tokyo condos peaked at 9 times in 1990 prior to Japan’s property correction.

A correction in China’s property market may dent the enthusiasm of Chinese buyers to purchase property in Australia, but the impact is likely to be felt more heavily through less demand for the resources required to build China’s increasingly empty apartments, office towers and shopping centers.

» More buyers delay home purchases: Poll - The China Daily, 6th April 2010.

» Collapse predicted as housing prices continue to soar - The China Daily, 3rd April 2010.

The Reserve Bank of Australia has today raised the official cash rate from 4 per cent to 4.25 per cent and says there is more to come.

In a media release following the rise, the RBA said “Interest rates to most borrowers nonetheless have been somewhat lower than average. The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.”

Interest payments are still higher today than in 1989 due to high household debt levels. (1977 to Dec 2009)

» Statement by Glenn Stevens, Governor: Monetary Policy Decision - The Reserve Bank of Australia, 6th April 2010.

Housing Minister, Tanya Plibersek indicated in a interview with the 7:30 report, that one of the objectives of the First Home Owners Boost was to keep the construction sector strong. According to Plibersek, the construction sector accounts for about 9% of employment in Australia.

But as predicted, when the government interfered with the housing market and introduced the first home owners grant, it simply pushed the price up of houses up.

As houses become more expensive, less people can afford to build. As a result, construction jobs are disappearing at alarming rates.

According to the Urban Development Institute of Australia (UDIA), Queensland has lost another 4,200 construction and housing sector jobs since November. This is in addition to the 20,000 full time jobs lost between August 2008 and November 2009 as Queensland’s booming property market starts to sour.

UDIA Queensland president Warren Harris said that in some regions, the housing and construction sector has lost more than 50% of its workforce. “The UDIA has been aware for some time now that significant declines in housing approvals, particularly in attached dwelling approvals, would inevitably lead to significant job losses throughout the state.”

Mr Harris does blame councils and state government’s more much of the cost and red tape, but hits the nail on the head saying the “end product will be unaffordable for the vast majority of home purchasers”.

The government now has quite a dilemma on its hand. The experts believe there is a shortage of houses, but the shortage can no longer be addressed, because new houses are too expensive.

» Construction industry warned of crisis - The Sydney Morning Herald, 2nd April 2010.

According to statistics released by the China Land Survey and Planning Institution, house prices in China increased 25 per cent in 2009, the biggest increase since 2001.

However, data from the National Bureau of Statistics suggest house prices only rose 1.5 per cent in 2009, a five year low.

While both indexes use different methods and data sources, the National Bureau of Statistics is suggested to use figures collected from property developers who may lower the figures.

Property developers want to hide the size of the property bubble in China on fears the government will try to slow it down to prevent it from bursting. And slow it down, they are.

The government has been working hard to control lending earlier this year. The most recent measures has seen 78 SOE (State Owned Enterprises) banned from making further investments in real estate. SOEs have been bidding up land prices and have been found have a major role in pumping up prices.

» Housing prices increased by 25 percent: report - China Daily, 2nd April 2010.

Any doubt Australia was not experiencing an ever accelerating housing bubble was squashed yesterday, when RP Data - Rismark released house price data for February.

In Darwin, Residential Property (Units & Houses) increased 19.7% for the year to February 2010. This was closely followed by Melbourne (19.3%), Canberra (14.7%), Sydney (12.3%), Adelaide (9.1%), Perth (7.5%) and Brisbane (6.5%). This comes after wages rose by just 2.9% last year, their slowest growth rate in nearly a decade.

Prices surged in Sydney and Melbourne in the month of February, returning a monthly gain of 2.6% and 2.0% respectively.

These figures put further pressure on the Reserve Bank to put up interest rates next week. In an interview with the RBA Governor, Glenn Stevens earlier this week, he said said that it would be unwise to keep interest rates too low for too long, even going as far to warn investors of the housing bubble - “I think it is a mistake to assume that a, you know, riskless, easy, guaranteed way to prosperity is just to be leveraged up into property”

As households spend more money from the household budget on housing expenses, retail sales have recorded a “surprise” fall in February. Seasonally adjusted figures released on Wednesday show retail sales fell 1.4%. Economists had expected a 0.3% rise. Falls in retail turnover is likely to put pressure on retail jobs in the coming months, as retailers cut staff in a bid to remain afloat.

» Home prices surge - again - The Sydney Morning Herald, 31st March 2010.

» RP Data – Rismark Hedonic Home Value Index Results - RD Data, 31st March 2010

» Australian Retail Sales Disappoint - The Wall Street Journal, March 30th 2010.