Grave fears are mounting for the future stability of the Australian economy as new data released today shows the Reserve Bank of Australia’s housing bubble is surging at records not seen since 2003.
The RP Data statistics confirms reports of investor led irrational exuberance in the Sydney and Melbourne markets. On an annualised quarterly basis, Melbourne surged an unsustainable 21.2 per cent, followed by Sydney at 13.8 per cent. The investor surge is both eroding rental yields and increasing vacancies causing many experts to warn of a bleak future for investors when capital gains slow to more sustainable levels, or worse – starts falling.
The boom stems from emergency record low interest rates set by the Reserve Bank of Australia – the lowest in over 5 decades. This latest data should force the central bank to either increase interest rates or bring in macro-prudential controls, although the bank has been happy to sit on its bum to date, opting to watch the bubble grow more top heavy.
Martin Conlon, Schroders head of Australian equities told Fairfax, “There is ample evidence that lower interest rates are fuelling nothing other than increasing asset prices, suppression of yields and misallocation of capital,”
David Murray, chairman of the Financial System Inquiry warns real estate is now the biggest risk to the Australian economy.
The surge comes at a dangerous time for the Australian economy, a time when jobs losses are mounting and wages are falling. Housing bubbles act as a leach to the economy, sucking the lifeblood from our already weak economy. It causes a misallocation of capital from productive sectors of the economy to unproductive sectors, and sucks household disposable income dry with huge mortgage serviceability requirements stemming from crushing household debt levels.
Official Australian Bureau of Statistics (ABS) unemployment data showed unemployment surged to 6.4 per cent last month, a 12 year high. Private gauge unemployment surveys from Roy Morgan more accurately place unemployment at 12.2 per cent.
The loss of jobs is putting pressure on wages. In the last two quarters, according to the ABS, wage growth has failed to keep up with inflation – i.e. real wage growth is negative. Wage growth is now the worst in 17 years.
But the biggest concern is in the youth unemployment sector. A report from the Brotherhood of St Laurence released today show youth underemployment is now at levels not seen in 36 years and unemployment is at 13 year highs. It has many social ‘scientists’ warning we are creating an entire generation that will be jobless. Housing affordability will be the least of their concerns.
It’s no wonder Tony Abbott wants to cut this cohort loose to save his budget.
» RBA flags housing risks but does nothing – The SMH, 1st September 2014.
» David Murray warns Australia’s financial risks concentrated in real estate – The ABC, 29th August 2014.
» Banks demand bail-out protection – The SMH, 29th August 2014.
» Record housing investment boom accelerates – 1st September 2014.
» Barely Working – Young and underemployed in Australia – Brotherhood of St Laurence, 1st September 2014.