Thanks for the insights Glenn..... (Lone Ranger)

The RBA Governor, Glenn Stevens, has warned about the possibility of a bubble in housing prices:

Equally surprising was the strong warning in his speech that a housing bubble could be on the cards "in the near term" if the low cost of housing finance failed to translate into more dwellings being built.

He said this would put Australians at risk of being denied affordable housing while household balance sheets could become over leveraged and asset prices could eventually deflate.

"Given the circumstances - the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs - this ought to be the time when we can add to the dwelling stock without a major run-up in prices," said Mr Stevens.

"If we fail to do that - if all we end up with is higher prices and not many more dwellings - then it will be disappointing, indeed quite disturbing."

(See link here).

What is a housing bubble? What is any asset price bubble? Well, one definition is that it is a sustained and rapid increase in the price of an asset, significantly in excess of other related variables, particularly income. Classic bubbles in history have included “tulip mania” in the 17th century Netherlands and the Mississippi bubble in early 1720s France. A bubble bursts when the price of the asset becomes unsustainable (i.e. it gets so far out of whack with incomes and/or its true market value, that the prices begin to fall).

Glenn, mate, what do you call the run-up in house prices over the last decade if not a bubble?

Please see the attached chart courtesy of http://www.whocrashedtheeconomy.com/. The Australian data for the chart was from Nigel Stapledon at the University of NSW.

What this tells us is that, compared to the long term average, Australian house prices are about three times what they would otherwise be. Three times!! Traditionally, average house prices in Australia were around three times the average income – they are now around 8-10 times. Does this qualify as a bubble?

I borrowed the following chart as well, as it demonstrates the rapid growth of household debt compared to GDP. I am no statistician, but the growth of household debt and housing prices over the last thirty years are looking curiously correlated to me.

And what caused the bubble Glenn? Could it have been the RBA misreading the economy and keeping interest rates at below real market rates? Could it be the out of control growth in the money supply that saw Australians borrowing heavily to purchase rapidly appreciating houses? Is it that the RBA is the problem? Could it be that the RBA Governor would not recognise a housing bubble if it was dropped on him from a very tall height?

The Australian housing bubble looked like it was beginning to correct in 2008, but timely intervention by Government to “save” housing prices appears to have kept at least the bottom end of the market bubbling along.

The Australian housing bubble must surely qualify as one of the greatest asset price bubbles in history. As someone with a mortgage, I can already tell you that housing prices are way beyond the sustainable level and will, eventually, deflate. Many Australians are already locked out of the housing market because of this asset price inflation – that the RBA Governor cannot apparently recognise that we have already been through a housing bubble probably means that he should look for another job.