Australian Housing Bubble: California Repeated?
Hugh Pavletich FDIA
May 25, 2010
Mish's Global Economic Trend Analysis: Insanity Down Under: ING Says Thanks to Capital Appreciation, Paying Principal on Mortgage Loans is Unnecessary
Within the above article Mish (Mike Shedlock) of Global Economic Trend Analysis responds to a report from the Australian Daily Telegraph "Revealed: The home loan that could save you a fortune", where Australia’s fifth largest mortgage lender ING Direct, is now selling interest only mortgages with no fixed terms.
This is an understandable response (although a seriously unwise one) by financial sector participants due to the grossly inflated Australian housing prices, as illustrated within the 2010 6th Annual Demographia International Housing Affordability Survey, where Australia’s major urban markets at 6.8 times annual household earnings (3rd Qtr 2009 data) were the worst, in what is loosely termed the Anglo world.
Expect the next “idiotic innovation” from Australia’s finance sector to be teaser interest rates at the initial stage of the mortgage, that progressively increases over time.
It would appear the Australians are following the example of the Californians across the Pacific – where the Global Financial Crisis was triggered.
The Californians had perfected distorted mortgages to the extent that they were lending 11 times household earnings, where households on a gross income of $90,000 a year were borrowing $1,000,000.
Herb Greenberg explained this following the housing crash in California "Straight talk on the mortgage mess".
The reality is that housing should not cost any more than 3 times gross annual household earnings, with mortgage loads of around 2.5 times household earnings.
Australian Governments do not allow housing to be built at affordable prices – and have failed to learn from the land use and mortgage laws of the State of Texas, where housing prices stayed at 2.5 times annual household earnings, while bubbles raged in other poorly governed United States housing markets.
The Demographia Survey found New Zealand housing prices 5.7 times household earnings; United Kingdom 5.1; Ireland and Canada 3.7 with the United States overall 2.9
For specific urban market details refer Schedule 2, Page 39 of the Demographia Survey.
Australia’s housing markets have inflated further since then – as they blindly repeat the mistakes of California.