Australian housing market holds sub-prime danger
By Glenn Milne and Nick Gardner
The Sunday Telegraph
March 22, 2009 12:01am
+ - Print Email Share Add to MySpace Add to Digg Add to del.icio.us Add to Fark Post to Facebook Add to Kwoff What are these? Australia copying US mistakes
Bankruptcy risk driven by stimulus
"First homebuyers most vulnerable"
AUSTRALIA is facing its own version of the US sub-prime housing crisis, with thousands of young homeowners risking bankruptcy as a result of Kevin Rudd's economic stimulus package.
That is the grim warning from the economic expert who first called the debt crisis that is driving the global financial meltdown.
Dubbing the looming crisis "Sub-Prime Lite," Professor Steve Keen told The Sunday Telegraph Australia was making the same mistakes as the US.
Professor Keen said in trying to avoid an economic crisis caused by too much borrowing, Australia was in effect encouraging the poorest in the community to take on even more debt.
"Yet these low-paid first homebuyers are the people who are most vulnerable to the economic downturn," he said.
The top end of capital cities housing market has been suffering for some time as mass redundancies within the financial sector have forced homeowners to sell.
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Meanwhile, the first-home buyer end of the market has been booming.
But economists fear this flurry of activity at the lower end has inflated prices to unsustainable levels.
In Sydney, the average property already costs nine times the average household income, while the UK and US reached a peak of only seven times average income before their markets crashed.
According to Professor Keen, the First Home Owner Grant has cost the government about $200million, but has inflated property prices by close to $3billion.
"This is all illusionary wealth that could disappear very quickly," he said.
"The additional $2.8billion or so has come from increased mortgage debt taken on by those most vulnerable to a serious economic downturn at a time when we can see very clearly that the global recession is coming our way."
The Government may well extend the first-homebuyer grant beyond its planned end-date of June 30, which Professor Keen says will end up pumping the market to even higher levels.
The University of Western Sydney professor said he had sold his Sydney house because he feared a property crash, but his gloomy view on the market has been backed by other experts.
Gerard Minack, chief economist at Morgan Stanley, said property prices were likely to fall by 20 per cent in some cities, while the value of houses on coastal strips such as the NSW mid-north coast and the Gold Coast could halve.
"People paid Hamptons prices for properties up there but it is not the Hamptons," he said.
"Traditionally what has hurt people has not been rising interest rates but rising unemployment. I don't care what rate you're paying, if you have a mortgage five times your income and you lose your job, you're toast."
Mr Minack said while he understood the motivation behind the grants, encouraging marginal buyers to enter the market at this stage of the cycle (just ahead of a sharp rise in unemployment and with interest rates so low), Australia risked "creating a sub-prime underbelly in our own housing market".
With unemployment currently at just over 5 per cent, many economists are forecasting it will peak at 8-9 per cent in 2010, which will lead to a "bloodbath" in the property market as thousands of mortgagors default on their loans.
Most buyers were also taking out low, variable-rate mortgages, which left them exposed to rapidly rising rates when the economy began to recover and this would also spell trouble for many buyers.