That sound you hear the next time you go to the beach (at least on the West Coast) may be the Australian housing bubble popping. After Hong Kong, Sydney is rated the second-least affordable housing market in the world (see page 12), with median home prices more than twelve times median household incomes–and that’s based on 2014 data. Prices since then have gone up much faster than incomes.
As of September, prices in the country as a whole are 7.2 times incomes; that’s more than all but a handful of urban areas in the United States. Home prices and price-to-income ratios have both risen sharply since 2000. The country’s housing stock is worth nearly US$4.5 trillion, or roughly 20 percent of the U.S. housing market, which is pretty high for a country that only has 7.5 percent of the U.S. population.
Economists have been expecting Australian home prices to collapse for some time, and it hasn’t happened yet. But the UBS Housing Bubble Index ranks Sydney as the fourth-riskiest housing market in the world, after Vancouver, London, and Stockholm.
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Naturally, Australia’s housing bubble can be traced to growth restrictions, which are ridiculous in a country that, at 7.3 people per square mile, is even more thinly populated than Canada’s 8.3 per square mile. Sydney, Melbourne, and other major cities are surrounded by urban-growth boundaries set by the states. The government frequently promises that it will “release land” from regulatory constraints, but the releases never keep up with the demand.
Neighboring New Zealand isn’t much better off, with average prices in Auckland doubling in the last decade to NZ$1 million (about $700,000 U.S.). Economists there are also predicting of collapse of the bubble. NZ Prime Minister Bill English’s decision to run a government without a housing minister doesn’t help, as that means the government is solely focused on social housing (the British term for what Americans call public housing), which won’t do much for affordability.
The problem with a bubble is that you can see it growing but can never predict when it will begin to deflate. The U.S. housing bubbles began to deflate in 2006, yet in 2007 some economists were still arguing that there were no bubbles and prices would continue to rise. A collapse of the Australian bubble is not likely to have as serious an impact on world markets as the U.S. bubble, but it won’t be a good thing for Australian homeowners or the Australian economy.
Whenever signs point to a bubble in real estate, the experts (like in 2007) tell us that “this time it is different’ and it can’t happen here. When you hear those words, its time to get out before it is too late.
As far as those “deep discounts” in Australia, the true value of real estate is what buyers are willing to pay. If no one is willing to buy the property except at the “deep discount price”, that tells you it is not really a discount and that you are paying the full price with no guarantee that the discounts won’t continue to go below what you paid.
“The problem with a bubble is that you can see it growing but can never predict when it will begin to deflate.”
Peter Schiff and Ron Paul did a pretty good job of predicting the bursting of the housing bubble.
“some economists were still arguing that there were no bubbles and prices would continue to rise.”
These same economists laughed at Peter Schiff’s predictions. They look silly now in the YouTube video “Peter Schiff was Right.”
Anyway, it’s happening! Again!
Any actual visitor to Sydney or Melbourne will notice, if they stray from the tourist oriented downtown areas, that both cities sprawl for miles and miles with low density single family residential reminiscent of the United States. From the City of New South Wales website: http://www.cityofsydney.nsw.gov.au/learn/research-and-statistics/the-city-at-a-glance/metropolitan-sydney
we learn that population density is only 372.4 people per square kilometer.
Making more land available at the edge of town won’t reduce demand at the center of town, if people want to live at the center. If we really want to make San Francisco housing prices as cheap as Houston we must systematically destroy all the high-paying jobs in downtown San Francisco to make it more like Houston, with no single area dominating the job supply.