Part 1: Australian Housing Bubble Visualized

"A bubble doesn’t occur because investors become fools, it occurs because fools become investors."

-         - Tom Woods 2013

This statement reflects the dangers of speculation in any marketplace. When Governments start stimulus programmes that encourage speculation, this becomes a direct intervention on the free market. Such an intervention is commonly seen as manipulation. Governments will do this to encourage economic activity through asset purchasing and debt accumulation. Australia is politically a see-saw and the Australian people are willing to jump between left and right in back to back elections. This means that politicians will focus on short-term economic goals such as boosting housing to avoid technical recessions.

This is the first of my 3 part series on the fundamentals driving the Australian Housing Bubble. Part 2 is already written and auto-scheduled for posting in one week and explored 3 Myths of the Bubble. Part 3 will target our mortgage lenders and photoshop will show them no mercy. For now i'm going to keep this post quite simple.

This blog is about the big bad bond bubble, but of course when shit hits the fan it is going to get messy in many other places. From the IMF to the UN everyone is warning Australia about its Housing Bubble, but the Aussie attitude is still "no worries, we've got mining, she'll be right." We are actually extremely vulnerable in the Australian Housing Market. Please click on the image below to get a bigger look at the chart.

Question: Is Australian Housing in a Bubble? YES

The blue line represent the Real Housing Prices in Australia since 1880. The red line represents the typical phases and trajectory of an asset bubble. Do you see any correlation?

1950's to 1980's: This bubble has been in the making for quite sometime, as lending standards allowed for easy credit to flow into the market for the second half of the last century. This debt accumulation has expanded exponentially despite typical financial cycles.

1990's: In the later half of the 90's as the tech bubble really took off, the media was giving massive amounts of attention to the ease of margin lending and the rapid rate of housing price increases. The media lived up to its image and allowed for the mania phase of this bubble to take off. 

2000's: Australia shrugged off the tech bubble bursting and put even more faith into housing. Enthusiasm led to greed and greed led to delusion. Even after the GFC and US housing bubble we still turned our nose up to the rest of the world and took the Governments free housing grant money and kept buying at higher and higher prices.

2010's: Cracks start appearing on prices and are labelled a "soft-landing." This is announced as a temporary flattening of housing prices. The term "soft-landing" epitomises the Denial Phase of any bubble. This will only lead to a bull trap in 2013- early 2014 as stock market rallies make investors believe that there is now a "return to normal." 

Predictions:

Towards the middle of 2014 you will see the Chinese Housing Bubble burst. This is now widely accepted as overdue, and mid-2014 is a conservative estimate on my part. This will lead to manageable financial turmoil and a temporary pull-back of industry in China. But they will need this correction as currently they have 64 million uninhabited dwellings. This temporary pullback will strain the Australian economy massively. 
The US Federal Reserve is expanding its money base at the rate of $85 billion per month, what this means is when we do business with the USA we are being paid in their rapidity depreciating currency. But essentially we are being paid in their inflation, and the same goes for business with Japan. Australia is finding itself as canon fodder in these currency wars and will be forced to raise interest rates as we import inflation from abroad leading to higher domestic inflation. 
The temporary recovery of housing prices in 2013-early 2014 will suddenly begin to collapse with all these factors and you will see the Aussie Housing Market begin free-fall collapse by the end of 2014, start of 2015.