Part 3: Aussie Housing Bubble: The Pain of our Delusions will be borne by our youth.

Philip Soos explains that there are three phases to finance:

"hedge, speculative and Ponzi. With hedge financing, income flows from an asset are sufficient to pay down both principal and interest on the debt used to finance the asset purchase, and prices are based upon intrinsic value. Speculative financing results in income flows covering only interest repayments, not principal, requiring debt to be continually rolled over. Investors may experience financial stress, but it is not widespread and fundamentals valuations are kept largely in check."

"with Ponzi finance, as income flows cover neither principal nor interest repayments (including running expenses in the case of rental property). Investors rely solely on escalating capital values in order to realise substantial capital gains at sale to pay down the cost of debt and balance their income losses. Asset prices are completely delinked from fundamental valuations at this stage. Investors rely upon ‘greater fools’ to maintain positive price momentum, resulting in a bubble. Once there are no more investors willing to take upon staggering amounts of debt to finance asset purchases, prices stagnate then collapse, as the market finally realises that prices are based upon a pyramid scheme, not fundamentals,"

So after reading my last two blog posts, you might be worried that in fact Australia is in a price bubble. Well with all the charts we have seen, have a look at this one.

How can anyone is their right mind think that house prices in Australia are based on real market fundamentals when the correlation of household debt to GDP ratio chart is exactly the same as the real housing price chart. I have overlayed these in photoshop for you to see.

There is not much more evidence you need to see that house prices are not connected to housing fundamentals of supply and demand, but they are instead connected to lending fundamentals of debt and borrowing. The more we are allowed to borrow, the higher the prices will go up. It is absolutely insane, and you should be angry.

Soos goes on to say:

"Another indicator is the rising levels of household debt used to speculate on housing prices. Household debt is overwhelmingly composed of mortgage debt, whereas personal debt is a small fraction. Figure shows the recent and considerable increase in the household debt to GDP ratio, peaking at 97 per cent in 2010 when housing prices did the same. The ratio has fallen slightly to 93 per cent, which may explain the falls in property values over the last two years, including the historically-low growth in housing finance data (Housing finance misses expectations in November, January 14)."

"A troubling fact is that almost 60% of investor loans are interest-only (25% for owner-occupier loans), signifying the speculative motive of property owners,"

"Investors were then dependent upon rising capital values in order to realise a profit at sale and to cover the cost of mortgage debt... This resembles the terminal Ponzi phase, where housing prices and the household debt to GDP ratio have boomed while net income losses have escalated."

"Accordingly, by these measures, the evidence suggests that the residential property market is currently experiencing a bubble, with prices detached from fundamental valuations... This appears to be the largest bubble on record, orders of magnitude larger than all preceding bubbles... When it does burst, heavily indebted property owners (recent home-buyers, negative gearers) will experience financial trouble, including the economy at large."

Professor Steven Keen recently commented on Today Tonight that what may cause the Housing Bubble to continue are "pollution refugees" who are wealthy Chinese investors that can compete in the Aussie market for new homes. This even playing field between the domestic and international players is one that is unique to Australia. In my opinion this is a slap in the face to the Australian public, not to mention a sloppy short-sighted way of boosting the housing market.

So do you have a mortgage? Remember that in bubble phase psychology, as the price escalates exponentially you go from euphoria to delusion. As the prices flattens out you go from delusion to denial. Following this we go from denial to fear as the media discovers the bubble is popping, and shortly after we go from fear to price capitulation. However I beleive the Government is willing to dish out more pain and suffering to those who have hopes of ever affording a home.

So who can we blame for this mess? Obviously as I have covered the main people to blame is the Federal Government through stimulus measures such as FHOS (or as Steve Keen calls the First Home Vendors Scheme) and providing policy to help leverage debt.

However for cathartic kicks and giggle I want to personally attack the seedy underbelly of this Housing Bubble  which is none other than the fat belly of mortgage lenders. Other than the banks this big belly has the big face of Aussie Home Loans, head up by Fat Cat John Symonds. So I have prepared some photoshopping to better help understand exactly how disgusting the people whom we decide to enslave our families to. (Note: all images are photoshopped and manipulated.)

Here;s your daily John Symonds inspiration for the day!

What about once he gets into his office? TRANSFORMATION. For all those Star Wars nerds you'll understand the quotes referenced.

Here is the link to Philip Soos Article on this topic that I referenced.