I think our our governments are caught holding a double headed snake of their own making and don't know what to do with it - either way they (and us) are going to get bitten.

The article below, from the weekend, suggests that Australia is starting on its own version of the US sub-prime stimulus.

The article points out one vulnerability for Australian home mortgagees:

“The average Sydney property already costs nine times the average annual household income, yet Britain and the US reached a peak of only seven times average income before their markets crashed.”

Combine this with the ‘bubble” house price appreciation, it doesn’t look good long term.

An earlier post had this quote from Graham Dyer:

“... the property boom in Australia has been one of the most extreme in the world, rivalled only by Spain and Ireland.”

This was illustrated in this week’s edition of “The Economist”.

The chart on house-price appreciation from 1997-2008, in the article entitled “Caught in the downward current”, noted that Irish and Spanish house price rose 193% and 184% respectively. The next largest appreciation was Australian house prices at 163%.

Other countries were France (152%), Britain (150%), NZ (102%).

The United States had three measures - the Case Shiller national index (66%); the OFHEO index (84%) and the Case-Shiller ten-city index (102%).

The only two, in the chart, that experience negative growth were Japan (-33%) and Hong Kong (-35%).

The last paragraph, of three, that accompanied the chart, stated:

“Gone is the optimism of yesteryear. Book titles such as “Are You Missing the Real-Estate Boom? The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them” (2005) are destined for the annals of folly, next to asset-bubble classics such as “Dow 36,000”. Fear has replaced frenzy, and house prices may overshoot on the way down. A recent report by Numis Securities estimated that British house prices could fall by a further 40-55%, saddling millions with properties worth less than their mortgage debt. Long was the uphill march, long will be the downhill descent”.

Two sentences from George Elliot’s “Silas Marner: The Weaver of Ravelow”, may be relevant for today:

“The sense of security more frequently springs from habit than from conviction, and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent.”

(The peak to trough fall in Sydney house prices maybe anywhere from 60 to 80 percent, in the Next Great Depression).

"First-homebuyers at risk thanks to stimulus package"

Glenn Milne and Nick Gardner, news.com.au, March 22, 2009:

AUSTRALIA faces its own version of the US sub-prime housing crisis, with young homeowners risking bankruptcy thanks to the PM's economic stimulus package.
That's 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 said Australia was making the same mistakes as the US.

Prof Keen said that 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 the nation's housing market has been suffering for some time. 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.

The average Sydney property already costs nine times the average annual household income, yet Britain and the 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 $200 million, but has inflated property prices by close to $3 billion.

"This is all illusionary wealth that could disappear very quickly,'' he said.

"The additional $2.8 billion 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 Home Owner Grant beyond its planned end-date of June 30, which Prof Keen says will end up pumping the market to even higher levels.

The University of Western Sydney academic 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.

"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 at just over five per cent, many economists are forecasting it will peak at eight or nine per cent in 2010, leading 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.

AMP Capital chief economist Shane Oliver said the tendency for buyers to take out low, variable-rate mortgages would spell trouble for many buyers when interest rates rose.

Golly gee wow, a government making laws to stop people doing bad things. WELL I NEVER!