Australia's Debt Addiction Fuels Record Real Estate Bubble

Australia's obsession with real estate over the last 50 years, has created a generational debt addiction and record levels of private debt to GDP of over 200% (see chart below).  Because of the record debt levels Australia now has a real estate bubble and just received confirmation with the title of coming 4th, behind Vancouver, London and Stockholm in the UBS Global real estate bubble index.

See link for full story on UBS Global Bubble index - www.zerohedge.com/news/2016-09-27/global-housing-bubble-biggest-these-six-cities

Our private debt levels relative to GDP has been steadily rising since the 70's (see chart below), surpassing the USA and most advanced economies. Besides pulling back so slightly in 2009 and 2010 due to the GFC, we have not looked back. Since Australia's debt levels have kept rising, real estate prices have followed suit, as people outbid each other to drive prices higher. This in turn has further fueled more speculation into real estate as asset prices rise year after year without hesitation.

In contrast to the USA and advanced economies, Australia's private debt to GDP levels are at record highs, where as the USA private debt tapered off from 2009 - 2012 as the consumer deleveraged, after millions lost their homes. Since then the private debt has been going sideways relative to GDP, which explains one of the reasons why growth in the US in the last few years, has been so sluggish compared to previous recoveries from a recession.

Click chart for source: Debtdeflation.com

Income Vs Real Estate Prices

A key ingredient to determining whether an asset is in a bubble is  to compare the current value of an asset compared to income / rent levels.

The chart below shows since 1986 rents and construction prices have risen 25% -30% adjusted for inflation, compared to housing prices which have risen by 270+% adjusted for inflation over the same period.

If you take a look at household income it has risen by approximately 50% adjusted for inflation since 1986, which explains why its has become increasing difficult for first time buyers to get into market.

The exponential rise in real estate prices from the mid 80's has been clearly supported predominately by an equally significant rise in the level of private debt, rather than being supported by increases in household incomes or rent prices.

Click chart for source: Smh.com.au

Australian Real Estate Bubble Parody Video

Below is a short real estate parody video that shows the crazy lengths Australians go to so they can participate in the real estate bubble as the fear of missing out drives their decision making.

Even though this is a parody the reality is, the themes shown here resemble behaviours similar to the current state of the Australian real estate market.

Real Estate Now The Biggest Contributor To GDP

Australia has experienced a record breaking 25 years of GDP growth without experiencing a recession, which is defined as 2 quarters of consecutive GDP declines.

Since the mining boom has slowed the last few years, the real estate and related industries have become more important within the economy, as it has been a big contributor to Australia's GDP growth.

Looking at the chart below of Australia's Industry share of GDP, I have outlined in black - Ownership Dwellings, Rental, Hiring and Real Estate, as well as Finance and Insurance. These 3 real estate industries account for a combined 20.3% of Australia's GDP.

When you combine the construction industry 7.7% contribution to GDP, of which real estate construction would be a considerable component of the construction industry. You realize that real estate industry is the single biggest industry by GDP in Australia, and any downturn in real estate prices and or construction activity would impact on Australia's GDP considerably in the future.

Click chart for source: Ibisworld.com.au

Lastly  I wanted to show a real life of example of a house that was sold this week to illustrate how much real estate prices have risen. The picture of the house below is a 2 bedroom house located in Greenarce, a suburb that is 17km away from Sydney. It sold for AUD $926,000 and features 545 sqm of land and is un-renovated.

Click picture for source: Afr.com

If you want to take a look at Australia's REIT's sector review and how it is holding up, despite record levels of debt and low interest rates you can click on the link at: Aussie REIT Sector Review

Sources:

Debtdeflation.com
Zerohedge.com
Smh.com.au
Afr.com
Mortgagee Property Youtube Channel
News.com.au
Ibisworld.com.au