Australian property prices break 1989 Japanese homeland to GDP record

ABC financier Alan Kohler has shared a “scary” housing chart, after Australia hit a grim milestone dating back to 1989.

ABC financier Alan Kohler has shared a “scary” chart to illustrate Australia’s housing bubble – comparing the current situation to Japan before the “lost decade” crash that saw prices plummet by 70 percent.

“And finally, another scary, depressing way to look at house prices in Australia,” Kohler said at the end of Wednesday’s segment.

“As a percentage of GDP, all of Australia’s residential land is now worth more than all Japanese land was in 1989 — which was one of the biggest bubbles of all time, followed by one of the biggest crashes of all time.”

He added: “But of course it will be different this time.”

During Japan’s real estate bubble, the home value-to-GDP ratio reached an all-time high of over 330 percent.

“We just broke that record in Australia, which is not a good starting point,” Dr. Philipp Hofflin of Lazard Asset Management. Livewire Markets this week.

“It certainly didn’t end well in Japan.”

dr. Hofflin also noted that in the period before the global financial crisis in the US, real estate prices rose by the equivalent of 60 percent of GDP.

“Well, we just did a lazy 100 percent plus in three years,” he said.

“Home values ​​have increased by $2.5 trillion in the past three years, reaching over $10 trillion early this year. And you can see this really dwarfs every other asset price in the country.”

Japan experienced a major boom in the early 1980s, with stocks and real estate exploding in value, with asset prices skyrocketing attributed to “easy credit and rampant speculation, coupled with a lax central bank,” as AVATrade notes.

Land and real estate prices rose nearly 170 percent between 1985 and 1990, while stock prices doubled between 1987 and 1990.

The bubble burst in late 1989, when the Bank of Japan (BoJ) began raising interest rates sharply in an attempt to curb runaway prices.

Asset prices then collapsed, leading to a period of economic stagnation from 1991 to 2001, known as the “lost decade.”

The Japanese stock market was wiped out, losing 60 percent of its value between 1989 and 1992.

Despite the stock carnage, the BoJ continued to aggressively raise interest rates due to the resilience of real estate prices, which eventually began to fall in 1991.

In June 1991, the BoJ quickly reversed course and began cutting interest rates again, and the following year the Japanese government launched a series of massive and ultimately ineffective stimulus packages.

But by then it was too late: the economy was already in a downward spiral.

Japan was gripped by both a credit crunch – with banks cutting lending despite the BoJ’s lower interest rates – and a liquidity trap as households and investors held onto cash.

Land and real estate continued to decline over the decade, finally falling 70 percent in 2001. The Nikkei index fell below 8,000 in August 2003, from a peak of just under 40,000 at the end of 1989.

Real Estate Drops as RBA Goes on a Shock Rise

The Reserve Bank of Australia shocked markets on Tuesday with a higher-than-expected increase of 50 basis points to push the official spot rate to 0.85 percent.

It came after Australian house prices marked their first decline since September 2020, falling 0.1 percent in May, according to CoreLogic.

Annual price growth has fallen from 24 percent six months ago to 14 percent now.

Several banks had already forecast a decline of between 5 percent and 15 percent by the end of 2023, but Tuesday’s shock caused some experts to warn that prices could fall as much as 25 percent.

Writing for news.com.au, David Llewellyn-Smith and Leith van Onselen of MacroBusiness noted that before this week’s decision, most economists predicted that the cash interest rate would peak at 2.5 percent by mid-next year.

They now predict an increase of 50 basis points in July.

The futures market is even more aggressive, projecting the RBA to raise the spot rate to 3.5 percent by May 2023.

“With both mortgage demand and consumer confidence experiencing heavy declines due to interest rate hikes, the RBA risks sending home prices into a tailspin if it rises as aggressively as economists, let alone the market, predict,” they wrote.

“The futures forecast of 3.5 percent OCR would crash the housing market, with real house prices falling by about 25 percent in real terms and more than 30 percent in nominal terms according to the RBA models.”

frank.chung@news.com.au

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