The factors that led to the popping of the Brisbane house price bubble are similar to the popping of the US bubble. House price rises and interest rate rises led to very low levels of affordability. Stressed sales began to occur, by owner-occupiers and the large number of speculators that had come into the market, with fewer buyers able or willing to take up the slack. Thus a negative feedback loop commenced and the bubble began deflating. In some US cities it has popped.
Many will argue that the US situation is different because it is now clear that a lot of people were given loans that they would never be able to repay. I would argue that things were not that dissimilar in Australia. I know from personal experience that, so called full-doc (our equivalent to prime) lenders, were prepared to lend, without witnessing any history of savings, mortgages that required repayments equivalent to 60% of net income (when interest rates were at 7% and lower). Australia was no different to anywhere else � quantity of credit sold by lenders was the key driver, not quality! That caused a very significant reduction in lending standards, which as of writing is being reversed (because lenders know that they now need to have very good quality mortgages if they are to have any hope of on selling the credit through those complex instruments � residential mortgage backed securities.)
To come up with a forecast of what might happen to house prices in Brisbane over the next few years, I plotted an index of the median Brisbane house price versus the Case Shiller 20 US city index and indices for Miami and Los Angeles, two of the more spectacular boom cities (Figure 2). I realigned the US indices so that the peak of the 20 city index was in line with the presumptive peak in the Brisbane index at March 2008. |
