REAL ESTATE: If Oz’s bubble bursts, is Vancouver’s far behind?
Philip Soos is 30, an economist and, more significantly, a renter. He’s in no hurry to buy.
Soos lives in Melbourne, Australia. Melbourne’s housing prices have experienced the same alarming rise in value that Vancouver’s have, and, as in Vancouver, many in the public blame Chinese offshore buyers as the main cause. Soos is not among them. As the co-author of a recently published 810-page doorstop entitled Bubble Economics: Australian Land Speculation 1830-2013, which I have not read, because there are limits to what I am willing to do for this job, Soos and his co-author Paul Egan blame two decades of rampant domestic speculation as the reason for the rise in residential prices. The Oz obsession with real estate speculation was a common theme among the several Aussie journalists and economists I talked to during the last couple of weeks.
Australians, they all said, see a better chance at a big payoff in housing than in more traditional equities.
They don’t put their stock in stock.
They put it in property.
Last month, Soos told my colleague at the Globe and Mail, Frances Bula, much the same thing. But since then, Soos enlarged upon his thesis.
In a co-authored submission made last week to Australia’s ongoing parliamentary inquiry into housing, he and economist Lindsay David made a prediction of which Metro Vancouverites might take note, since they are caught in the same dynamics as those that afflict the Australian housing market.
“Housing prices across all capital cities,” they wrote, “remain grossly inflated relative to rents, income, inflation and GDP. What event or set of events triggers the beginning of the end of the housing bubble is not yet known.” But those unknowns aside: “A bloodbath in the housing market, however, appears a near certainty due to the magnitude of falls required for housing prices to again reflect economic fundamentals. The largest residential land market bubble on record is truly incomparable and dwarfs earlier speculative episodes in the commercial and industrial land market.”
Australians, Soos said in a phone interview, have the third highest household debt to GDP in the world, after Denmark and Switzerland. Canada, he said, is not far behind.
“What’s been driving the bubble is the taking on of unaffordable mortgage debt. We’re so over-debted, it can’t continue. The debt burden will become so onerous and so toxic that sooner or later the whole thing will just collapse.”
Soos believes the Australian government won’t do anything to correct the situation. Quite the opposite, he said. A raft of generous tax writeoffs and low mortgage rates have only encouraged and sustained the real estate rush, he said.
“The government’s not going to do anything because it’s so deeply in the pockets of the real estate industry and developers.”
Predictions of Vancouver’s bubble bursting have come and gone for two decades now, and the real estate market has blithely ignored them.
But similarities to Australians’ deepening debt position have emerged here. A Royal Bank of Canada report this year found Canadians had taken on record levels of mortgage debt in 2014, and that our combined household debt of $1.82 trillion had surpassed the country’s GDP of $1.65 trillion by last year’s end. And here’s a statistic that’s timely, given the news out of Athens: Between 2007-2014, Canada’s household debt-to- income ratio rose more than any other country except Greece.
Soos was asked what effect Chinese offshore investors might have on a bubble. A recent Credit Suisse study, which I quoted in an earlier column, predicted that $60 billion from Chinese offshore investors and recent Chinese landed immigrants will flow into the Australian residential real estate market. Couldn’t that sustain the market?
Soos agreed, yes, it could, but only for a time. “Chinese investors may have pushed out the day of reckoning ... but the bubble definitely has to burst.”
There are those who disagree with Soos, including, no surprise this, the Australian government. His is a minority position. Soos takes it happily.
“There are 15,000 economists in the U.S., and you know how many predicted the financial crisis of 2007-2008? Fifteen. That’s 0.1 per cent. You know how many Irish economists predicted the economic collapse there? Three.”
Soos predicts the bloodbath to arrive as soon as 2017, though the influx of offshore money might delay that date.
In the meantime — and Metro Vancouverites can take away whatever lesson from this they wish — he pays his rent and socks away the rest. In time, he sees prices falling to the point he’ll be able to buy.