Housing bubble

There are divided opinions about the bubble status of Australian housing market.

It has enjoyed mostly uniterrupted growth over the last decade.

Any real house prices increases in excess of real GDP growth will eventually lead to asset bubble and consequently crash. (i.e. consuming more than one produces is not sustainable)

House bubble has a much larger implication for the economy than a stock market bubble.

The reason is very simple. One needs a roof over its head but not investment in stocks.

Once the housing bubble pops, it will have a broad impact affecting the rich and the poor. Because of the significant amount of capital tied into housing for majority of people's life.

Effect of bubble status will take years if not decades to work through the system mainly via deleveraging of debt starting from the least cost effective forms of debt.

This is essentially the American story. With 70% of GDP relying on consumption, the massive glut of unsold inventory and foreclosed home will take the livelihood of the American consumers when the unemployment is struck at 9%-10%.

What it means for Australian housing market. This is a perfect lesson that most Australian won't learn until it eventuates.

I am not saying the Aussie house price will collapse in near-term. In my opinion, the house market remain reasonably supported by strong employment and neutral interest rate environment.

An outright crash is unlikely. However, the house value has reached a level such that any future return on this asset class will be at best anemic.

If you were told by many that the Australian house market is a sure bet for future financial security, you have been warned.