In One Slide, Here's Why CBA's Chief Economist Believes Australia's Not In A Housing Bubble

Not a bubble! Getty/Doug Benc

Commonwealth Bank chief economist Michael Blythe yesterday gave a great presentation at the Australian Institute of Company Directors (AICD) Lunch* at the Hilton in Sydney titled “Four booms, three transitions & a bubble?”

US demographer and author of The Great Depression Depression Ahead Harry Dent has been wandering around the country telling all who’ll listen that property prices in Australia can fall as much as 50% in coming years, so it’s the “bubble” bit we’ll concentrate on this morning.

Blythe noted he had been dealing with questions of the bubble in Australian property prices since 2003 and it’s largely the international audience – outsiders like Dent – who are most interested in when the Australian property market is going to crash.

Unlike Dent, Blythe does not think there is a bubble in property prices and included the following slide in his presentation.

That’s not a bubble

The key point about rising house prices now compared to other markets and even Australia in the past is the first one on Michael Blythe’s slide. It’s one the RBA has made in the past. House prices rises per se don’t cause a bubble – what is needed is for the rises to be fuelled by increased borrowings – leverage – which makes the system fragile and unstable.

That just isn’t happening at the moment.

Which brings us back to Dent. Interestingly Dent doesn’t seem to be saying that Australian property prices per se are going to fall. Rather, housing in Australia will fall after the there is a stock market crash after the Chinese property market crashes.

To me this sounds like the conditional probability of a crash in Australian property prices is much lower than the strength with which Dent is making the assertion prices will fall by 30-50%.

Australia’s major bank chief economists – Blythe, Evans, Oster and Eslake/Hogan their teams – have proved more adept at predicting the swings and roundabouts of the Australian economy than pretty much anyone else over the past decade. When the GFC hit, predictions of a crash in Australian property prices spiked but for a number of reasons it didn’t happen then and according to Commbank’s Blythe, the Australian property market is not a bubble now.

* Greg McKenna attended the Lunch as a Gradute of the AICD and Director of Police Bank. Michael Blythe’s presentation was used with permission.

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