LOCAL property investors have become "Ponzi borrowers" in a market 40 per cent overvalued, according to a Morgan Stanley strategist.
In a bearish note to clients this morning, Morgan Stanley strategist chief strategist Gerard Minack warned Australia's housing "bubble" could be pricked should banks tighten credit or "loss-making" middle-class landlords start to sell.
He argues owner-occupiers are in too much debt and investors are riskily relying on capital gains to repay their loans and interest repayments. Compounding the problem is "ill-advised policy", such as the government's first home-buyers grant, which has combined to make Australian houses "40 per cent above fair value", Mr Minack says.
"Buying an asset that's over-priced never ends well," he said. "The real return on residential property over the next decade is likely to be negative, in my view."
"Owner-occupiers have played a game of financial chicken, competing for property by taking on increasingly imprudent amounts of debt. Investors have become Ponzi borrowers -- Hyman Minsky's term for borrowers who rely on capital gains to repay debt and interest -- in the belief that housing is a sure-fire long-term investment. History shows that it isn't."
Australian Bureau of Statistics figures show overall average house prices rose 18.4 per cent for the full year to June, with Sydney prices rising 21.4 per cent -- the largest since it began recording these figures in 2002.|
But the rate of growth has been slowing in recent months as rising interest rates feed through the economy.
Commonwealth Bank of Australia, the nation's largest bank by market value, also warned last week it could be forced to raise rates independent of the Reserve Bank. CBA's full-year results showed some key business units were struggling with higher costs.
On the positive side, Mr Minack said the most plausible trigger for a correction in the Australian housing market -- broad-based jobs losses -- doesn't appear likely in the near term. This means big price declines in the near term "seems low".
Australia's jobless rate rose to 5.3 per cent in July, from 5.1 per cent, as more people decided to look for work and as full-time employment fell for the first time in 11 months.
The RBA – one of the few central bank's in the developed world to raise rates since the global financial crisis -- has been on hold since May as six rate rises since October feed through the economy. The official cash rate stands at 4.5 per cent.
But Mr Minack said Australia dodging of the worst of the global financial crisis didn't demonstrate that there's no housing bubble.
"I'm not persuaded by arguments that houses are sustainably priced; I'm not persuaded by the view that debt is not a problem; and I'm not persuaded that policy-makers could prevent collateral damage to banks," he said.
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