House prices losses - asset-inflation gains wiped out

""Typically, real house prices give up 70 per cent of what they gained in a boom during the bust that follows" Professor [Morgan] Kelly, a professor at University College, Dublin, who has studied earlier real estate bubbles] said. "This is a remarkably robust relationship, holding across very different OECD housing markets over more than 30 years"" (Bloomberg, Irish owners not smiling, AFR, July 5, 2007, p.57).

Sydney and Melbourne house prices to crash at least 50% nominally?

"The land mania of the 1880s took two main forms. The first was based on a plethora of building societies, whose optimistic officials believed that every family in the colony could simultaneously build their own house, keep up the payments through good times and bad, and support an army of investors who were being paid high rates of interest for the use of their money. The second form of mania was the deeply-held belief that it was impossible to lose money by 'investing' in land - a belief which persists to the present day" (Michael Cannon, The Land Boomers, (Melbourne: Lloyd O'Neil, 1986), p.18).

"... a debt bomb is growing Down Under. Australia's total non-financial debt is over 250 per cent of GDP, up around 50 per cent since 2010. Household debt is currently over 120 percent of GDP, among the highest proportions in the world. The ratio of household debt to income has nearly quintupled since the 1980s, reaching an all-time high of 194 per cent" (Satyajit Das, Bloomberg, Far too dependent on 'houses and holes': Australia's economic luck is running out, smh.com.au, October 4, 2017).

"... household debt is at a record-high 194 percent of income, compared with 104 percent in the U.S., wages are stagnant and policy makers are fretting that consumers could be spooked into pulling back. That would be a major hit given household spending accounts for more than half of gross domestic product"  (Michael Heath, 26 Recession-Free Years Hide a Darker Picture for Australia, bloomberg.com, October 3, 2017).

Bank-Government Nexus - Too much debt exposure

"... Australian debt levels remain high. [Shane] Oliver says this makes housing our Achilles' heel, with house prices being vulnerable to an economic slowdown (with rising unemployment) or further interest-rate rises" (Annette Sampson, House prices can't go up indefinitely, smh.com.au, June 4, 2011).

"As [Ross] Garnaut and his co-author David Llewellyn-Smith relate [in their book the Great Crash of 2008], in early October bank chiefs met Rudd to warn him that foreign lenders were refusing to roll over their foreign debts: ''The banks told (Kevin Rudd) that, if the Government did not guarantee their foreign debts, they would not be able to roll over the debt as it became due. Some was due immediately, so they would have to begin withdrawing credit from Australian borrowers. They would be insolvent sooner rather than later... The process of adjustment would be enormously disruptive and costly''" (Tim Colebach, We failed the GFC test, theage.com.au, October 27, 2009).

"Over 60 percent of the Australian banking system's loan book is in residential property, nearly 20 percentage points more than second-placed Norway and more than double the U.S. ratio, according to data from the International Monetary Fund. In Hong Kong's frothy housing market, the ratio stands at only 14 percent...

"Australian banks are prepared to lend a greater proportion of a borrower's income than many overseas peers. Half of Australia's mortgage credit is held by households who have borrowed more than six times their annual income, according to research by JCP Investment Partners, an equities fund. In the U.K., banks are only allowed to issue 15 percent of new mortgages at more than 4.5 times borrowers' income...

"The Reserve Bank of Australia recently estimated that one-third of borrowers have little or no buffer in the form of money set aside to meet an unexpected rise in mortgage loan repayments or other costs" (Emily Cadman, Moody's Downgrade Brings Australia's Home Loan Risks Into Focus,  bloomberg.com, June 20, 2017).

"Government net debt borrowing, ostensibly low at around 20 percent of GDP, is higher than it looks. That figure ignores borrowing by state governments, which adds around 10 per cent to government debt levels. It also ignores contingent liabilities, such as implicit government guarantees. These relate primarily to Australia's large banking system, which accounts for over 200 percent of GDP.

"In 2008, the government was forced to guarantee bank deposits and borrowing to ensure liquidity. In addition, governments implicitly bear a portion of the risk of private-public partnerships used to finance essential infrastructure and services, which can't be allowed to fail.

"Public finances are deteriorating, since strong growth in the commodity sector no longer offsets weak domestic conditions. Budget deficits reflect an eroding tax base and an aging population, which is driving up health, aged care and retirement expenditures.

"The high debt levels increase the risk of a banking crisis, which could be sparked by rising losses on real estate loans. Australia's especially vulnerable because of its dependence on foreign capital; foreign net debt tops 50 per cent of GDP, much of it borrowed by banks to cover the shortfall between loans and domestic deposits.

"The high debt levels increase the risk of a banking crisis, which could be sparked by rising losses on real estate loans. Australia's especially vulnerable because of its dependence on foreign capital; foreign net debt tops 50 per cent of GDP, much of it borrowed by banks to cover the shortfall between loans and domestic deposits..." (Satyajit Das, Bloomberg, Far too dependent on 'houses and holes': Australia's economic luck is running out, smh.com.au, October 4, 2017).

"... you can be insolvent for two types of reasons, one: you get yourself into trouble with the way you've managed your debt and you can't roll over your debt as it becomes due, or you run into trouble with the value of your assets.

"The rest of the world's problems, Europe and American's problems were problems with their bad assets, our problems were the problems of excessive reliance on a source of debt that turned out not to be reliable...

"We've had a couple of times in history when banks have been ... or when the economy has been heavily reliant on foreign debt and foreign debt dried up.

"In the 1890s, we had the Great Depression of that time, when most of our banks went bankrupt in those circumstances. The time of the Great Depression, more of the debt was government debt, so it didn't give rise to that situation.

"This time, the banks were in trouble with their debt, and the Government stood behind them" (Ross Garnaut, Ross Garnaut joins The 7.30 Report, abc.net.au, October 12, 2009).

"... a "bail-in" of creditors. This is where senior bondholders are exposed to losses in a bank collapse, rather than taxpayers.

"S&P said adopting "bail-in" rules could affect the major banks' ratings, as these were currently premised on the assumption that government support for banks in a crisis was likely.

"It also warned the economy would made more be vulnerable in a financial crisis if Australia chose to "bail in" the foreign investors that banks rely on for part of their funding.

" "We believe Australia could find it challenging to effect an economic recovery in circumstances whereby a key source of funding upon which the recovery would likely depend - senior unsecured creditors - had been 'bailed in' during the downturn," it said" " (Clancy Yeates, Beware the 'disorderly correction': Standard & Poor's warns on overheating mortgage market, smh.com.au, September 5, 2014).

Flats 1920s - Appartments 2010/20s

"The growth of the suburbs was accompanied by a rapid rise in property prices... There was a further factor in causing high land prices in the eastern suburbs and one which was new to Sydney: a boom in flats... In 1921 only nine per cent of dwellings units in Sydney were flats, but the 1933 census revelaed that the figure had reached 32 per cent" (M. T. Daly, Sydney Boom Sydney Bust, pp.166).

"The great Aussie dream used to be about the family home, the picket fence, the quarter-acre block.

"But not any more. W ith population growth, higher property prices and an increased desire for inner-city lifestyle driving a surge in families trading traditional suburban life for high density living...

Australians were also getting more comfortable with the idea of living in a unit, he [social demographer Mark McCrindle] said, describing this shift in mindset as a "massive attitudinal change"...

"BIS Shrapnel senior manager of residential property, Angie Zigomanis ... warned some households, especially those with kids, could get locked out of the market for units because developers were focused on courting investors who preferred one-bedroom units" (Sam McKeith, Buyers Swap 'Traditional Aussie Dream' For High Density Apartments, huffingtonpost.com.au, February 4, 2016).

"Such has been the splurge in building of apartments that houses, which back in the 1980s accounted for 75% of all residential building work, and which even at the start of 2012 accounted for 62% of the total, in September accounted for just 51% of private sector building numbers" (Greg Jericho, Apartment building is booming, so betting on a rate cut isn't as safe as houses, theguardian.com, January 21, 2016).

"According to the Reserve Bank of Australia, Australia's household debt as a proportion of disposable income now stands at a record high...

"The two closest episodes were the 1880s and the 1920s, which both preceded the only two economic depressions ever experienced in Australian history in 1890 and 1929" (Joe Hildebrand, Australia headed for 'economic armageddon,'news.com.au. February 18, 2017).

The ends of the post-World War booms provides 'types' for the end of the post-Cold War boom.

Previous booms and busts

"... two housing economists [Lindsay David and Philip Soos] ... believe the current bubble is worse than those in the 1880s, 1920s, mid-1970s and late 1980s" (Heath Aston, Australian housing market facing 'bloodbath' collapse: economists, smh.com.au, June 22, 2015).

Bust 1890s

"The crash began in 1891. Land values fell to levels around one half their boom levels. In addition ... data on individual suburbs are available. In Prahran, prices peaked at an average of over £1,000 per property in 1888 and fell to £520 by 1898. Similarly, in Brighton, average property values peaked at around £950 in 1888 and then fell to around £400 in 1893 and £300 in 1898. A comparison of these data to the accounts in Cannon (1966) suggests that the picture is fairly accurate but may understate the speed of the bust. For example, Cannon writes that, 'by the end of 1891 the bottom had completely dropped out of the land market ... In Collins Street, sites for which £2,000 a foot had been rejected a short time before, were now being offered for £600 a foot - and could not find buyers even at that price' (Cannon 1966, p. 18)" (John Simon, Three Australian Asset-price Bubbles, rba.gov.au, 2003, pp.22-23).

Note: "The level of household debt [todau] is higher now than at any other time in Australia;s history, with records going back to the 1850s. The level of bank lending as a share of GDP is now more than double the share of the previous peak, which was during the 1890s land boom" (Mortgaging our children's future: Aussie ticking time bomb sparks fears should new GFC hit, news.com.au, March 16, 2015).

"Recession in 1886 produced a large number of unemployed and even more strident opposition to assisted immigration. The government was forced to concede and immigration slowed to a trickle after 1887, not to recover in the 19th century.

"The general antipathy towards immigration stimulated by the fear of wages being driven down and by the recurrent increases in the level of immigration, was matched by religious bigotry and racial intolerance. The longest standing enmity was against the Irish ... The other group to attract the abuse of the general population were the Chinese, and they did eventually cluster in particular location in Sydney..." ( M. T. Daly, Sydney Boom Sydney Bust, pp.174-75).

Bust 1920s/30s

"The world depression found Australia unable to meet her repayments, and the boom was rapidly translated into a disastrous slump. The average price of a house in Sydney fell from the 1925 level of £959 to £668 in 1935, but this was a bonus only to those who had money... for the years 1931 to 1934, building in Sydney came to a virtual standstill" (M.T. Daly, Sydney Boom Sydney Bust, (Sydney, George Allen & Unwin, 1982), p.169).

Over ten years, from 1925 to 1935, average Sydney housing prices fell 30.3 per cent.

See for more at the bottom of this page.

Boom and Bust 1960s-1970s

"Sydney had never experienced a property boom on the scale of that between 1969 and 1974. It involved a frenzy of buying, selling and building which reshaped the central business district, greatly increased the supply of industrial and retailing space, and accelerated the expansion of the city's fringe. Its visible legacy of empty offices and stunted subdivisions was matched by a host of financial casualties which incorporated an unknown, but very large, contingent of small investors, together with the spectacular demise of a number of development and construction companies and financial institutions. The boom was the most significant happening of the 1970s and the shock waves from the inevitable crash were felt right up to 1980. It was an extraordinary event for Sydney and Australia...

"The fluctuating fortunes of the property market in Sydney during the 1970s left many bewildered. The enormous losses sustained by so many individuals and firms gave the lie to the deeply rooted conviction that property was the safest form of investment" (Daly, pp.1 & 132).

"The 1972-1974 bear market proved to be the worst for Australia in this century. The declines of the Great Depression were mitigated by the strength in Gold and other resource stocks" (Dr. Bryan Taylor, The Global Financial Data Guide to Bull and Bear Markets, globalfinancial data.com).

Boom and Bust 1980s-1990s

"The housing and inner city office boom of the late 1980s was the precursor to Australia's most prolonged recession in over 50 years..." (ACOSS, More Affordable Housing, acoss.org.au, October 2003, Paper 352, p.2).

"For the purposes of this book the most important period was from October 1987 (when [interest] rates were comparatively low) to the end of 1991... [There was] the relaxation of rates after the crash as the monetary authorities tried to avoid a money panic. This was a legitimate fear, but rates were eased to far..." (Trevor Skyes, The Bold Riders, (Sydney: Allen & Unwin, 1994), p.27).

"With the share market dead on its feet in late 1987, the surviving cowboys swung into the property market... The relatively low interest rates of early 1988 encouraged them to believe that they might escape their troubles in the equity market by gearing up in Central Business District (CBF) property...

"The cowboys and their lenders who stampeded into the office block construction in 1988 and 1989 showed woeful lack of experience. History tells us that a share market crash is frequently followed within a couple of years by a property crash..." (Skyes, pp.28-29).

"In the late 1980s, it was the business sector that ramped up its debt levels - to a large extent to finance speculation in assets (mainly corporate takeovers and inner city offices)..." (ACOSS, p.10).

"... the commercial property bubble inevitably burst, and when it did property values halved. In Melbourne and Perth, property values in 1993 were below their 1985 levels while in Sydney values were only slightly above their 1985 level. The commercial property boom ended for pretty much the same reason that most land booms end - supply increased and rental returns couldn't support the prices being paid. This was particularly true of highly-leveraged investors who faced higher and higher interest rates over this period as monetary policy was progressively tightened" (Simon, ibid., p.36).

"... figures from the Real Estate Institute of Australia show in the two years following the boom of the late 1980s the median house price in Sydney fell by 25 per cent" (Ross Gittins, Beware the bang if the property bubble bursts, smh.com.au, June 15, 2005).

Property and borrowing boom of the 1980s

Business credit as a %of GDP, 1982-2003

(Source: Simon, 2003 - (ACOSS, p.11)

"A major reason for the sluggish recovery from the 1991 recession was the need for the corporate sector to unwind its high debt levels. These may have been sustainable during the boom, but they were no longer so once demand for goods and services fell. This was a major factor behind the severe round of corporate 'down sizing' in the early 1990s..." (ACOSS, p.14).

What else to expect

" ... the wealthiest areas could be hit hardest.

""Some of the top-end properties are more vulnerable than the middle-market because their buyers are typically employed in sectors most likely to be hammered by an economic slowdown and rise in unemployment, namely banking and finance," he [Morgan Stanley chief equity strategist Gerard Minack] said.

""We could also see big falls in the places these people have holiday homes - the (NSW) Central Coast for example - which could even see prices fall by 50 per cent."

"Blaxland MP Jason Clare said the Bankstown sheriff's office had a list of 30 homes to be repossessed in the next few weeks.

""They had to evict a 70-year-old couple after they had gone guarantor for their children's home and couldn't keep up the repayments," he said.

""They said that was one of the most terrible things they'd seen"" (Angela Saurine, Property slump worsening, news.com.au, April 12, 2008).

Fragile Financial Sector

"The Economic Sphere never appreciates how its behavior and fortunes are dictated by the Financial Sphere" (Doug Noland, Digging a Little Deeper into "Financial Sphere" Analysis prudentbear.com, April 29, 2005).

Financial sector imbalances are the crucial factor in determining the severity of a bursting asset bubble. This has been the case in Australian crises, as the next section introduces.

Two Australian Depressions, One Banking Collapse

Chay Fisher and Christopher Kent in a June 1999 Research Discussion Paper entitled "Two Depressions, One Banking Collapse" outlines the Australian experience:

"Over the past 150 years, Australia has experienced two macroeconomic depressions, both of which coincided with worldwide depressions. The first of these was in the 1890s and the second in the 1930s. These were also times of financial distress both domestically and in the rest of the world. For Australia there were many similarities across both depressions... in this paper we highlight one of the major differences between the two depressions. Namely, the 1890s involved the collapse of a significant proportion of the Australian financial system, whereas the disruption to the financial system in the 1930s was comparatively mild...

"The central argument of this paper is that variation in the performance of the financial system across the two depressions was primarily due to variation in the condition of the financial system prior to each depression. We show this by examining the behaviour of a range of indicators of financial stability over the decade prior to each depression. These indicators are:

(i) the level and nature of investment;
(ii) property market speculation;
(iii) credit growth;
(iv) capital inflows;
(v) degree of risk management within the financial system; and
(vi) competitive pressures in the financial sector.

"Each indicator suggests that the financial system during the 1880s was becoming increasingly vulnerable to adverse shocks. During that period there was a sustained increase in private investment associated with extraordinary levels of building activity and intense speculation in the property market. This was accompanied by rapid credit growth, fuelled in part by substantial capital inflows (much of which appears to have been channelled through financial intermediaries). At the same time, banks allowed their level of risk to increase in an attempt to maintain market share in the face of greater competition from a proliferation of new non-bank financial institutions.

"In contrast, if anything there was only a moderate decline in measures of financial system stability during the 1920s compared with the 1880s experience. It is therefore not surprising that whereas the financial system essentially collapsed following the substantial shock to real output in the first year of the 1890s depression, a shock of at least the same magnitude during the first year of the 1930s depression had relatively little impact on what was clearly a more robust financial system.

"Historically one of the major causes of financial instability has been rapid increases in bank lending in conjunction with unsustainable rises in asset prices. In recent times the catalyst for this process has been financial deregulation. In a way, this force was also present in the 1880s. The Australian banking system in the 1800s had operated under direction of the British Treasury in accordance to the 'real bills doctrine', which among other things prohibited lending backed by land. However, Pope (1991) suggests that after the arrival of 'responsible government' in the 1850s, these regulations were largely ignored and banks increasingly engaged in lending for speculative purposes. Increasing willingness to ignore the real bills doctrine was at least in part a response to increasing competition from non-bank financial institutions" (rba.gov.au).

""The old theory says investors are "rational." The fact, however, is that fear is stronger than greed, which is why financial markets fall more rapidly than they climb" (Robert Folsom, If It Works in Practice... Will It Work in Theory? elliottwave.com, May 25, 2005).

Responsible government is required to protect people from themselves. Greed and fear are powerful forces that can play havoc in an economy.

Boom and Bust 1920s-1930s

"... Forget Crocodile Dundee and rugged individualism, the country was built by state governments"
- The Economist, Oz and the monarchy, November 6, 1999, p.14

"In the decade before 1930, borrowing, mostly from Britain, amounted to £250,000,000, and after 1925 no year had a favourable balance of trade. Very few saw this imbalance as an ominous sign for the future" (John Molony, p.244).


'If the United States sneezes the rest of the world catches a cold'
                                                                         - an old saying

"It was ironic, to say the least, that while the American boom of the 1920s had not been transmitted to the rest of the world, the rest of the international community very quickly felt the impact of the American crash..." (David Meredith & Barrie Dyster, Australia in the Global Economy, (Cambridge: CAP, 1999), p.85).

"Germany was easily the largest debtor nation, and in the period 1925-1929 she borrowed four times as much as Australia, the next largest debtor" (C.B. Schedvin, Australia and the Great Depression, (Sydney, Sydney University Press, 1970), p.39).

"... [in] the years leading up to the Great Depression ... the Australian economy had experienced no real growth for five years and, as a
consequence, unemployment was rising. Furthermore ... Australia was in the midst of a balance of payments crisis" (Dr David Gruen and Colin Clark, What have we learnt? The Great Depression in Australia from the perspective of today, treasury.gov.au/sites/default/files/2019-03/03_Colin_Clark_speech.pdf November 11, 2009, p.32).

"The closure of the London money market to Australian long-term borrowing... [and] the rapid accumulation of short-term debt in London which followed in the second half of 1929 and in 1930 was the most important single factor in shaping depression policy to mid-1931. The interaction between the pressure this debt exerted and the instrumentalities of domestic policy formation is an important theme... Australia found herself in a much more embarrassing position on the eve of the world depression than other large debtor nations" (Schedvin, p.106).

"It did not take long for the [Scullin Labor] administration to appreciate that the heavy adverse trade balance was the most urgent problem that it had to deal with, for the growing trade deficit was primarily responsible for the deterioration in Australia's international credit rating and was also giving rise to speculation that the country would be forced to default on interest payments due abroad" (Schedvin, p.140).

"Consider this scenario. The economy has shrunk by 10 per cent; unemployment is 31 per cent; the government can't pay its public servants and so defaults on its foreign debt. Sound familiar?

"Greece 2015. Right?

"Wrong. We are talking New South Wales. 1932.

"On 29 January, Jack Lang, the incendiary and one-of-a-kind state premier, announced New South Wales would not pay interest owing to British bond-holders.

"And it wasn't the first time. In April the previous year, Lang had similarly declined to pay the interest then due on British bonds, arguing the money should instead be spent on the dole...

"Britain showed no such mercy to its colonies.

"... in 1930, it sent Sir Otto Niemeyer from the Bank of England to argue that Australia deal with the Depression with deflationary policies, including savage cuts to social services and insisted that the debt be serviced. Lang, alone among state and federal leaders, rejected this so-called "Melbourne agreement" (because it arose from a meeting in the Victorian capital).

"Instead, he expanded the welfare and related measures he'd embarked upon when first elected in 1930 - restoring the 44 hour week, preventing landlords from auctioning evicted tenants' possessions, establishing a lottery to help finance hospitals, extending the repayment period of mortgages and other loans, and directing state funds into public works.

"He could not dissuade the (also Labor) federal government from cutting wages nor to agreeing that NSW could expand its debt. But he was adamant that British bond-holders would not get funds that could do at least some good to the economically distressed in NSW.

Because of our federal structure, the Commonwealth was obliged to assume responsibility for NSW's debt obligations. It paid the Poms - and tried to recover the funds from Lang's Treasury. To say Lang resisted, and set legal and administrative traps to thwart the feds, would be a severe understatement.

The legal and political tussles between Canberra and Sydney over control of NSW finances in the wake of the second default were way too byzantine to summarise here but they make todays politics look very tame indeed" (Anne Summers, Debt needs to be cut for economies to rebound, smh.com.au, July 10, 2015).

"In the year 1932, just over 30 per cent of Australian breadwinners were out of work. Unlike the 1890s, this was a world-wide depression: but Australia's ability to cope with it was gravely impaired by its heavy overseas debt...

"How did Australians manage to work their way out of the difficulties? They traded their way out of trouble. That's the modern, glamorous way of expressing it, but in fact they sweated their way out of it. They reduced their imports and increased their exports. Unfortunately, I doubt whether we could expect to "trade our way out" very easily [today].

"... the extent of unemployment experienced in the early 1930s rapidly cut down the import bill... Thus in the year 1928-29, Australia's total import costs £130 million. They cost only £51 million three years later. In case you think that changes in money, including the first big currency depreciation in our history, mainly caused this sharp fall, let me specify how the actual tonnage of imports fell away.

"In the two years after 1929-30, imports of motor cars chassis fell from 62,000 to 4000. In the same two years the imports of electric cables and wires fell from 15,000 to 2000 tons. The impact of petroleum - our consumption of petroleum - was almost cut in half. The imports of whisky fell to a mere one-sixth, and in this era of the sardine sandwich even the imports of tinned fish were halved.

"... we will not be able, in a future debt crisis, to fight our way to solvency with such ruthless cuts in imports.

"Nor are we certain to ease a future debt crisis by the kind of speedy recovery in export prices seen in the past..." (Geoffrey Blainey, Our extended Australian family: over-extended or third time lucky, The Australian, March 2, 1990).

Paintbrush Picture
(P.D. Jonson and G.R. Stevens, ibid., p.1)

In relation to Geoffrey Blainey's unempolyment figure, the Reserve Bank of Australia noted, with graph above:

"After fluctuating in the range from 3 to 6 per cent between 1910 and 1929, the rate of unemployment reached 20 per cent [19.75%, from, David Gruen and Colin Clark above] (almost 30 per cent among trade unionists) in 1932. Unemployment did not subsequently fall much below 10 per cent until the Second World War...

Forconstruction "the big shake out occurred in 1929/30 and 1930/31... employment ... declined by 21 per cent and 28 per cent in these years... employment in construction ... was cut almost in half..." (P.D. Jonson and G.R. Stevens, The 1930's and 1980's: Some facts, Research Discussion Papoer 8303, September 1983, p.1 and Attachemnt 1, p.1).

Paintbrush Picture
(P.D. Jonson and G.R. Stevens, ibid., p.2)

Australia quickly recovered its 1929 sharemarket high primarily because its economy was based more on raw materials, than on industrials, and because its economy was not as closely tied to the United States and Europe as many other countries (Brian Taylor, Could this decade be the next 1930s? gold-eagle.com, December 13, 2002).

The Australian sharemarket rose 196.1% from December 1916 to February 1929. It then fell 46.3% from February 1929 to August 1931.

The sharemarket recovered its 1929 high in October 1934. (Brian Taylor, ibid.,).

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