Uh-Oh We're In Trouble, Something's Come Along And It's Burst Our Bubble...(Maybe)

Only a few economists believed when the housing bubble burst, financial difficulty would be imminent, including Dean Baker who wrote about it in his 2009 book entitled ‘Plunder and Blunder, The Rise and Fall of The Bubble Economy.’  You just have to look at the UK or US, the real estate bubble went pop and then a recession hit. So if bubbles bursting do lead to an economic downfall, what does this mean for Australia??

For those considering emigrating it may be worth noting that the price of houses in Australia has increased more than the UK and US in the past 25 years. According to figures from the RBA the average house price rose from $375 000 in 2005 to $540 000 in 2009. As I found out first hand, renting reflects these high house prices, where a room could be anything from $200 to $1000… per week!

Mortgage debt is the largest type of Australian debt and has been driven by the financial sector and the government which offered a First Time Owners Grant in an effort to boost the economy. The more credit was extended the more house prices increased and the real estate market became overvalued. The combination of these higher debt levels and rates has taken its toll on a typical Australian family, who spend far more on mortgages than anything else and may be reaching a limit on what they are able to pay. The RBA have lowered interest rates and the first 11 months of 2011 showed only a 3.7% decrease in house prices but the rating agency Moody’s believes that the current house prices are ‘not sustainable’. Some economists appear to be ignoring the $2 trillion bubble but others including Steve Keen believe the market has topped out and has predicted that the Australian housing bubble will pop very soon.

So will the bubble burst soon and will it lead to an economic crisis, or will Australia be in a better position than other countries to withstand it? Only time will tell!