Larry Schlesinger | 6 February 2012

US analyst Jeremy Grantham adjusts Australian housing price bubble predictions, so watch housing construction numbers now

US analyst Jeremy Grantham adjusts Australian housing price bubble predictions, so watch housing construction numbers now

Australia’s housing bubble will “pop” if it builds more houses, says US hedge fund manager Jeremy Grantham.

“If you have a housing bubble and you respond by building houses, it pops. It behaves from a bubble expert’s point of view.”

However, Grantham says the RBA’s interest rate cuts are forestalling a property crash.

“The UK and Australia are abhorrent bubbles, because of government policy, you draw out the agony,” he told the Australian Financial Review.

According to Grantham, a property crash would be good for the economy and for those who have not bought yet.

Grantham, co-founder of Boston-based hedge fund GMO, caused a stir in April 2010 when he declared a housing bubble in Australia and said prices would tumble as interest rate rose (the Reserve Bank pushed rates up by 25 basis points to 4.25% in April 2010).

His declaration resulted in a flurry of short-selling by Australian banks.

In 2011 Grantham visited Australia and said the housing bubble was about to burst, but later adjusted this forecast to say it might only deflate slowly rather than pop.

Grantham correctly predicted Japanese real estate’s bubble in the 1980s, the bursting of the dotcom bubble and the events that led to the US housing crash in 2008.

He maintains that an overpriced housing market is not healthy for the economy and puts Australia at a risk of a Japanese-style housing scenario.

Under a Japanese scenario those looking to enter the housing market (young first-home buyers) must either continuously save or live outside of the major cities to afford a house.

“For someone that hasn’t bought and for a generally healthy economy it’s better to get rid of it and start again,” he says.

According to Grantham first-home buyers and new arrivals are better of renting than buying at the moment because house prices are being artificially “propped up.

Renting now, he says, is a cheaper and less risky proposition than buying a property.

“You are putting a terrible burden on young families, which is a miserable idea,” he says.

“Japan did it that way and they have worked it out after 20 years. Back in 1990 if you were young you were looking at loony prices for little shacks in Tokyo.”

Backing his argument, Grantham says first-home buyer numbers are at record low ratios in both Australia and the UK. 

Another US analyst, Heather Hagerty of bond fund manager Fidelity Investments, says the 3.5% fall in house prices in 2011 is “comforting” and says a “healthy correction is going on”.

“We take comfort in the fact that the household leverage isn’t growing, that the savings rate continues to be at a high level and the market appears to be reacting to the rate cuts.”

However, while Hagerty says the Australian market is shielded by the tax structure, full-recourse lending, low loan-to-value ratios, she agrees with Grantham that pent-up demand is the issue.

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