Australian property: A bubble bigger than US pre-2008?

It's hard to sustain a state of amazement. Eventually, even the most perplexing, confounding things become normalised.

Take Sydney house prices, for example. I've been in a state of incredulity about them for more than 15 years now. Having grandly proclaimed to anyone foolish enough to listen that they 'simply weren't sustainable', eventually I wised up and shut up.

Fortunately, there are still people nurturing the flame. Economist Steve Keen is one, Bloomberg View's William Pesek another. Today he wrote an incendiary story for anyone leveraged into Australian property which, given how our tax laws almost mandate useless speculation, is almost everyone with a job and a few spare bucks.

And the choice quote? This alarming little morsel:

'With Australia facing the highest unemployment rate in 12 1/2-years, slumping business spending and deflation spreading around the globe, a little more RBA stimulus would seem in order.

That's until you consider the out-of-control housing market, which is in the grip of an irrational exuberance arguably beyond anything the U.S. experienced in the mid-2000s. In February alone, Sydney homes surged 14.7 percent from a year earlier, the fastest pace in five months. According to economist Lindsay David, author of the new book "Print: The Central Bankers Bubble,” Sydney land prices rose 512 percent faster than inflation between 2001 and 2011, while the city's population only grew 16 percent.'

Pesek goes on to argue that with Australia's rampant property market and slowing economie(s) – the resource states are different – Stevens could not address one problem without making the other one worse. Holding rates, as the RBA did yesterday, was the only sensible option.

The Government could be doing more to address rising unemployment, says Pesek, but is 'focused more on trimming the national budget than the hard task of diversifying the economy's growth engines and bringing them into closer alignment. [Abbott] killed the previous government's effort to tax miners to redistribute wealth to depressed areas. He's done little to invest in education, training or better infrastructure - all crucial to improving Australia's competitiveness.'

For property investors, there's a potential double whammy here. If property prices are exuberantly irrational, investors might be bailed out by government attempts to boost productivity, lower unemployment and increase average income and expenditure. If Australia rediscovered 'the liberalizing instincts that dominated Canberra in the 1980s and 1990s and transitioned back to a non-mining economy', that would be good for all, especially property investors. 

But what are the chances of that, from a Prime Minister that believes 'coal is the foundation of prosperity for the foreseeable future'? So the RBA's hands are tied and the government doesn't want to address the issue. If a recession does trigger a property price crash, we'll know where to skewer the blame. And it won't be with Glenn Stevens.