Australia - The Australian - Housing Market a 'Time Bomb', Says Investment Legend
Wednesday, 16th June 2010
Australian and British housing markets are the last two bubbles left in the
wake of the financial crisis, and it is only a matter of time before they
crash, warns legendary US investor and co-founder of global investment
management firm GMO, Jeremy Grantham.
Mr Grantham famously
reported a year before the global financial crisis: "In five years, I
expect that at least one major bank (broadly defined) will have failed and that
up to half the hedge funds and a substantial percentage of the private equity
firms in existence today will have simply ceased to exist".
He said yesterday
had an unmistakable housing bubble and that prices would need to come down by
42 per cent to return to the long-term trend.
possibly miss it," he said.
"The price of
housing typically trades about 3.5 times of family income and in bubble it goes
to 6 or . . . 7.5 (times).
having one now. You are at near 7.5 times family income . . . which suggests
you are twice the size that you should be."
GMO is one of the
biggest investment management firms in the world, with about $106 billion in
funds under management, and is considered to be an authority on asset bubbles.
Mr Grantham, who is
to meet with GMO clients in Sydney and Melbourne this week, said any bubble
could be an exception to the rule.
quite a few things in common but housing bubbles have a spectacular thing in
common, and that is every one of them is considered unique and different,"
As an example, he
cited the British housing market bubble of 1989. At the time, he said people
dismissed the bubble because there was no more rezoning, creating a land
shortage and as such, they believed prices would rise forever.
later, in 1997, they hit the lowest multiple of family income since the record
books started in 1945. It's always the same old argument, they are not making
any more land."
case, Mr Grantham described the housing market as a "time bomb" just
waiting for interest rates to increase and become impossible to support.
Since last October,
the Reserve Bank of Australia
has raised the official cash rate six times. The rate is now 4.5 per cent.
If the Australian
housing market did not return to the normal multiple of family income, he said
"it will be the first time in history."
later, the rates will go up and the game is over.