By Jonathan Shapiro
Australians are being “irrationally exuberant” and borrowing too much to invest in housing, exposing the economy to financial shocks, global bond fund giant PIMCO says.
In a detailed statistical study that compares Australian borrowers to those in other countries, PIMCO researchers found that Australians’ decision to borrow is driven by falling interest rates and rising house prices – not economic fundamentals that reflect the health of the economy like employment.
In the US wages and other measures of economic health drive people’s decisions to borrow.
The world’s biggest bond investor said Australians’ focus on capital gains and cheap credit “may not be sustainable or linked to the productivity of the asset.”
Australians also appear to be ‘trigger happy’ about debt – they respond far quicker than other borrowers to changes in interest rates and asset prices. They start borrowing more after only six months of increases in house prices compared with a year in the US.
“Households are exhibiting irrational exuberance because they are placing little weight on broader fundamentals like unemployment that may be more representative of future incomes or asset price returns, increasing the likelihood of asset price bubbles,” the report released by the bond fund on Wednesday said.
Australians react faster and “more vigorously to a shock in asset prices or mortgage rates” which makes the economy more vulnerable to an external shock, such as a sharp slow down in China’s economy or another financial market sell-off, the report said.
The conclusions may bolster those who believe parts of Australia’s property market are into a bubble, including Treasury secretary John Fraser, and put pressure on regulators to take action. A sharp fall in property prices could hit the big banks, which borrow billions each year from overseas investors like PIMCO.
“The key point is that the speed which Australian households reacted to changes in housing assets and mortgage rate was much faster,” the researchers said.
Originally appeared at: http://davidstockmanscontracorner.com/australias-housing-bubble-the-mania-down-under/