The Australian Housing Bubble Pop: More Unemployment Required, or Something Simpler?

I have to say that this gets my goat a bit, so to speak…

It is common these days for people (especially those denying for whatever reason that Australia is in a housing price bubble) to assert that a significant increase in unemployment is required to cause a significantly reduce Australian House prices, via problems with servicing existing debts, and the subsequent swelling of houses being listed on the market, which the former owners could no longer afford.

The truth is that Housing is just so the “elephant in the room” in this country, over the last decade in particular.

That being true, have the “it’ll be OK, even if it’s not” crew considered what must be happening to our economy if, for whatever reasons, the housing sector gets “sick”?

Given its status and economic importance, if something is wrong with Housing, then something is REALLY wrong with the whole system, yes?

And, the notion that problems will only really arise if unemployment becomes a “problem” is really so one-dimensional, in my honest opinion…isn’t it true that a huge part of our population is employed in construction? And that a huge part of that construction sector is employed in housing? And that a large part of housing construction is predicated upon bubble-style investment, be it new homes and renovations?

There’s also the problem that people seem to assume that an unemployment shock is what is required, as if everything is otherwise “fine” already; when the opposite is true: households are struggling incredibly, and delinquencies on “less important” (than the house) bills are already increasing significantly, and that households are already cutting back wherever they can, reducing saving, taking out debt to cover debts, and really coming to their financial limits to “save the house”. Is everyone in this situation? In part, many are, and cannot absorb much more demands on debt-servicing? But there certainly are many households that are struggling that badly…and it can only take a few to bring down the many (the “few” sub-prime loans in the USA certainly are a good example of this…).

All the above premises being true, if there are problems with the status quo of housing investment – whatever they might be! – then problems will flow into the massive construction sector, and, therefore, affect the profitability and employment levels of the construction sector.

That, in my honest opinion, is a way for housing finance “stagnation” to affect housing price “stagnation”, which in turn affects construction sector profitability, which affects construction sector employment levels, which given its size significantly affects national employment levels….and they are only the DIRECT financial and employment affects…since everything is linked together, problems would get worse.

The Housing sector is now SO large and SO important to the Australian economy, that problems even in its perceived medium-term profitability (ie. capital price appreciation) will have HUGE implications for the economy as a whole.

What i perceive as simple (simplistic?) arguments about something as massive as housing only being significantly adversely affected by “significant” unemployment increases misses the fact that other factors affect the house prices (eg. housing finance growth) and that THESE could actually, instead, be considered root factors that increase unemployment, via housing price problems!

So, stagnation of housing prices for a “prolonged period” (12 months?) could affect unemployment initially, instead of unemployment affecting housing prices! Fancy that!

Housing finance slumps knocking on in a cascade to increase unemployment, and a subsequent viscous cycle (collapse)…who would have thought?

Will the government spend (waste?) more taxpayer money trying to stop something that can’t really be stopped? Perhaps only slowed down (but made worse in the long run by further cheap bubble money?)

Anyhow, with overly simplistic arguments like the one I’ve just attempted to address, it’s no wonder we don’t see these things coming.

And forgive me: i’m not trying to sound arrogant or anything, it’s just that we really should know better…but people (me included) always seem to make mistakes.

Regards,

Stewart

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