Following the publication of this article http://www.debtdeflation.com/blogs/...presentation-on-scribd-on-australian-housing/ by Steve Keen on 21 May, I'm starting this thread to record thoughts regarding a (potential) housing bubble in Australia. For what it's worth here are my thoughts: Australian housing prices are high and in bubble territory. However we know from previous bubbles (eg. Nasdaq late 1990s) that the mere existence of a bubble is not sufficient for prices to (1) stop rising and (2) start falling. Keen recently lost a very public bet with a Macquarie Bank economist regarding the movement of Aussie house prices. My view is that Keen is right, just very early. While I agree that Aussie house prices are high by a variety of measures, one thing that may provide *some* kind of floor under the housing market is the tax treatment of investment properties in Australia. Specifically, it is possible to make a tax-deductible loss on the operating costs of housing investment (eg. rent received less interest paid on loans less maintenance expenses), in the hope of making a capital gain. Furthermore, long-term capital gains (holding period 1 year or more) are taxed at 50% of the normal marginal tax rate. For a taxpayer on the highest bracket, long-term capital gains will be taxed at 22.50% and not the usual 45%. So let's assume that the RBA cuts interest rates to 0.25%. In this situation there will still be demand for housing (and those who won't sell) given this generous tax treatment. Since 2000, the Aussie government has had a history of providing grants to first home buyers. Given that the Aussie govt debt / GBP ratio is lower than that of many countries, especially PIIGS nations, it is possible that if Aussie house prices experienced a significant decline (10% ? 20% ?) then these grants could be increased. This is particularly true given that a Federal election is expected before the end of 2010, and that many swinging voters look to move up the socio-economic ladder by "investing" in property. Summary: * House prices in bubble, but waiting for confirmation of bubble popping before considering trades to capitalise on the bubble deflating. Such trades include buying Aussie govt bonds, shorting AUD/USD, shorting Aussie banks (CBA, WBC, NAB, ANZ, BEN, BOQ) http://finance.yahoo.com/q/cq?d=v1&s=CBA.AX,wbc.ax,nab.ax,anz.ax,ben.ax,boq.ax * Some government policies (negative gearing; capital gains discount) will provide a floor under house prices, so that declines may not be as big as some house price bears expect. * Low government debt to GDP ratio provides room for the Federal Government to increase existing home buyer grants without the bond market vigilantes punishing such a move * Wildcards include the deflationary clouds hovering in Europe, negative wealth effect of a declining stockmarket and an economic contraction in China. If one or more of these factors hit the Aussie economy, then a housing decline could be deeper than if these factors were not present.