Asset Price Bubbles: The startling growing danger in Australia
In the words of noted author, columnist and guest commentator, Barry Ritholtz, you would be “…hard-pressed to recall when any sort of bubble was accurately identified…” , such is the difficulty when determining the origins and effects of price bubbles in the financial sector as well as their effects on society as a whole. In the past year Glenn Stevens, the Governor of the Reserve Bank, suggested at the possibility of a growing housing price bubble in Sydney , an opinion parroted by the secretary of the Federal Treasury John Fraser. If such a bubble exists it would explain the swift growth of prices in Sydney’s houses but it would also signal the renewal of a much argued debate …show more content…
Such a bubble could potentially cause billions of dollars of damage to the Australian economy as well affect the global community, much like the subprime mortgage bubble in the US that ultimately led to the GFC. The Nobel Prize laureate, Professor Vernon Smith, agrees that Australia should be careful when he opines that “Sydney real estate is growing faster than your other cities…” and he goes onto say that property investors will be hugely impacted when the bubble eventually bursts. However, there is much speculation about whether a bubble actually exists, former Federal Treasurer Joe Hockey dismissed such speculation about a potential bubble instead claiming that it’s an issue of insufficient supply which “…doesn’t suggest…a bubble” purporting that this is an issue which can be simply be resolved with producing more housing . While it’s true that Australia’s housing markets are lagging behind its population growth this sharp increase in housing prices has existed over the past 18 months clearly demonstrating an economic trend. Vernon’s opinion is supported by economists Lindsay David and Philip Soos who argue that “…the data clearly establishes Australia in the midst of the largest housing bubble on record” , they also put forth the opinion that some politicians and members of the …show more content…
The lean strategy refers to the “…leaning against the upswing of a credit cycle…” , also known as pre-emptive tightening, in order to limit the eventual damage by moderating credit bubbles. However, this tightening reduces the productivity of the boom period making it unfavourable to many economists. The clean approach, instead of focusing on moderating the boom period, allows it to continue but focuses on cleaning the aftermath. The clean approach has been the “…dominant view until quite recently...which has been in favour of cleaning up afterwards” , nonetheless, due to the recent GFC the economic debate has experienced a shift with more economists now supporting the lean strategy. The clean strategy has largely come under fire because when the bubble bursts the “…collapse in asset prices…leads to…a feedback loop in which loans go sour…demand for assets declines further and prices drop…” which diminishes the investments covering a wide number of assets. William White, the chairman of the economic and development review committee (EDRC), opines that “monetary policy should be more focused on pre-emptive tightening” to moderate credit bubbles…” highlighting the great weakness in the clean strategy that it is too globally damaging in today’s highly connected international markets. An opinion seconded by Mishkin when he states that
In the words of noted author, columnist and guest commentator, Barry Ritholtz, you would be “…hard-pressed to recall when any sort of bubble was accurately identified…” , such is the difficulty when determining the origins and effects of price bubbles in the financial sector as well as their effects on society as a whole. In the past year Glenn Stevens, the Governor of the Reserve Bank, suggested at the possibility of a growing housing price bubble in Sydney , an opinion parroted by the secretary of the Federal Treasury John Fraser. If such a bubble exists it would explain the swift growth of prices in Sydney’s houses but it would also signal the renewal of a much argued debate …show more content…
Such a bubble could potentially cause billions of dollars of damage to the Australian economy as well affect the global community, much like the subprime mortgage bubble in the US that ultimately led to the GFC. The Nobel Prize laureate, Professor Vernon Smith, agrees that Australia should be careful when he opines that “Sydney real estate is growing faster than your other cities…” and he goes onto say that property investors will be hugely impacted when the bubble eventually bursts. However, there is much speculation about whether a bubble actually exists, former Federal Treasurer Joe Hockey dismissed such speculation about a potential bubble instead claiming that it’s an issue of insufficient supply which “…doesn’t suggest…a bubble” purporting that this is an issue which can be simply be resolved with producing more housing . While it’s true that Australia’s housing markets are lagging behind its population growth this sharp increase in housing prices has existed over the past 18 months clearly demonstrating an economic trend. Vernon’s opinion is supported by economists Lindsay David and Philip Soos who argue that “…the data clearly establishes Australia in the midst of the largest housing bubble on record” , they also put forth the opinion that some politicians and members of the …show more content…
The lean strategy refers to the “…leaning against the upswing of a credit cycle…” , also known as pre-emptive tightening, in order to limit the eventual damage by moderating credit bubbles. However, this tightening reduces the productivity of the boom period making it unfavourable to many economists. The clean approach, instead of focusing on moderating the boom period, allows it to continue but focuses on cleaning the aftermath. The clean approach has been the “…dominant view until quite recently...which has been in favour of cleaning up afterwards” , nonetheless, due to the recent GFC the economic debate has experienced a shift with more economists now supporting the lean strategy. The clean strategy has largely come under fire because when the bubble bursts the “…collapse in asset prices…leads to…a feedback loop in which loans go sour…demand for assets declines further and prices drop…” which diminishes the investments covering a wide number of assets. William White, the chairman of the economic and development review committee (EDRC), opines that “monetary policy should be more focused on pre-emptive tightening” to moderate credit bubbles…” highlighting the great weakness in the clean strategy that it is too globally damaging in today’s highly connected international markets. An opinion seconded by Mishkin when he states that