Is This Our ‘Minsky’ Moment?

After years of house price growth in Australia, we could be in for a Minsky moment.

What do we mean by a ‘Minsky’ moment?

Well, it comes from economist Hyman Minsky. His idea is that a long period of growth leads to more speculation using debt, which pushes asset values up. Yet, if screws tighten then prices can collapse suddenly, which means that borrowers cannot sell assets at the previous high prices.

House prices have been increasing at a rapid pace in recent years.

We have seen amazing gains in housing in the past few years, especially in Sydney and Melbourne. In Sydney, property prices have increased 74% in the last five years.

Now, things are starting to cool. As you can see below, weekly clearance rates are on a downward trend. Property prices are dropping.

Weekly Clearance Rate

Source: Corelogic
[Click to enlarge]

We could see the end of the ‘wealth effect’

Australians were lucky to avoid the global financial crisis.

In fact, 26 years without a crisis has meant that some generations have never lived through one. Yet the quicker the property market grows, the more vulnerable it comes to a correction…

…a correction that very few may be prepared for.

Where are we seeing the screws tighten?

Well, as we told you yesterday, for one there is credit availability. Banks are cutting credit and increasing scrutiny on mortgage applications. Cut off credit and demand for property will fall.

We’re also seeing higher interest rates. While the Reserve Bank of Australia has been keeping rates stuck at the record low of 1.5%, so as not to fuel the housing markets, lenders have been slowly increasing interest rates.

A slowdown on the property market could mean we see an end to the wealth effect.

What’s the ‘wealth effect’?

As asset prices increase, households feel they have more money…so they spend more.

In fact, while many are asset rich, they don’t have much cash. As you can see in the graph below, the Australian savings ratio has collapsed in the last years.

Aus Household Saving Ratio

Source: Trading Economics
[Click to enlarge]

Are Australian’s accumulating too much debt?

Households are saving less and have instead accumulated high debt.

Yet higher interest rates and credit availability are not the only risks to the property market.

There is also the risk of higher unemployment. High debt is already trickling down into lower consumer spending. Yet weaker property prices could result in higher unemployment rates in different sectors related to the market, like residential construction, real estate agencies, furniture stores…you name it.

While the unemployment rate is at a low 5.6%, it has been edging higher. And underemployment, that is people that want to work more hours but can’t get them, is at record highs.

Higher unemployment would put a strain on already highly indebted households.

Digital Finance Analytics estimates that more than 963,000 households are already suffering financial stress. That amounts to 30.1% of owner occupied households.

What they mean by mortgage stress is that their net income doesn’t cover the household’s costs.

And, there is the risk that in some parts of the world inflation and interest rates are already starting to move up. Like in the US.

So far, inflation is still tame in the US, with core inflation at 2.1%.

Yet, while it may take a little while to move from 2% to 3%, it is easy for inflation to spiral out of control. If you have lived in Argentina, you know that inflation can easily jump from 3% to 5%, to 7% or 10%, in a short time.

If inflation starts rising in the US, we could see the US Federal Reserve rise interest rates quicker than expected. The market is already forecasting four hikes for this year.

This could bring in higher interest rates into Australia.

Property values have appreciated massively in the last few years…but have they really created wealth?

Well, after gains like that, wealth only happens if you actually cash out.

If prices tumble, then you have lost all your gains…and you have only accumulated a huge pile of debt. For those who buy near the peak, high valuations mean that prices need to go much higher to get their money back.

Nobody can predict if or when the property market will collapse. Yet, as Minsky says, after a long period of growth, everything can come quickly to an end if one or more screws go on too tight…

How can you protect yourself?

The best thing to do is to pay off debt. If things take a turn for the worse, the ones better positioned will be the ones with little or no debt.


Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent has a chilling warning for Australian property. Harry is the editor of Harry Dent Daily, and has been recently touring around Australia. If you want to learn more about Harry’s worrying forecasts for Australia, click here.


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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