Canada's Housing Bubble

June 16, 2010 Katherine Jimenez The Australian

THE Australian and British housing markets are the last two bubbles left in the wake of the financial crisis, and it is only a matter of time before they crash, warns legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham.

Mr Grantham famously reported a year before the global financial crisis: "In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist".

He said yesterday that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.

"You cannot possibly miss it," he said.

"The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times).

"Australia is having one now. You are at near 7.5 times family income . . . which suggests you are twice the size that you should be."

GMO is one of the biggest investment management firms in the world, with about $106 billion in funds under management, and is considered to be an authority on asset bubbles.

Mr Grantham, who is in Australia to meet with GMO clients in Sydney and Melbourne this week, said any bubble could be an exception to the rule.

"Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different," he said.

As an example, he cited the British housing market bubble of 1989. At the time, he said people dismissed the bubble because there was no more rezoning, creating a land shortage and as such, they believed prices would rise forever.

"Seven years later, in 1997, they hit the lowest multiple of family income since the record books started in 1945. It's always the same old argument, they are not making any more land."

In Australia's case, Mr Grantham described the housing market as a "time bomb" just waiting for interest rates to increase and become impossible to support.

Since last October, the Reserve Bank of Australia has raised the official cash rate six times. The rate is now 4.5 per cent.

If the Australian housing market did not return to the normal multiple of family income, he said "it will be the first time in history."

"Sooner or later, the rates will go up and the game is over."