A visit to Sydney by Jonathan Tepper, of Variant Perceptions, has caused much wailing and gnashing of teeth amongst vested interests in the real estate market. He considers that Australian housing is in a massive bubble and  he expects to see a price decline of 30% to 50%.

Along with John Hempton of Bronte Capital, Tepper toured western parts of Sydney, speaking with mortgage brokers and others. He was then interviewed on the television programme, 60 Minutes. He presented considerable evidence that the market is overheated, such as the large percentage (~50%) of interest only loans. One that I like is the “deposit guarantee”, which has become very popular. Instead of a deposit, the prospective purchaser takes out an insurance policy such that the deposit will be paid if the purchaser defaults. What could go wrong.

I have written about the Australian housing bubble previously. Read  more here and here. This post shows pictures of what $1 million will buy in Sydney. Hint, not very much.

One of the most overpriced suburbs in Sydney at the moment is Kellyville, circled in red below. It is on the far northern outskirts of the city, adjacent to farmland, market gardens and the like.

Kellyville_mapImage courtesy Google Maps

The image below is part of a new subdivision in Kellyville. You can see a market garden and paddock to the left of frame. Lots similar to these, without a house, are being sold for as much as $750,000. It is hard to understand how someone could pay so much for so little. And so far away – about 38Km from the CBD.

KellyvilleImage courtesy Google Earth

Now the thing about bubbles, whether it be tulips or houses, is that they always grow far beyond any rational expectation. Australia is now building huge numbers of apartment towers. It is clear that this new supply will far exceed demand, and yet the building goes on.

The bubble has been deflating for some time in rural and mining communities, and on the outskirts of small cities such as Perth. As Tepper says, this looks like the canary in the coal mine. There will be a trigger for deflation in the cities, such as rising unemployment. But it is not possible to predict what the trigger will be, or when it will occur.

Nonetheless, it would be risky to bet against continued growth.

“Markets can remain irrational longer than you can remain solvent.”

John Maynard Keynes