Edward Chancellor, of US investment management firm GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.
Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value -- a once in 40-year event. " If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably," he told The Australian.
He said prices would have to fall by more than a third to reach fair value -- although some of this fall would be cushioned by income growth.
He attributed Australia's "luck" to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.
"My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom," he said.
"Those are the facts and you can't paper over them.
"In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.
"The problem is the bubble and that hasn't gone away."
A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.
"It's the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse," he said.
Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.
"We would see the Chinese demand for Australian commodities as being potentially vulnerable," Mr Chancellor said.
He said he expected the negative news in Australia to come from "the housing market falling under . . . the sheer weight of its overvaluation and lack of affordablity" and a "terms of trade shock".
Everyone referred to Australia as the lucky country, he said. "I think that's pretty apt."
However, "given the great growth in private sector credit and the vulnerability of the housing market . . . Australia is not out of the woods. It hasn't even entered the woods."
Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value -- a once in 40-year event. " If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably," he told The Australian.
He said prices would have to fall by more than a third to reach fair value -- although some of this fall would be cushioned by income growth.
He attributed Australia's "luck" to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.
"My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom," he said.
"Those are the facts and you can't paper over them.
"In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.
"The problem is the bubble and that hasn't gone away."
A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.
"It's the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse," he said.
Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.
"We would see the Chinese demand for Australian commodities as being potentially vulnerable," Mr Chancellor said.
He said he expected the negative news in Australia to come from "the housing market falling under . . . the sheer weight of its overvaluation and lack of affordablity" and a "terms of trade shock".
Everyone referred to Australia as the lucky country, he said. "I think that's pretty apt."
However, "given the great growth in private sector credit and the vulnerability of the housing market . . . Australia is not out of the woods. It hasn't even entered the woods."
