Australia faces a “time bomb” housing bubble which could be triggered by rising interest rates, warned Jeremy Grantham, a US investment guru known for correctly predicting the economic recession a year before it happened.
Grantham noted that home prices in Australia, which have been on the rise for over ten years, needed to drop 42 percent to reach the long-term trend.
“You cannot possibly miss it,” said Grantham. “The price of housing typically trades about 3.5 times of family income and in a bubble it goes to six 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 you should be,” he added.
The central bank of Australia has increased interest rates six times since October following five decades of low figures to resolve inflation, which is increasing pressure on home-owners.
He stated that if the Australian housing market did not go back to the standard multiple of family income, “it will be the first time in history.”
“Sooner or later, the rates will go up and the game is over,” he said.
Grantham, who co-founded GMO, a global investment management company committed to providing services in identifying speculative bubbles, also pointed out that housing prices in Britain were over-inflated.