Australia the most ‘obvious’ bubble in 30 years

As far as bubbles go, they don’t get more obvious than Australia, according to one economist and noted bear.

Albert Edwards, economist with Société Générale, put out a note on Thursday morning whose title says it all: “The biggest bubble in recent history is heading for the mother of all hard landings.”

Mr. Edwards cites Australia’s extreme reliance on the Chinese economy as the foundation for the current bubble. After all, Australia, a global heavyweight in mining, is dependent on the global commodity boom that China has largely helped fuel over the last decade.

“All we have in Australia, at its simplest, is a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China,” he said.

Bubble or not, there is no doubt Australia’s economic ties and proximity to China have made its economy red hot. Of the G7 countries, Australia currently maintains the tightest monetary policy, with interest rates currently at 3.75% (compare that to Canada, which at 1% has the second highest interest rates in the G7).

Domestically, strong economic growth and a flurry of foreign investment has made Australia a very unaffordable place to live. Mr. Edwards notes that not a single Australian urban centre is classified as “affordable”. Cities such as Brisbane, Sydney and Melbourne fall under the “extremely unaffordable” category under the 2012 Demographic International Housing Affordability Survey.

Mr. Edwards adds that the current bubble has been precipitated by the fact that Australia has not experienced a recession for more than 20 years — making investors complacent as a result.

“The absence of any recession since 1991 has led Australians to have an excessive appetite for debt in the belief the future will reflect the past,” he said.

And complacency, of course, is a big factor in bubble creation. That has led Mr. Edwards to conclude the following about Australia: “Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious than the rather prominent nose on my increasingly haggard face,” he said.