US investment guru Jeremy Grantham has warned Australia is facing a “time bomb” housing bubble that will be set off by rising interest rates, a report said on Wednesday.
Grantham, who correctly predicted the financial crisis a year before it hit, said Australian house prices needed to fall 42 percent to reach the long-term trend.
“You cannot possibly miss it,” he told The Australian newspaper. “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 said Australian prices, which have been rising for more than a decade, needed to slide 42 percent to return to the long-term trend.
Grantham, co-founder of global investment company GMO who has made a career out of identifying speculative bubbles, said British house prices were also over-inflated, The Australian said.
Australia’s central bank has raised interest rates six times since October – off five-decade lows – to head off inflation, increasing pressure on home-owners.
Grantham said if Australian housing did not return to the normal 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 warned.
Source : AFP – 16 Jun 2010