Will High-Rises Come Down to Earth?

  • Will High-Rises Come Down to Earth?
  • Europe Contemplates Common Debt
  • States are Rising Up to Retirement Challenges
A swagman waltzing to Ballarat to join the Australian gold rush of 1851 navigated using the stars and his senses. My recent trip to the area with friends was directed by a GPS navigator, but we nonetheless found ourselves misguided on more than one occasion. We found no gold, and we barely found Ballarat. So much for modern technology.

In the present day, speculators have been waltzing to Australia searching for gold in residential real estate. Property values have escalated briskly, encouraging overdevelopment and pricing residents out of the market. The authorities are now engaged in a campaign to ease conditions without having them crash.

With more traditional commodities also in decline, Australia’s world-record streak of 26 years without a recession may be at risk. The situation Down Under is not unique, but having company in a community of overheated property markets is cold comfort. How this community works through its challenges will have an important influence on global economic performance.

Thirty years ago, apartments seemed passé. Post-war generations favored suburban life and single-family dwellings. Today, by contrast, apartments are all the rage. Young professionals favor proximity to work, to play, and to one another. Apartments are also popular with another population: investors and bankers. The collective enthusiasm has raised property prices in some markets to stratospheric levels.

Residents in markets especially popular with investors are forced to take out huge mortgages if they seek to own property. Whereas households in the U.S. and the U.K. have reduced their leverage in recent years, Australia and Canada have seen personal leverage continue upward. Most observers agree this trend is not sustainable.

The banking systems in Canada and Australia take justifiable pride in their credit risk management, which allowed the two countries to come through the 2008 financial crisis in relatively good shape. But homeowners in both countries have found access to aggressive financing, including subprime and interest-only loans. These products served as dangerous accelerants during the 2008 crisis in the U.S.