Is Australia’s Asset Boom a Bubble Waiting to Burst? The ‘Moral Hazard’ Threat

Australia’s property and share markets are defying gravity, hitting record highs while global economic uncertainty looms. But this isn’t simply a story of healthy growth; it’s a surge fueled by unprecedented liquidity and a growing sense that central banks will always step in to prevent a collapse. This creates a dangerous dynamic – a ‘moral hazard’ – that could have devastating consequences for the Australian economy and the 15 million jobs tied to it.

The Liquidity Fueling the Fire

The current asset price boom isn’t organic. It’s being artificially inflated by a flood of cash injected into the economy by central banks worldwide, including the Reserve Bank of Australia (RBA). Lowering interest rates and quantitative easing – essentially printing money to buy bonds – were initially intended to stimulate economies during crises like the 2008 financial crisis and the COVID-19 pandemic. However, this strategy has created a situation where investors perceive less risk, driving up demand for assets like property and shares.

As Montgomery Investments founder Roger Montgomery explains, the RBA’s consistent willingness to intervene during crises has inadvertently lowered the perceived probability of extreme market declines. This encourages excessive risk-taking, with investors increasingly inclined to jump on the bandwagon – a classic case of “FOMO” (fear of missing out).

Property: Demand Outstripping Supply

The Australian property market is a prime example of this dynamic. Demand is being driven by a combination of factors: investment tax breaks, historically low interest rates, and continued migration. However, supply is struggling to keep pace. The government’s ambitious target of 1.2 million new homes requires building roughly 240,000 homes annually, but we’re currently falling short by around 60,000. This chronic shortage is pushing up both house prices and rents, particularly in major cities like Sydney and Brisbane.

Cotality’s capital city rental value index rose 3.0% in the year to July, ending a 16-month period of moderation. This indicates that the rental crisis is far from over and is likely to worsen without a significant increase in housing supply.

Share Market Soars to New Heights

The share market is also experiencing a surge, with the S&P/ASX 200 surpassing 8,900 points – an all-time high. This represents a remarkable 22% increase since the dip following the US-China trade tensions in 2019. Even traditionally safe-haven assets like Bitcoin and gold are hitting record levels, further demonstrating the widespread appetite for risk.

Has the Concept of Risk Changed?

A fundamental question arises: has the very definition of risk been altered? Historically, putting money in a bank or buying a government bond was considered relatively safe. Now, with increasing investment in the share and property markets, there’s growing pressure on governments and central banks to protect these assets. Why? Because a significant market correction could trigger a catastrophic economic downturn.

This reliance on central bank intervention creates a dangerous precedent. If investors believe they will always be bailed out, they are more likely to take on excessive risk, potentially leading to a larger and more damaging correction down the line. This is the core of the ‘moral hazard’ problem.

The Superannuation Factor

Australia’s $4 trillion superannuation industry adds another layer of complexity. With increasing exposure to global markets, particularly Wall Street, and a concentration of ownership in a few key Australian stocks (like Commonwealth Bank, owned directly or indirectly by 13 million Australians), the potential for systemic risk is significant. A sharp decline in either the global or Australian market could have a devastating impact on retirement savings.

Looking Ahead: What Could Go Wrong?

The current situation is unsustainable. While the RBA insists its focus is on inflation and employment, not asset prices, its actions have undeniably contributed to the current boom. The risk is that when interest rates eventually rise (or the RBA signals a shift in policy), the bubble will burst.

A potential trigger could be a global economic slowdown, a geopolitical shock, or even a change in investor sentiment. When the music stops, those who are heavily leveraged or have overpaid for assets will be the most vulnerable.

Did you know? The 2008 financial crisis was largely triggered by a housing bubble in the United States, demonstrating the devastating consequences of unchecked asset price inflation.

Navigating the Uncertainty

So, what can investors do? Diversification is key. Don’t put all your eggs in one basket. Consider investing in a range of asset classes, including those that are less correlated with the stock and property markets.

Furthermore, it’s crucial to understand the risks involved in any investment. Don’t blindly follow the herd. Do your research and seek professional financial advice if needed.

Frequently Asked Questions

The current asset boom is a complex phenomenon with potentially far-reaching consequences. While the RBA attempts to navigate a delicate balance between economic stability and inflation control, the underlying risks remain. The question isn’t *if* a correction will occur, but *when* and *how severe* it will be. Staying informed, diversifying your investments, and understanding your risk tolerance are crucial steps in navigating this uncertain landscape.

What are your predictions for the Australian property market in the next 12 months? Share your thoughts in the comments below!