Treasury seeks to inflate housing bubble

November 9, 2012

Did you think there is a housing bubble in Australia? Not so, according to the chairperson of Aussie Home Loans, John Symond, who said last month: “I am confident, notwithstanding a lot of hype from offshore analysts about a housing bubble, of Australia’s fundamentals.”

Symond wants us to trust him, not those offshore analysts, because it's not as if the owner of a home loans company has any interest in the maintenance of an overpriced property market.

These offshore analysts include the Economist magazine, which said in an August study that Australia’s house prices were 36% above their "fair value".

The October 4 Australian Financial Review reported that credit agency Moody’s "recently conducted stress tests on Australian banks [and] said that while the banks were currently sound, ‘you can see issues arising’”.

For most people, issues have been arising for a long time. A 2008 Senate report, titled A Good House is Hard to Find, found that “the average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s”.

As the commodity boom begins to deflate, business has put immense pressure on the Reserve Bank of Australia to lower official interest rates. Major party politicians have been urging it to do it, as have right-wing unionists, as well as the big banks and mortgage brokers like Symond.

Their demand is for looser credit to stimulate borrowing and investment in other sectors of the economy outside of commodities.

Senior Treasury economist David Gruen told a parliamentary committee on October 17: “In a couple of years, when mining investment does not contribute to growth any more, we will need other things to contribute to growth ... One of the most obvious things [to contribute to growth] is the housing market, given that we think there is undersupply.” He said this was “a natural and desirable development and we are seeing early signs of it”.

Higher housing prices in Australia are early signs of this “desirable development”. The September 27 Australian Financial Review said Sydney’s home values had increased 3% so far this year. Across the five biggest capital cities, house prices had risen 0.4% in the first nine months of this year, and 1.2% in September alone. Melbourne’s property prices fell 1.5% over the year — although the city’s house prices are still hugely inflated, leaping 21% in 2009.

However, events throughout the world — especially with the US subprime mortgage bubble — have shown how stimulation of an investment boom in property can be disastrous, yet the Australian Treasury sees this course as desirable and natural.

Some economists have seen the danger in this approach. Former Reserve Bank board member Warwick McKibbin told the Australian Financial Review on October 4: “If you’re transferring a bursting bubble from the commodity boom into a bubble in the housing market, when it bursts it’s going to be much more catastrophic.”

The paper also reported: “Bank of America Merrill Lynch Australia chief economist Saul Eslake said that rate cuts encouraged borrowers to load up on more debt, potentially delaying the process of household balance sheet repair, a key factor in raising financial stability across the economy.”

The total amount of private debt in Australia is about $2.1 trillion and housing debt is about $1.25 trillion. That adds up to an average housing debt of about $55,000 a person.

Compared with GDP, private debt levels are worse in Australia than they are in US.

Despite this, Treasury’s preferred policy is to encourage more debt-fuelled growth through speculative investment in property. The alternatives, such as generalised real wage growth or widespread public investment, are less acceptable to big business.

The commodity boom has shielded Australia from the worst of the global economic crisis. But as the commodity boom slows, it is clear that the fundamentals of the Australian economy are not so different to economies hit hardest by the crisis.

The push to increase growth with easy credit has already had an impact. The October 4 Australian Financial Review said: “While Australia’s mortgage arrears rates remain low, there are signs that lending standards have eased, with the number of borrowers taking out loans with deposits of less than 10% edging higher."

In September, the Australian Prudential Regulation Authority said the big banks and financial firms “have begun to unwind the more conservative housing lending standards that they had imposed during the early phases of the global financial crisis”.

Similar rises in debt have emerged in other nations, such as Canada. The October 15 Wall Street Journal said: “Paul Ferley, economist at Royal Bank of Canada, said the newly revised debt levels are close to the peak witnessed in the US at the height of the subprime mortgage crisis."

It said: “Concerns about overheating in the mortgage market prompted Canadian Finance Minister Jim Flaherty to implement tougher rules regarding eligibility for home loans in July.”

A destruction of public housing stock, a tax system that favours rich investors and existing homeowners, and policies such as the first homeowners grant have fuelled housing prices. Now many young people are either reconciling themselves that they will not have any chance of buying a home or are preparing for a future of massive mortgage debt, usually on top of other liabilities such as student debts.

The Australian Treasury would have us believe we can just transfer out of the commodity boom into a debt-fuelled property bubble with no real consequences. Yet that disastrous path has been trodden too many times before.

There may be short-term profits for big capital in the rush from commodities into property. But for the rest of us it will mean higher house prices, more debt and a financial system that risks collapse under the weight of unpayable debt.

As it is in Europe now, the question is: When the crisis comes, who will be made to pay for it?

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