If there was ever any doubt that the great Aussie Housing Bubble is bad for the economy, David Murray’s repeated warnings about our banks and financial system should clear that up. The chair of the recent financial system inquiry today delivered yet another stern warning on banks, housing investment, private debt, the budget, and the intractable relationship between them all. It’s time to pay attention Australia.
As I’ve explained previously, in addition to providing the world’s most generous tax and policy support for residential real estate, our government is effectively sponsoring cheap borrowing costs for housing speculation in order to keep our mountain of private debt and the associated housing bubble propped up:
“Mr Murray is insistent that the banks, which rely on foreign funds, are undercapitalised and pose a risk to the Australian economy. Because of expectations the Big Four banks’ debts are underwritten by the federal Treasury, any credit downgrade of the government could hit their AA credit ratings, increasing their funding costs and reducing their access to foreign capital. The AAA rating of the Commonwealth is looking increasingly vulnerable, with little room to move.”
In order to ensure that the housing bubble does not collapse, the government must maintain its AAA sovereign credit rating, lest bank funding costs rise, and the cost of all those mortgages rise in turn, risking housing market collapse, banking crisis and the stability of our whole financial system.
To do that, successive governments have been forced to pursue budget surpluses, and are largely prevented from borrowing cheaply to fund productivity enhancing infrastructure, a subtle point lost on many mainstream economists and commentators. Add to that the inability of the Reserve Bank to cut rates further to support the rapidly slowing economy, because of deep concerns about further credit and price growth in housing, and you have an economy that is completely held hostage by record levels of private debt, and the second most expensive housing in the world.
Therefore, any commentator or analyst that talks about low levels of public/government debt in Australia in reference to the budget, or makes the spurious claim that our banks are among the safest in the world (or denies risks in the housing market) does not understand this crucial interplay between public and private debt. The total debt burden in Australia (our long standing current account deficit) has crippled our economic structure, and the commodities boom was the only thing that saved us from prior calamity. Not only will we have no mining boom to save us from the next potential calamity, it is very likely that housing debt is going to be the next crisis
Australia has gotten itself stuck in an economic Chinese finger trap, with one finger being the fast weakening economy, and the other finger being the housing bubble. Pulling on either finger tightens the trap around both fingers. We can’t use monetary or fiscal policy to stimulate the economy as the former risks a further destabilising blowoff in the housing bubble, and the latter would compromise the AAA rating which for the time being prevents the bubble’s collapse, as alluded to by David Murray’s latest warning:
“[Low interest rates] had helped create a “housing casino” in Australia, he said, and had driven up high-yielding shares, including banks, as investors searched for yield. Meanwhile, the broader economic malaise was limiting the Australian government’s ability to cut spending because it would damage the fragile economy. These conditions had placed the Reserve Bank of Australia in a very tough position.”
Therefore, the most logical and safest (but the most politically difficult) course of action is to face up to and tackle the housing bubble (“relax the finger in the trap” to continue the prior analogy). We must take the heat out of the bubble by implementing macro-prudential controls on new housing credit, ensuring higher capital ratios for our banks and reducing the record speculative demand from the market by abolishing the preferential tax and policy treatment of housing investment (negative gearing, capital gains tax concessions, asset means testing exemptions, SMSF leverage into residential property, under-enforced foreign investment regulations etc).
These measures would likely lead to a private sector deleveraging, which thanks to our existing economic imbalances is the only course available to policy makers that does not lead to even worse imbalances and risks to our economy and the financial system down the track. It would enable further monetary and fiscal stimulus, facilitate further (much needed) devaluing of the currency and divert investment funds away from unproductive housing and back into productive enterprise. It would however burst the housing bubble. But given that all bubbles must eventually burst anyway, these policies/reforms are the least bad option for an economy that is well and truly trapped.
The fact that the head of the first financial system inquiry in fifteen years has now warned at least three times about our banking system, the federal budget, housing speculation and private debt, and their very precarious interplay, suggests its time for Australians from all sides of politics, and all levels of relative privilege and vested interest to pull their heads out of the sand, and like any addict, look itself in the mirror and admit it has a problem. Then we can get on with the next eleven steps along the path to recovery from private debt addiction…
Unfortunately its too late to avoid some level of pain in addressing these imbalances. But the longer we wait, the worse it gets. We have to face up to that fact, and it needs to be front and foremost in any debate about the economy, social welfare and the budget, otherwise we are only having half of the debate. The housing bubble has formally swallowed all other political and economic issues in this country, as indicated by the daily debate and warnings littering mainstream and alternative Australian media.
I for one am tired of reading that there is nothing to worry about with respect to the housing market and our financial system. The genuine independent experts and pundits have warned over and over again. Time to ditch the bubble denial Australia.