and
Australian Boom and Bust Cycles
Sydney house prices to crash at least 50%. Here's why.
Real Estate - An Australian Dream
"The land mania of the 1880s took two main forms. The first was based on a plethora of building societies, whose optimistic officials believed that every family in the colony could simultaneously build their own house, keep up the payments through good times and bad, and support an army of investors who were being paid high rates of interest for the use of their money. The second form of mania was the deeply-held belief that it was impossible to lose money by 'investing' in land - a belief which persists to the present day" (Michael Cannon, The Land Boomers, (Melbourne: Lloyd O'Neil, 1986), p.18).
As we have recently been reminded - House prices do fall
"... in the past 70 years prices have fallen 13 times. The biggest fall in Sydney was 41 per cent, during World War II" (Kelvin Bissett and Justin Vallejo, Landslide: Sydney house values drop, news.com.au, March 3, 2008).
["In Sydney, fear of an impending Japanese invasion caused people to move west, causing housing prices in the Eastern Suburbs to drop, while those in and beyond the Blue Mountains rose significantly" (Attack on Sydney Harbour, Wikipedia)].
Sydney house prices overvalued at peak
" Since the peak of the boom in early 2004, Sydney's southern suburbs has dipped the most in value, with the median price falling $82,750 over the ensuing 15 quarters, according to Australian Property Monitors figures..." (Kelvin Bissett and Justin Vallejo, Landslide: Sydney house values drop, news.com.au, March 3, 2008).
(Shane Oliver, House prices are 30% overvalued, Oliver's insights, amp.com.au, June 4, 2004).
The real bust to come in the second contraction
"Managed Investment Assessments ... director Kate Gymer said ... "As with the previous property downturns over the past 150 years, it is expected that this one will occur in the aftermath of a fall in the stock markets of the major western economies"" (Mortgage funds 'too risky', news.com.au, December 12, 2006).
Future Watch argues that the present "crisis years" are following a historical pattern of contraction, expansion and contraction.
[The co-ordinated Central Bankers December 2007 response to the crisis suggested from history that there would be one more recovery before the real crisis would begin].
This implies that the real bust is to come in the second contraction. The bust will be aggravated by Australia's own version of the American sub-prime housing crisis.
What was predicted for what will become known as the first stage of the "crisis years" will apply to the second stage - the contraction after the recovery. While the first contraction of the Australian cycle has been mild compared to the America's first contraction both Australia and America, and the world economy, will experience a severe depression rivaling the Hoover recession - the first contraction of the Great Depression - in the second contraction of the present "crisis years".
In what follows the predictions for the first stage apply to the second stage.
Post WW2 - This time it is different
"Banking consultant Grant ... Halverson's view is that this downturn could be different to previous ones, driven by indebtedness rather than unemployment..." (Andrew Cornell, End is nigh for heydays of lending, AFR, August 14, 2006).
"The current business cycle is inching towards a deflationary ending. Excessive increases in leverage and capacity in this cycle could turn disinflation into deflation during the coming downturn...
"The Anglo-Saxon consumer debt and Chinese overcapacity will likely become the main factors in causing cyclical deflation as the current cycle turns down...
"In addition to the risk of experiencing some cyclical deflation ahead, the risk of secular deflation remains..." (Andy Xie, To deflation, morganstanley.com, June 10, 2005).
["... secular generally means a primary trend running for three years or more. Cyclical means a primary trend running for more than one year but less than three years" (Adam Hamilton, Hui and SPX Correlation, zeallc.com, April 22, 2005)].
"... decades of government intervention to prevent financial crises and price deflations have encouraged economic agents to accumulate the highest private debt burdens ever attained. Even without outright price deflation, these debt burdens are now acting to suffocate demand and threaten (at best) stagflation, at worst, outright financial crisis" (Marshall Auerback, Endgame for Fiat Currencies? prudentbear.com, June 14, 2005).
Since the end of WW2 real [Australian] house prices, after rising above the mean, have only reverted close to or just below the long term trend. But will the correction of the 1990s-early 2000s boom follow the post-war pattern? Two economic environments are key to understanding the future - low inflation during the boom; and deflation during the bust - that is, house price deflation in a world economy experiencing general deflation.
House prices falls and low inflation
"A common myth is that house prices only go up, never down. This is nonsense... house prices do fall. However, in the past the adjustment has been masked by high inflation which allowed real house prices to fall without nominal prices necessarily coming down. It is unlikely we will have this luxury this time around with inflation now very low. One of the arguments often cited against large falls in house prices is that home owners tend to be in for the long haul and hence, unlike many share investors, are unlikely to sell in response to short term weakness. This is true to a degree but ignores the large role played by investors in driving up prices recently" (Shane Oliver, The beginning of the end for the house price bubble? Oliver's insights, amp.com.au, December 8, 2003).
Previous falls
In the information above there are three major periods of 'boom and bust' - the 1880s-1890s, 1920s-1930s-1940s and 1980s-early 1990s. These previous cycles provide clues to understanding the direction of the fallout of the latest property boom of the late 1990s-2000s.
It was noted above that the biggest housing price drop in Sydney was 41 per cent during World War 2. The price drop after the land boom of the 1890s and the inner-city office and housing boom of the 1980s provide examples of possible price drops after the latest Sydney inner-city apartment and housing boom.
Bust 1890s
"The crash began in 1891. Land values fell to levels around one half their boom levels. In addition ... data on individual suburbs are available. In Prahran, prices peaked at an average of over £1,000 per property in 1888 and fell to £520 by 1898. Similarly, in Brighton, average property values peaked at around £950 in 1888 and then fell to around £400 in 1893 and £300 in 1898. A comparison of these data to the accounts in Cannon (1966) suggests that the picture is fairly accurate but may understate the speed of the bust. For example, Cannon writes that, 'by the end of 1891 the bottom had completely dropped out of the land market ... In Collins Street, sites for which £2,000 a foot had been rejected a short time before, were now being offered for £600 a foot - and could not find buyers even at that price' (Cannon 1966, p. 18)" (John Simon, Three Australian Asset-price Bubbles, rba.gov.au, 2003, pp.22-23).
Bust early 1990s
"... the commercial property bubble inevitably burst, and when it did property values halved. In Melbourne and Perth, property values in 1993 were below their 1985 levels while in Sydney values were only slightly above their 1985 level. The commercial property boom ended for pretty much the same reason that most land booms end - supply increased and rental returns couldn't support the prices being paid. This was particularly true of highly-leveraged investors who faced higher and higher interest rates over this period as monetary policy was progressively tightened" (Simon, ibid., p.36).
"... figures from the Real Estate Institute of Australia show in the two years following the boom of the late 1980s the median house price in Sydney fell by 25 per cent" (Ross Gittins, Beware the bang if the property bubble bursts, smh.com.au, June 15, 2005).
Bust 1920s/30s
"The world depression found Australia unable to meet her repayments, and the boom was rapidly translated into a disastrous slump. The average price of a house in Sydney fell from the 1925 level of £959 to £668 in 1935, but this was a bonus only to those who had money... for the years 1931 to 1934, building in Sydney came to a virtual standstill" (M.T. Daly, Sydney Boom Sydney Bust, (Sydney, George Allen & Unwin, 1982), p.169).
Over ten years, from 1925 to 1935, average Sydney housing prices fell 30.3 per cent.
Second stage of crash - What to expect
"Affluent suburbs are also in the firing line as the combination of overpriced properties and rising interest rates, which caused the 2004 market downturn, hit again in 2008...
"Morgan Stanley chief equity strategist Gerard Minack said prices could fall by as much as 25-30 per cent in the next two or three years if Australia fell into recession, and by 10 per cent or more if we have a soft economic landing.
"And the wealthiest areas could be hit hardest.
""Some of the top-end properties are more vulnerable than the middle-market because their buyers are typically employed in sectors most likely to be hammered by an economic slowdown and rise in unemployment, namely banking and finance," he said.
""We could also see big falls in the places these people have holiday homes - the (NSW) Central Coast for example - which could even see prices fall by 50 per cent."
"The International Monetary Fund recently said Australian property was among the most overvalued in the world. It said at least 25 per cent of the increase in value over the past decade could not be justified, leaving the market ripe for a correction.
"While latest data showed prices rising strongly in the March quarter, AMP chief economist Shane Oliver said the rises were unsustainable.
""In Sydney, a typical house will cost 8.4 times a typical family's household income, which is patently unaffordable," he said.
""That compares with 3.6 times income in America - where prices have recently fallen by 10 per cent - and 5.5 times income in the UK, which is currently experiencing a housing downturn" (Nick Gardner, Sydney house prices predicted to fall by up to 30pc, news.com.au, April 9, 2008).
"Blaxland MP Jason Clare said the Bankstown sheriff's office had a list of 30 homes to be repossessed in the next few weeks.
""They had to evict a 70-year-old couple after they had gone guarantor for their children's home and couldn't keep up the repayments," he said.
""They said that was one of the most terrible things they'd seen"" (Angela Saurine, Property slump worsening, news.com.au, April 12, 2008).
Note
"Real estate consumer advocate Neil Jenman says, using history as a guide, the message is obvious. "It is time for a fall," he says... Jenman says the historical average of price falls in Sydney is 17.7 per cent, and, after recording the longest period of growth in the past 70 years, "those estimates of 20 per cent don't seem as ludicrous as the braver pundits predict"" (Peter Weekes, House arrest, smh.com.au, January 28, 2004).
Some of the information below relates to the peak of the Sydney housing bubble - around the last quarter of 2003 and the first quarter of 2004. The extreme on the upside, portends an extreme on the downside.
The housing-bubble baton maybe said to have been passed on to the resource-rich states that have benefited most directly from the Chinese investment and export bubble.
"... problems of housing affordability in the resource-rich states. House prices have doubled in Perth over the past four years and risen by 43 per cent in Brisbane. The national increase over that period has been 27 per cent, while average Sydney prices have increased by less than 1 per cent" (David Uren, Canberra to coax migration to WA, Qld, news.com.au, January 19, 2008).
"The Sydney median dwelling price has fallen from $527,700 in 2003 to $465,900 in March, according to a Housing Institute/Commonwealth Bank index" (Jacob Saulwick, First-home buyers remain strong, smh.com.au, June 10, 2008) - a 11.7% fall.
The positive Australian economic background has prevented the Sydney housing bubble from entering the severe second stage of the bust.
"The mining boom fueled a 30 percent surge in household incomes in the past five years, more than any other developed economy, according to the central bank.
"Many households used the cash to take on debt, which almost doubled since 1999 to around 160 percent of incomes, a higher ratio than the U.S. and U.K., according to Shane Oliver, senior economist at AMP Capital Investors in Sydney" (Jacob Greber, Australia's Economy Faces First Recession Since 1990, bloomberg.com, November 11, 2008).
The sharemarket has played its part.
"According to Constellation Capital Management, the total return from Australian shares - that is, capital gains plus income (dividends) - was 16.2 per cent in calendar 2007, as measured by the ASX 200 index. It followed a particularly strong five-year run. Constellation says total returns in the previous four years were 15 per cent, 27.9 per cent, 22.5 per cent and 24.5 per cent.
"If you'd had $100,000 invested in the Australian sharemarket at the beginning of 2003, and if you achieved a return no better or worse than the market itself, your investment would have grown to $260,663" (Simon Hoye, Black January reminded us of risk, smh.com.au, February 2, 2008).
When a yet future global stockmarket rout occurs the severe stage of the housing bust will begin. Japan provides an example.
Australia and Japan
"The chart below shows what happened to Japanese house prices after the 1980s bubble, with Australian house prices shown as well. Japanese house prices are down 66% from their 1990 high.
(Shane Oliver, House prices: overvalued, over-owned & set for stagnation, Oliver's Insights, amp.com.au, June 8, 2005).
"The many differences between Australia and Japan suggest we may not share the same fate - we had a smaller bubble, our population is unlikely to decline soon and Japan suffered from numerous policy mistakes. However, the chart shows that the risks are high after a bubble bursts" (Shane Oliver, House prices: overvalued, over-owned & set for stagnation, Oliver's Insights, amp.com.au, June 8, 2005).
But The Economist notes, with chart:
"Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms.
(The Economist, In come the wave, June 18, 2005, p.54).
Japan has followed the regular pattern of the property market peaking (1991) after the sharemarket peak (1989).
Note: Japan has only experienced the relatively mild first stage of the fallout of the bursting of her stockmarket and property boom. Worse is yet to come.
The bursting of a stockmarket and property bubble late in an economic cycle is the catalyst that forces the restructuring of an economy that is required to meet the changing economic environment. It is during difficult times, when imbalances have accumulated to dangerous levels, that major restructuring can take place that would not likely be made in easier times. For example:
"The story of 1986 for the [Australian] Labor Party was the smashing of its icons. Labor embraced an economic rationalist agenda not by choice but by compulsion. It was driven throughout by a mounting currency crisis. Labor's policy was reshaped against a backdrop of falling electoral support, internal disputes, fear of recession and a growing undercurrent of Hawke-Keating tensions" (Paul Kelly, The End of Certainty, Revised Edition, (Sydney: Allen & Unwin, 1994), p.209).
Sydney house prices are overvalued
"Sydney has some of the most expensive house prices in the world. During the great boom housing prices went up by an average of 150 per cent, BIS Shrapnel says...
"Late last year an American pro-growth consultancy named Demographia announced that the median house in this city cost 8.5 times the median household income. This was up from a multiple of five in the 1980s, which even then was steep. Demographia defines "affordable" as a multiple of no more than three. The 2005 result meant housing in Sydney was the sixth least affordable of 100 cities looked at around the world" (Michael Duffy, Priced out of the boom town, smh.com.au, May 6, 2006).
["The value of the average family home rose 70 per cent since 1994-95, from $176,000 to $300,000, nationally" (AAP & staff, Sydney rents the highest, news.com.au, March 13, 2006)].
Shane Oliver also pointed out with chart:
"Another sign house prices are well above fair value is to look at the ratio of house prices relative to average wages. This is now at a record level as is apparent in the next chart. For the ratio of house prices to wages to return to its average of the past 40 years, house prices would need to fall by 39%. A reversion to the rising trend that has applied since 1965 would imply a fall of 30%...
"History suggests that, unless there is a 'new economic paradigm' in relation to house prices, there will be some inevitable reversion in prices back to their long-term trend, if not below it. If this were to occur immediately Australian house prices would have to fall 24% (or 32% in the case of Sydney house prices)"(House prices are 30% overvalued).
According to Shane Oliver Sydney house prices would have to fall 32 per cent to return to the long-term mean. But he also suggested that prices could go below the long-term trend.
But with the low inflation (with future deflation) and low interest rate environment of today prices are likely to go considerable below the mean.
Not only Australia
The Economist concurs with Shane Oliver on the house price/average wage ratio:
"House prices are at record levels in relation to average income in America, Australia, Britain, Ireland, the Netherlands and Spain. The prices of British, Irish and Dutch homes are now 50% above their 30-year average relative to incomes. By the same gauge, property is "overvalued" by 23% in America, by 33% in Australia, and by 68% in Spain" (The Economist, House-price indices - Homing in on trouble, March 13, 2004, p.70).
"... last week the IMF singled out Australia as having one of the four most overvalued housing markets in the Western world, and one of four highest levels of housing debt.
"In a chapter released early from its World Economic Outlook, it estimated that Australian housing prices last year were 25% higher than could be explained by economic fundamentals...
"Even in 2006, it found, Australia had the fourth highest housing debt in the Western world. Households owed mortgage debt equivalent to 80% of GDP (it's now 85%)" (Tim Colebatch, Australia vulnerable to US 'tsunami', IMF warns, theage.com.au, April 9, 2008).
Another warning indicator
The house price/rent ratio is also flashing red:
"According to calculations by The Economist (with the help of Julian Callow of Barclays Capital), house prices are at record levels in relation to rents (ie, yields are at record lows) in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. America's ratio of prices to rents is 32% above its average level during 1975-2000. By the same gauge, property is "overvalued" by 60% or more in Britain, Australia and Spain, and by 46% in France..." (The Economist, Global house prices, March 5, 2005, pp.69-70).
"In Britain, just 2 per cent of households own residential property they rent out. In the United States and Canada it's 6.5 per cent. In Australia, no less than 17 per cent of households also rent to other households. It's this distortion that holds the greatest threat to us from the property boom - the risk that rather than continuing to slowly deflate, the property bubble could yet end with a frightening bang" (Ross Gittins, Beware the bang if the property bubble bursts, smh.com.au, June 15, 2005).
(The Economist, Hear that hissing sound? December 10, 2005, p.79).
Global impact
"Property is the biggest business in the world, accounting for 15 per cent of global gross domestic product, with assets of $50 trillion, compared with $30 trillion in shares" (Frank O'Donnell, Housing boom faces global meltdown, news.scotsman.com, March 18, 2004).
"According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history...
"Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000" (The Economist, In come the waves, June 18, 2005, p.52).
"Claudio Borio and Patrick McGuire, two BIS economists, have analysed the relationship between booms and busts in equity and house prices in 13 countries over 30 years... [they] draw two conclusions from past experience. The bigger the boom in property prices, the bigger the bust. And the bigger the increase in debt accompanying the boom, the more that real house prices fall. It is ominous, therefore, that many countries have seen a much bigger rise in real house prices than in previous cycles, and that debt has increased more sharply" (The Economist, House-price indices - Homing in on trouble, March 13, 2004, p.70).
"''In some areas in China, especially in the Yangtze Delta Region, there's a serious property bubble," said Hai, of China International Capital Corp. in Beijing" (Nerys Avery, China Issues New Restrictions on Real Estate Sales, bloomberg.com, May 12, 2005).
"A real estate collapse, experts say, would deal a blow to the struggling banking sector, which got into trouble in the 1980's and 1990's by lending to poorly managed state-owned companies and is now making big loans to home buyers and developers" (David Barboza, China Acts to Curtail Property Speculation, nytimes.com, May 13, 2005).
"John Templeton [considered one of the greatest investors] currently believes that the risk of a 50% decline in U.S. home prices is "quite possible." [Financial Intelligence Report, February, 2005]" (Darren Pollock, Irrational Exuberance Moves Home, prudentbear.com, May 1, 2005).
""... [Pam Woodall, The Economist's economics editor] said. "If the US falls, it would be the first global property bust in history"" (Frank O'Donnell, Housing boom faces global meltdown, news.scotsman.com, March 18, 2004).
"Property speculation has been at the heart of demand creation in both Anglo-Saxon consumption and Chinese investment - the two drivers of the current business cycle" (Andy Xie, To deflation, morganstanley.com, June 10, 2005).
A property bust in China and the USA, would not only impact their economies but also the global community that has depended on these two engines of the world economy for its own growth over the last two to three years. This reality is reflected in this observation:
"... the most interesting aspect of China's trade statistics is that while China enjoys an enormous trade surplus with the United States, it enjoys a significant trade deficit with the rest of the world" (Peter Schiff, The Expectations Game, prudentbear.com, June 13, 2005).
Australian price collapse?
"We have learned from experience that a slowdown often precedes a price collapse" ["The Next Bubble (Or Bust)," by Robert Shiller, Global Agenda Magazine, January, 2005]" (Darren Pollock, Irrational Exuberance Moves Home, prudentbear.com, May 1, 2005).
"Lending to investors has dropped a long way below the monthly peak of $7.1 billion reached in October 2003, but has been holding up well for the past six months and appears unaffected by the March rate rise" (Turi Condon and David Uren, Homes market overpriced and stagnant, news.com.au, June 9, 2005).
"Over the last year Australian house prices have essentially stagnated as the air has come out of the housing bubble which saw national house prices double over the six years to March last year. The big question is what happens next. Australian house prices are still at least 25% overvalued, and the experience of the two comparable housing bubbles last century, i.e. in the 1920s and 1970s, suggests we could be looking at a decade where house prices go nowhere..." (Shane Oliver, House prices: overvalued, over-owned & set for stagnation, Oliver's Insights, amp.com.au, June 8, 2005).
"According to the Australian Bureau of Statistics (ABS) 2008 Year Book...
"In 2006-07 the average loan size for first homebuyers was $230,000, compared with around $90,000 in 1994-95...
"The proportion of people who own their home outright declined from 43 per cent in 1994-96 to 34 per cent in 2005-06, while the proportion with a mortgage rose from 28 per cent to 35 per cent.
""The decline in outright home ownership may reflect increasing uptake of flexible low-cost financing options which allow households to extend their existing home mortgages for purposes other than the original home loan purchase, the ABS said.
"Twenty per cent of households were renting from a private landlord in 2005-06, while around 5 per cent were renting from a state or territory housing authority" (AAP, Interest rates not deterring ownership dream, @news.com.au, February 7, 2008).
"... because property prices and debt levels are so much higher, the interest burden is actually greater than in 1989 when Paul Keating presided over 17 per cent mortgage rates..." (Steve Burrell, PM shouldn't get too relaxed, smh.com.au, August 1, 2006).
"... in 1989 the average new home loan was worth just $66,700.
"As CommSec chief equities economist Craig James pointed out, repayments on such a small mortgage added up to just $959 a month, or 25.8 per cent of average household disposable income at the time.
"Seventeen years later the size of the average new home loan has soared to $222,200, implying repayments of $1685 a month, or 28.2 per cent of disposable income" (John Breusch, Debt burden changes equation, AFR, August 4, 2006, p.8).
"In the new era of hyper-debt and sky-high property prices, a mortgage interest rate of 8 per cent may be the new 18 per cent.
"Our willingness to borrow heavily to buy houses has turned interest rates into a financial weapon of mass destruction.
"In 1989 mortgage rates soared to about 18 per cent, which sent the economy into a deep recession the following year. But now even relatively small rate rises have the potential to cause the same pain or worse, because the debt hanging over Australian families is so much bigger" (Matt Wade, Soaring prices mean rises hurt more, smh.com.au, March 3, 2005).
"The booming economy over the past decade has sent households into a spending frenzy, racking up the greatest level of personal debt in the country's history" (Kerry-Anne Walsh, Exclusive poll reveals new fears over personal debt, smh.com.au, August 15, 2004).
"Australians have reached $1 trillion of debt for the first time. The combination of higher housing costs and rising interest rates has pushed people deeper into the red" (Scott Murdoch, Personal debt hits $1 trillion, news.com, September 30, 2006).
"... according to a recent JP Morgan/Fujitsu Australian Mortgage Industry Report... housing debt as a percentage of the market value of residential property doubled from 12.1per cent in December 1992 to 24.2per cent last year" (Annette Sampson, Tread warily when you buy into the dream of home ownership, smh.com.au, April 12, 2008).
"... business debt burst the $700 billion mark for the first time, despite the credit crunch" (Jessica Irvine, Treasury's secret alert to Rudd, smh.com.au, February 1, 2008).
"Australia's debts to the rest of the world have hit a record...
"... the record $19.3 billion current account deficit for the December quarter ... confirmed the economy was being driven by foreign borrowings rather than the nation's savings...
"Net foreign debt reached a $610 billion, sitting at record levels, or 56 per cent of the economy" (Sid Marris, Current account deficit exceeds 'banana republic' levels, news.com.au, March 5, 2008).
"The ... current account deficit and investment outflow is largely financed by borrowing, mostly by Australian banks, and mostly off their balance sheets.
""The stock of bank loans to Australian households is twice as big as the stock of loans to Australian business. This is one of the reasons the Reserve Bank of Australia was concerned by the housing boom from 1996 to 2004" [said Lowy Institute, HSBC's chief economist John Edwards ]" (Alan Kohler, Debt forced Stevens' hand, smh.com.au, November 11, 2006).
"... over the past three completed financial years, the current account deficit added up to a staggering $155 billion. And $95 billion of that was, again broadly, the interest on the foreign debt.
"All of which then just gets added to the foreign debt. Uh oh. Borrowing to pay interest on existing debt, which then just further increases the debt?" (Terry McCrann, Debt may have us on borrowed time, news.com, December 6, 2006).
"The debt burden of the average household has recently risen above 150 per cent of disposable income, so a quarter per cent rise would have three times the impact today that it would have had in the late 1980s when debt was less than 50 per cent of income" (Garry Shilson-Josling, AAP, Pressure on rates, @news.com, July 5, 2006).
"If households respond to falling house prices, rising unemployment or higher interest rates by cutting spending and devoting more income to paying off debt, it will sap demand and damage the whole economy" (Matt Wade, Decade of debt eats family cash, smh.com.au, July 9, 2005).
"In a speech last year, the Reserve Bank governor, Ian Macfarlane described the debt-servicing ratio (that is, the ratio of interest payments to disposable income) as "the most important financial ratio from the household perspective"" (Peter Weekes, Life after debt, smh.com.au, January 26, 2005).
(Reserve Bank of Australia, Statement on Monetary Policy, August 2006, rba.gov.au)
"The Reserve [Bank] report ... said households were borrowing freely and the amount of household income being soaked up by debt repayments had risen to a record 11 per cent. In 1989 when mortgage rates were around 17 per cent, the proportion was just 9 per cent" (Matt Wade, Tax cuts stoking rate rises, RBA hints, smh.com.au, August 5, 2006).
"Still, how bad is the debt problem? Is the bubble ready to burst and destroy all the wealth we have built up over the last decade, like the tech boom in 2000? Will house prices plummet and banks foreclose, as they did during the recession that followed the 1987 stockmarket crash?..." (Peter Weekes, Life after debt, smh.com.au, January 26, 2005).
It is suggested here that the Reserve Bank interest rate increases from May 8, 2002 to March 2, 2005, with the 'cash rate' rising from 4.25 to 5.50, has already played its part in pricking the Sydney "housing bubble".
The problem is not the use of a blunt instrument like interest rate increases to cool an overheated economy but the interest rate decreases that contributed to the boom.
The interest rate decreases from February 7, 2001 to May 8, 2002, when the cash rate went from 6.25 per cent to 4.25, has created a bigger problem than what they were intended to ameliorate.
"... the Bank will be acting in the money market this morning to reduce the cash rate by 50 basis points to 5.75 per cent. This decision took note of four principal considerations:... (2) Economic conditions abroad have deteriorated noticeably since last year. The United States economy has slowed more quickly than expected, after several years of exceptional strength. This has prompted a significant decline in US interest rates. Notwithstanding this, a slowing US economy can be expected to dampen growth in the world economy in 2001" - (Ian Macfarlane, Monetary Policy Media Statement, rba.gov.au, February 7, 2001).
"... outgoing Reserve Bank governor Ian Macfarlane warns ..."To the extent that there are risky aspects of the world economy at the moment, they are the legacy of very low world interest rates during the 2001 to 2004 period," he said.
"Mr Macfarlane ... said Australians should not assume that the economic expansion of the past 15 years, described as a "miracle economy", would continue indefinitely.
""I don't think the last 15 years will turn out to have been a normal period," he said. "It has been better than normal"" (Glenda Korporaal, Days of low rates are 'over', news.com, August 12, 2006).
Following a regularly occurring historical trend of using interest rate decreases as a response to potential global economic crisis, in this case resulting from the bursting of the dot.com bubble, the monetary response signalled the start of the mania stage of the inner-city apartment boom. In the Hawke-Howard Property Rhyme below it will be argued that the mania stage of the inner-city office space boom was also signalled by interest rate decrease in response to global crisis - the sharemarket crash of 1987.
With record foreign debt the Reserve Bank will be limited in its use of monetary policy to help a slowing Australian economy, especially when there is a run on the Australian dollar. These factors, among others, imply that the next recession will be more severe than the last.
Fragile Financial Sector
"The Economic Sphere never appreciates how its behavior and fortunes are dictated by the Financial Sphere" (Doug Noland, Digging a Little Deeper into "Financial Sphere" Analysis prudentbear.com, April 29, 2005).
"ABN Amro's resident bear, Gerard Minack, meanwhile, believes we are watching the beginning of a slow-motion train crash. "It's important what's in the carriage and what's in the caboose. The first carriage that hits the wall is retail and residential construction. Arguably, next will be media and domestic industrials. The final carriage - and it is a big carriage - is the financials."
"In the Minack view, investors had better stock a lot of "baked beans in the cupboard" for a couple of lean years, as the "Anglo world" rotates out of its 20-year economic ascendancy" (John Garnaut, The party’s over, smh.com.au, May 7, 2005).
"If the soft landing the Reserve Bank and the Government are aiming for turns out to be a hard one, it will be because problems in the "financial economy" - the global credit crunch and our heavily indebted households - combine to make things much worse in the "real economy".
"... money was borrowed on US financial markets by our banks and non-bank housing lenders at interest rates that were too low, not adequately reflecting the risks involved. Now, thanks to the subprime debacle, the US lenders have flipped to the other extreme, charging a lot higher rates (despite the big cuts in US official interest rates) and being a lot more choosy about who they lend to.
"Some of our non-bank lenders have gone out backwards and our banks have to pay a lot more for foreign borrowings. Our non-bank lenders made a lot of bad loans and our banks have probably made some, too - they always do.
"So now the banks have passed their higher borrowing costs on to business and home-loan borrowers, in addition to the rate rises engineered by the Reserve Bank. But that's not the biggest worry; the Reserve can take that into account in its own rate moves.
"No, a bigger worry is that the banks - anxious about their own unwise lending and its effect on their balance sheets - may start to ration their new and rollover lending, calling in loans and being reluctant to lend even to soundly based businesses.
"When businesses and households start to worry about the size of their debts and begin cutting back their spending as a precautionary measure, that's when the economy really starts to slow.
"And it can feed on itself, with a small slowdown and small rise in job losses scaring people more and leading to a bigger slowdown and bigger job losses.
"That's when problems in the financial economy cross over into the real economy of consumer spending and employment, turning a soft landing into a hard one" (Ross Gittins, She'll be right ... unless debt problems bite, smh.com.au, April 5, 2008).
Financial sector imbalances are the crucial factor in determining the severity of a bursting asset bubble. This has been the case in Australian crises, as the next section introduces.
Two Australian Depressions, One Banking Collapse
Chay Fisher and Christopher Kent in a June 1999 Research Discussion Paper entitled "Two Depressions, One Banking Collapse" outlines the Australian experience:
"Over the past 150 years, Australia has experienced two macroeconomic depressions, both of which coincided with worldwide depressions. The first of these was in the 1890s and the second in the 1930s. These were also times of financial distress both domestically and in the rest of the world. For Australia there were many similarities across both depressions... in this paper we highlight one of the major differences between the two depressions. Namely, the 1890s involved the collapse of a significant proportion of the Australian financial system, whereas the disruption to the financial system in the 1930s was comparatively mild...
"The central argument of this paper is that variation in the performance of the financial system across the two depressions was primarily due to variation in the condition of the financial system prior to each depression. We show this by examining the behaviour of a range of indicators of financial stability over the decade prior to each depression. These indicators are:
(i) the level and nature of investment;
(ii) property market speculation;
(iii) credit growth;
(iv) capital inflows;
(v) degree of risk management within the financial system; and
(vi) competitive pressures in the financial sector.
"Each indicator suggests that the financial system during the 1880s was becoming increasingly vulnerable to adverse shocks. During that period there was a sustained increase in private investment associated with extraordinary levels of building activity and intense speculation in the property market. This was accompanied by rapid credit growth, fuelled in part by substantial capital inflows (much of which appears to have been channelled through financial intermediaries). At the same time, banks allowed their level of risk to increase in an attempt to maintain market share in the face of greater competition from a proliferation of new non-bank financial institutions.
"In contrast, if anything there was only a moderate decline in measures of financial system stability during the 1920s compared with the 1880s experience. It is therefore not surprising that whereas the financial system essentially collapsed following the substantial shock to real output in the first year of the 1890s depression, a shock of at least the same magnitude during the first year of the 1930s depression had relatively little impact on what was clearly a more robust financial system.
"Historically one of the major causes of financial instability has been rapid increases in bank lending in conjunction with unsustainable rises in asset prices. In recent times the catalyst for this process has been financial deregulation. In a way, this force was also present in the 1880s. The Australian banking system in the 1800s had operated under direction of the British Treasury in accordance to the 'real bills doctrine', which among other things prohibited lending backed by land. However, Pope (1991) suggests that after the arrival of 'responsible government' in the 1850s, these regulations were largely ignored and banks increasingly engaged in lending for speculative purposes. Increasing willingness to ignore the real bills doctrine was at least in part a response to increasing competition from non-bank financial institutions" (rba.gov.au).
""The old theory says investors are "rational." The fact, however, is that fear is stronger than greed, which is why financial markets fall more rapidly than they climb" (Robert Folsom, If It Works in Practice... Will It Work in Theory? elliottwave.com, May 25, 2005).
Responsible government is required to protect people from themselves. Greed and fear are powerful forces that can play havoc in an economy. Therefore, financial deregulation in the 1980s was going to lead to bubbles and disaster.
"Since March 2003, the benchmark ASX 200 and the All Ordinaries have both gained about 79 per cent due to strong company profits and the demand from China for raw materials - making it the strongest rally over almost three years since 1987, and in turn fattening the wallets of mum and dad investors" (Matt O'Sullivan reports, A bigger share of the action, smh.com.au, January 21, 2006).
With the ASX 200 setting a record closing high of 6828.7 on November 1, 2007, the ASX 200 had gained a 153 percent since March 2003.
One of the reasons that the bursting of the bubble of the Hawke years had a less severe impact on the economy than the coming fall-out of the Howard bubble was that the "mum and dad" investor did not play a big role. In the former the commercial property boom was the concern of the business investor - the corporate cowboys. But in the latter the residential boom was the concern of the household investor.
"... Professor Steve Keen, from the University of Western Sydney... "When the next recession hits, the pain will fall first on the household sector - in contrast to the 1990s recession, when the household names of the crash were Bond and Skase, rather than Jones and Nguyen"" (Jessica Irvine, Warning on interest burden of rising debt, smh.com.au, February 6, 2007).
Australia's uncharted waters
[Chart Steven Keen, Why Did I See it Coming and "They" Didn't? debtdeflation.com, November 2, 2008].
"... the previous two peaks in the debt to GDP ratio were followed by Depressions, and yet they were far lower than the current level" (Steven Keen, ibid.,).
"Thanks to rising asset prices - the so-called wealth effect - we've been able to get richer without the grind of having to save...
"But here's the rub: our net wealth has been increasing largely due to our willingness to take on more debt" (Annette Sampson, Old-fashioned thrift is suddenly cool, smh.com.au, February 9, 2008).
"Low interest rates and widely available credit over the past decade have led to the ratio of household debt to disposable income - a measure of households' ability to repay debt - to hit a record 160 per cent at the end of 2007, up from 78 per cent in 1997" (John Kehoe, RBA officiial signalled risks in high debt levels, AFR, April 11, 2008, p.16). It was 50 per cent in 1992.
Shane Oliver again:
"More than ever before, the surge in house prices has been due to investor interest following dissatisfaction with share markets and easy credit. In recent times investors have accounted for a whopping 45% of new housing loans (compared to a long-term average nearer 25%). The resultant surge in house prices has taken the ratio of house prices to average disposable income to record levels and seen a massive divergence open up between house prices and rental levels. This has seen rental yields on investor properties collapse to record lows.
"Investors are thus now very dependent on capital growth for decent returns. This contrasts to Australian shares where the dividend yield grossed up for franking credits is around 5%.
"This all makes the role of investors far more significant than in the past. Along with much higher debt levels, it means we are in uncharted waters as to how the house price bubble might deflate" (The beginning of the end for the house price bubble? Oliver's Insights, amp.com.au, December 8, 2003).
"Australians owe $772 billion on housing and $125 billion in personal loans such as credit cards... Household debt grew by more than $100 billion in the past year alone, despite widespread weakness in the housing market" (Matt Wade, Soaring debt burden adds to rate rise pain, smh.com.au, August 1, 2006).
""... in 2001, the total liability of Australian households was $424.6 billion" he [AMP chief economist Shane Oliver] says. "Today it's $901 billion."
"Nor do we look good when you study international comparisons. On this same measure of proportion of household debt, Australia five years ago was at about the middle of the pack of comparable countries, sitting well behind the United Kingdom, Canada, the United States, Japan and Germany.
""In 2001, when we were about 93 per cent, Japan was carrying about 135 per cent; the UK was abpout 115 per cent; the US was about 100 per cent," Oliver says. Now, Australia has moved into second place on the table behind the UK, which is on 165 per cent.
""We've really jumped up," Oliver says. "The UK rose steadily, where as we've had a huge jump from 93 to 160 per cent" (Fiona Carruthers, Harking back to the good old days, AFR, August 3, 2006, p.12).
House prices losses - asset-inflation gains wiped out
"The whole world economy is at risk... The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion"(The Economist, After the fall, June 18, 2005, p.11).
"Irish house prices could fall by as much as 60 per cent in the next eight years, a professor at University College, Dublin, who has studied earlier real estate bubbles, said.
"Prices might drop by as much as 7 per cent a year, Morgan Kelly said in a paper published by Ireland's Economic and Social Research Institute. The paper looked at housing booms and busts in Organisation fo Economic Co-operation and Development nations.
""Typically, real house prices give up 70 per cent of what they gained in a boom during the bust that follows" Professor Kelly said. "This is a remarkably robust relationship, holding across very different OECD housing markets over more than 30 years"" (Bloomberg, Irish owners not smiling, AFR, July 5, 2007, p.57).
The busts of the last thirty years occurred against a background of inflation/disinflation.
The Australian house busts of the 1890s and 1930s occurred against a backdrop of deflation and depression; so will the coming bust.
How far, then, will house prices collapse? A historical precedent:
"The depression-era drop in U.S. housing prices wiped out the total gain during the inflationary boom dating back to World War I...
"British data show a similar pattern in prices of private homes and farm land for the previous "Great Depression" that began in 1873. It too, wiped out the whole inflationary gain during the preceding boom. Private houses in Britain rose in value by 13 percent from the period 1851-52 to their peak in the years 1876-77. They then declined by 19 percent over the next thirty-five years...
"Evidence from the past two depressions show that deflation reduced the value of the average home each time by wiping out the inflationary gains of the previous boom" (James Dale Davidson & William Ress-Mogg, The Great Reckoning, (London: Sidgwick & Jackson, 1993), pp.403-404).
Australian house price crash
"...the nationwide doubling in established house prices over the six years to March 2004 prompted a "wealth effect" undoubtedly bigger than we've ever experienced before... The investment property orgy probably made a significant contribution to the doubling in house and apartment prices" (Ross Gittins, Welcome to life after the housing boom, smh.com.au, June 6, 2005).
Shane Oliver noted above that "there will be some inevitable reversion in prices back to their long-term trend, if not below it. If this were to occur immediately Australian house prices would have to fall 24% (or 32% in the case of Sydney house prices)".
(Shane Oliver, House prices - recent bounce unlikely to be sustained, Oliver's Insights, August 24, 2006).
If we say that the inflationary gains equals the doubling of house of house prices then values would have to fall 50 per cent.
From the mid-1990s to the peak in 2003 median Sydney house prices gained 150%. This implies for Sydney a fall of at least 60 percent to wipe out her house price inflationary gains.
"The AMP-NATSEM (The National Centre for Social and Economic Modelling) report - released today - reveals the dream of home ownership is fading for many people.
"House prices have jumped 400 per cent between 1986 and 2007 while income has risen just 120 per cent" (Colin Brinsden, Great Australian dream becoming a joke, news.com.au, March 18, 2008).
The first global housing bust will be severe as it also coincides with the restructuring of the global economy for the Information Age proper.
Therefore, there is a possibility that the inflationary gains from, say 1986, may be wiped out. If this was the case the national average prices would have to fall 80 per cent. (The Dow Jones Industrial Average fell 89% from September 1929 to July 1932).
"The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops" (The Economist, In come the waves, June 18, 2005, p.52).
Note: It is argued that the Industrial Age proper began after the Great Depression of 1873-95, over 80 years from the beginning of the Industrial Revolution (say, the Watt-Boulton steam engine of 1786). So that the Information Age proper begins after the coming depression, over 50 years from the beginning of the Computer Revolution (say, the UNIVAC 1 computer of 1951).
Australian 'Booms and Busts' and American Booms and Recessions
'If the United States sneezes the rest of the world catches a cold'
- an old saying
"It was ironic, to say the least, that while the American boom of the 1920s had not been transmitted to the rest of the world, the rest of the international community very quickly felt the impact of the American crash..." (David Meredith & Barrie Dyster, Australia in the Global Economy, (Cambridge: CAP, 1999), p.85).
America is the 'hegemonic' nation at the centre of this age of globalisation. Anticipating the future economic/financial 'impact' that America will have on Australia is aided by the chart below:
Australian Economy
|
American Expansions & Contractions
|
||
Boom 1920s
|
Jul 1924 - Oct 1926
|
Oct 1926 - Nov 1927
|
Nov 1927 - Aug 1929
|
Bust 1930s
|
Aug 1929 - Mar 1933
|
Mar 1933 - May 1937
|
May 1937 - Jun 1938
|
Boom 1960s-1970s
|
Feb 1961 - Dec 1969
|
Dec 1969 - Nov 1970
|
Nov 1970 - Nov 1973
|
Bust 1970s
|
Nov 1973 - Mar 1975
|
Mar 1975 - Jan 1980
|
Jan 1980 - Jul 1980
|
Boom 1980s
|
Nov 1982 - Jul 1990
|
 |
|
Bust 1990s
|
Jul 1990 - Mar 1991
|
|
|
Boom 1990s-2000s
|
Mar 1991 - Mar 2001
|
Mar 2001 - Nov 2001
|
Nov 2001 - ??? ????
|
Bust 2000-2010s
|
??? ??? - ??? ?????
|
??? ??? - ??? ?????
|
??? ??? - ??? ?????
|
Long booms and busts are periods of expansion and contraction - a boom starts with an expansion and ends with an expansion while a bust begins with a recession and ends with a recession.
The first thing to notice is that the Australian 'Boom and Bust' of the 1980s and 1990s does not follow the pattern of the two preceding 'Boom and Busts'. The Busts of the 1930s and 1970s were times of structural change, that were delayed by economic and financial pressures in the nations of and in the global economy.
The 'bust' of the early nineties was around one-third of the way through a long boom that started around 1982 and was still continuing at the end of 2007.
As was mentioned earlier, the 'bust' at the end of the twenties and early seventies coincided with the end of post war booms, at least for America in the first instance. The earlier American was also a 'long' boom that ran from 1896-1929. The soon coming bust belongs to this group.
The structural change and economic dislocation in the 1970s was less severe than the 1930s.
Looking at similar patterns from the Nineteenth Century, especially in Great Britain, history suggest that the structural change in America economy will be takes some time to complete - possibly more severe than the 1930s.
This change will be aggravated by a major and serious turning in the Anglo-American Hegemonic Cycle that will make the coming 'winter' stage of the present social cycle particularly challenging for the United States of America, or possibly what will remembered as the USA.
The following section looks at Australia in the 'booms and bust' from the chart above.
The emphasis, where applicable, is on the second/last stage of boom, property boom, debt, trade, the stockmarket and impact of the 'bust'.
Why the stockmarket emphasis?
"Simply put, the socionomic hypothesis is that social mood generates social events, not the other way around. This is why the stock market - the primary historical database of collective optimism and pessimism - turns before pivot points in the economy and cultural expression" (How Can You Use the Tax Revolt Indicator? elliottwave.com, June 27, 2007).
In the four booms above three have a 'contraction' between two periods of expansion or boom. The end expansion is referred to as the 'mania' or 'bubble' stage on the boom, which in case of the latter metaphor, bursts and recession set in. For the non-recession turning point of the boom the catalyst for the 'bubble' stage was the stockmarket correction of 1987. The Japanese housing and stockmarket and the Sydney commercial property booms over-inflated. The 'mania' phase of the boom receives more attention in the next section.
Boom and Bust 1920s-1930s
"... Forget Crocodile Dundee and rugged individualism, the country was built by state governments"
- The Economist, Oz and the monarchy, November 6, 1999, p.14
"In the decade before 1930, borrowing, mostly from Britain, amounted to £250,000,000, and after 1925 no year had a favourable balance of trade. Very few saw this imbalance as an ominous sign for the future" (John Molony, p.244).
Boom and Bust 1960s-1970s
"Sydney had never experienced a property boom on the scale of that between 1969 and 1974. It involved a frenzy of buying, selling and building which reshaped the central business district, greatly increased the supply of industrial and retailing space, and accelerated the expansion of the city's fringe. Its visible legacy of empty offices and stunted subdivisions was matched by a host of financial casualties which incorporated an unknown, but very large, contingent of small investors, together with the spectacular demise of a number of development and construction companies and financial institutions. The boom was the most significant happening of the 1970s and the shock waves from the inevitable crash were felt right up to 1980. It was an extraordinary event for Sydney and Australia...
"The fluctuating fortunes of the property market in Sydney during the 1970s left many bewildered. The enormous losses sustained by so many individuals and firms gave the lie to the deeply rooted conviction that property was the safest form of investment" (Daly, pp.1 & 132).
"The 1972-1974 bear market proved to be the worst for Australia in this century. The declines of the Great Depression were mitigated by the strength in Gold and other resource stocks" (Dr. Bryan Taylor, The Global Financial Data Guide to Bull and Bear Markets, globalfinancial data.com).
Boom and Bust 1980s-1990s
"The housing and inner city office boom of the late 1980s was the precursor to Australia's most prolonged recession in over 50 years..." (ACOSS, More Affordable Housing, acoss.org.au, October 2003, Paper 352, p.2).
"For the purposes of this book the most important period os from October 1987 (when [interest] rates were comparatively low) to the end of 1991... [There was] the relaxation of rates after the crash as the monetary authorities tried to avoid a money panic. This was a legitimate fear, but rates were eased to far..." (Trevor Skyes, The Bold Riders, (Sydney: Allen & Unwin, 1994), p.27).
"With the share market dead on its feet in late 1987, the surviving cowboys swung into the property market... The relatively low interest rates of early 1988 encouraged them to believe that they might escape their troubles in the equity market by gearing up in Central Business District (CBF) property...
"The cowboys and their lenders who stampeded into the office block construction in 1988 and 1989 showed woeful lack of experience. History tells us that a share market crash is frequently followed within a couple of years by a property crash..." (Skyes, pp.28-29).
"In the late 1980s, it was the business sector that ramped up its debt levels - to a large extent to finance speculation in assets (mainly corporate takeovers and inner city offices)..." (ACOSS, p.10).
"A major reason for the sluggish recovery from the 1991 recession was the need for the corporate sector to unwind its high debt levels. These may have been sustainable during the boom, but they were no longer so once demand for goods and services fell. This was a major factor behind the severe round of corporate 'down sizing' in the early 1990s..." (ACOSS, p.14).
Property and borrowing boom of the 1980s
Business credit as a %of GDP, 1982-2003
(Source: Simon, 2003 - (ACOSS, p.11)
Boom and Bust 1990s- 2000s
"Although investment in owner occupied housing has also risen substantially over the past few years, the main driver of the rise in household borrowing is investment in rental housing. Over the past five years, borrowing for investment housing (including apartments) rose by an average of 21% per year, while borrowing for owner occupied housing rose by 13% per year. Most of this growth occurred after 2001, following a 12 month pause in the housing boom after the GST was introduced in July 2000" (ACOSS, p.10).
* "Using PPP [purchasing-power parity] weights, as the IMF does, the world economy has grown by an average of 5% over the past five years, its strongest pace since the early 1970s... But if China and India are 40% smaller than previously thought, world growth would be trimmed to 4.5%" (The Economist, A less fiery dragon? economist.com, November 29, 2007).
* "... the 4.6% average we now estimate over the 2003-06 period would mark the strongest four years of global growth since the 5.5% average burst over the 1970-73 interval. Interestingly enough, the first oil shock of late 1973 came in a year when world GDP was booming at a 6.9% annual rate. Yet the subsequent supply disruption and a trebling of nominal crude oil prices within a year quickly turned a global boom into a bust - culminating in what was then the world economy's worst recession in post-World War II history" (Stephen Roach, Global Fault Lines, morganstanley.com, July 17, 2006).
* "The Rabbitohs' impressive 26-16 victory over the Sharks gave the famous club its best start to a season since 1972" (David Riccio, Bunnies best start in 35 years, news.com.au, April 1, 2007).
* "The historic victory puts Mr Rudd into the company of Gough Whitlam and Bob Hawke as Labor's only modern leaders to take Government from Opposition" (Will Temple, Kevin Rudd to be Australia's next PM, news.com.au, November 24, 2007).
* "Not one of the top four in the Labor team - Rudd, deputy Julia Gillard, shadow treasurer Wayne Swan and shadow finance minister Lindsay Tanner - has been a minister.
"Indeed, Swan and Gillard weren't even in parliament when Labor was last in power. The other two were in for only the last term of the Keating government.
"That revives memories of the raw team that came to power with Gough Whitlam in 1972 after 23 years. However, this group is much less starry-eyed and very practical" (Terry McCrann, Investors facing uncertainties, news.com.au, September 2, 2007).
* "Sydney is in the grip of a second property crisis with the supply of new houses falling to levels not seen since 1975... The results of a study, by BIS Shrapnel, has shown construction of new homes in Sydney has hit an historical low, rivalled only by the slump of the mid 70s"(Simon Benson, House alarm raised, news.com.au, February 12, 2007).
* "The new Labor government will inherit a foreign debt bill triple the size of the debt the previous Labor government left in 1996.
"Australia's net debt owing to foreigners stands at $570 billion, and would take half a year's economic output to repay in full. While government net debt was eliminated under the Coalition government, households and businesses continue to borrow..." (Jessica Irvine, Government will inherit nation of foreign debtors, smh.com.au, December 1, 2007).
"The economic boom is starting to resemble more closely the last great rise in the terms of trade in the early 1970s, with demand-driven growth rising at an unsustainable level...
"The 1970s boom was driven mainly by agricultural prices.
"Wool prices rose by 60 per cent in the space of a year, while cereals and meat prices rose by 40 per cent. By 1974, Australia's terms of trade (the ratio of export prices to import prices) were 25 per cent above their long-term average and, in the absence of restraint from the exchange rate, growth had taken off. Non-farm GDP rose by 8.8 per cent in the 12 months to March 1973..." (David Uren, Action needed as current boom echoes overheating of 1970s theaustralian.news.com, November 5, 2007).
(I.J. Macfarlane, Governor, Global Influences on the Australian Economy, Talk to Australian Institute of Company Directors Sydney - 14 June 2005).
Trade and debt
"Is our lifestyle being financed ... by the proceeds of others' savings gluts?
"... albeit a long way behind the US, the pumped up ... [Australia]... happens to possess the fourth biggest external deficit on the planet...
"Australia's external gap is now more than half due to the net income deficit on interest and dividend payments.
"... fingers need to be crossed that prices do not fall far from their present position in the top 5 per cent of the last half-centurys experience. Any meaningful reversion would drastically limit future macro-economic policy options" (Barry Hughes, RBA silent on imbalances, AFR, October 19, 2005, p.70).
"Australia has become the second largest consumer of international capital...
"A report to be published overnight by the International Monetary Fund shows Australia absorbed 4.1 per cent of the world's surplus capital in 2003. This equalled Britain and was second only to the US, which consumed 71.5 per cent...
"The deficit shows Australia is paying far more to the world in interest, company dividends necessary to service this foreign capital, as well as for imports of good and services, than it receives in return" (John Garnaut, Into the big borrowers' league, smh.com.au, April 6, 2005).
"Germany was easily the largest debtor nation, and in the period 1925-1929 she borrowed four times as much as Australia, the next largest debtor" (C.B. Schedvin, Australia and the Great Depression, (Sydney, Sydney University Press, 1970), p.39).
"The closure of the London money market to Australian long-term borrowing... [and] the rapid accumulation of short-term debt in London which followed in the second half of 1929 and in 1930 was the most important single factor in shaping depression policy to mid-1931. The interaction between the pressure this debt exerted and the instrumentalities of domestic policy formation is an important theme... Australia found herself in a much more embarrassing position on the eve of the world depression than other large debtor nations" (Schedvin, p.106).
"It did not take long for the [Scullin Labor] administration to appreciate that the heavy adverse trade balance was the most urgent problem that it had to deal with, for the growing trade deficit was primarily responsible for the deterioration in Australia's international credit rating and was also giving rise to speculation that the country would be forced to default on interest payments due abroad" (Schedvin, p.140).
"In the year 1932, just over 30 per cent of Australian breadwinners were out of work. Unlike the 1890s, this was a world-wide depression: but Australia's ability to cope with it was gravely impaired by its heavy overseas debt...
"How did Australians manage to work their way out of the difficulties? They traded their way out of trouble. That's the modern, glamorous way of expressing it, but in fact they sweated their way out of it. They reduced their imports and increased their exports. Unfortunately, I doubt whether we could expect to "trade our way out" very easily [today].
"... the extent of unemployment experienced in the early 1930s rapidly cut down the import bill... Thus in the year 1928-29, Australia's total import costs £130 million. They cost only £51 million three years later. In case you think that changes in money, including the first big currency depreciation in our history, mainly caused this sharp fall, let me specify how the actual tonnage of imports fell away.
"In the two years after 1929-30, imports of motor cars chassis fell from 62,000 to 4000. In the same two years the imports of electric cables and wires fell from 15,000 to 2000 tons. The impact of petroleum - our consumption of petroleum - was almost cut in half. The imports of whisky fell to a mere one-sixth, and in this era of the sardine sandwich even the imports of tinned fish were halved.
"... we will not be able, in a future debt crisis, to fight our way to solvency with such ruthless cuts in imports.
"Nor are we certain to ease a future debt crisis by the kind of speedy recovery in export prices seen in the past..." (Geoffrey Blainey, Our extended Australian family: over-extended or third time lucky, The Australian, March 2, 1990).
Australia quickly recovered its 1929 sharemarket high primarily because its economy was based more on raw materials, than on industrials, and because its economy was not as closely tied to the United States and Europe as many other countries (Brian Taylor, Could this decade be the next 1930s? gold-eagle.com, December 13, 2002).
The Australian sharemarket rose 196.1% from December 1916 to February 1929. It then fell 46.3% from February 1929 to August 1931.
The sharemarket recovered its 1929 high in October 1934. (Brian Taylor, ibid.,).