Australian Property Crash

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" height=35 BGCOLOR="#000099" TEXT="#F7F7FF"> <div> <B>Australian Property Crash</B></div> <div> <A HREF="id61.htm" TARGET="_top" TITLE="Sydney Property Crash">Sydney Property Crash</A>   |   <A HREF="id89.htm" TARGET="_top" TITLE="Australias Great Depression">Australia's Great Depression</A>   |   <B>Australian Property Crash</B></div> <div> </div> </td> </tr><tr> <td valign="top" height=445 BGCOLOR="#FFFFFF" TEXT="#080000"> <bR> <div> <B>and</B></div> <bR> <div> <B>Australian Boom and Bust Cycles</B></div> <bR> <bR> <div> <A HREF="id89_hey_big_spenders_it_s_time_to_worry.htm" TARGET="_top" TITLE="Australias Great Depression"><B>Hey, big spenders, it's time to worry about all that foreign debt</B></A></div> <bR> <div> <A HREF="id89_australia_s_version_of_the_us_subprime_crisis.htm" TARGET="_top" TITLE="Australias Great Depression"><B>The future Australian version of the US sub-prime housing crisis</B></A></div> <bR> <div> <A HREF="id89_worse_to_come_for_australian_economy.htm" TARGET="_top" TITLE="Australias Great Depression"><B>Worse to come for Australian economy</B></A></div> <bR> <div> <A HREF="id89_the_kevin_rudd_james_scullin_and_gough.htm" TARGET="_top" TITLE="Australias Great Depression"><B>The Kevin Rudd, James Scullin and Gough Whitlam Rhyme</B></A></div> <bR> <bR> <div> Australian house prices to crash at least 50%.<FONT SIZE="3" COLOR="#FF0000" FACE="Verdana" ><B> </B></FONT><FONT SIZE="3" COLOR="#000000" FACE="Verdana" ><B>Here's why.</B></FONT></div> <bR> <bR> <div> <B>Real Estate - An Australian Dream</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The land mania of the 1880s took two main forms</B></FONT>. 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. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>The second form of mania was the deeply-held belief that it was impossible to lose money by 'investing' in land</B></FONT> - <FONT SIZE="2" COLOR="#006600" FACE="Verdana" ><B>a belief which persists to the present day</B></FONT>" (Michael Cannon, <I>The Land Boomers</I>, (Melbourne: Lloyd O'Neil, 1986), p.18).</div> <bR> <div> <B>The Writing is on the Wall for the Australian Dream</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>On any measure, Australian house prices are overvalued</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>The chief economist of AMP Capital Investors, Dr Shane Oliver, estimates prices are still running at about 25 per cent above their long-term trend</B></FONT>. <FONT SIZE="2" COLOR="#6000C0" FACE="Verdana" ><B>The Organisation for Economic Co-operation and Development says Australian house prices compared with incomes are 34 per cent above their long-term average </B></FONT><FONT SIZE="2" COLOR="#008000" FACE="Verdana" ><B>and, compared with rents, house prices are about 50 per cent above their long-term trend</B></FONT>.</div> <bR> <div> "<FONT SIZE="2" COLOR="#FF6000" FACE="Verdana" ><B>Australian house prices are about six times annual household income, almost double the level in the US</B></FONT>. And with a gross yield of about 3.4 per cent, Oliver says rental-housing property provides a poor return compared with other investments...</div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"</FONT><B>But</B> <B>Australian debt levels remain high</B>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Oliver says this makes housing our Achilles' heel, with house prices being vulnerable to an economic slowdown (with rising unemployment) or further interest-rate rises</B></FONT><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >" (Annette Sampson, <I>House prices can't go up indefinitely</I>, smh.com.au, June 4, 2011).</FONT></div> <bR> <div> "The Australian dream of home ownership is slipping away, leaving a threat of a US-style collapse in house prices, according to a team of university researchers...</div> <bR> <div> "The researchers found that after 1996, average house prices increased by three times on average - to around 6.8 times medium household income - and debt levels surged.</div> <bR> <div> "On the one hand Australia is vulnerable to a collapse like the United States, where prices fell by a half during the sub-prime collapse ... or to a long slow decline as in Japan since 1988," Dr Flood said" (AAP, <I>House prices 'need US-style collapse'</I>, news.com.au, September 14, 2009).</div> <bR> <div> <B>Bad assets and too much debt</B></div> <bR> <div> "As [Ross] Garnaut and his co-author David Llewellyn-Smith relate [in their book <I>the Great Crash of 2008</I>], in early October bank chiefs met Rudd to warn him that foreign lenders were refusing to roll over their foreign debts: ''<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The banks told (Rudd) that, if the Government did not guarantee their foreign debts, they would not be able to roll over the debt as it became due</B></FONT>. Some was due immediately, <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>so they would have to begin withdrawing credit from Australian borrowers</B></FONT>. They would be insolvent sooner rather than later... The process of adjustment would be enormously disruptive and costly''" (Tim Colebach, <I>We failed the GFC test</I>, theage.com.au, October 27, 2009).</div> <bR> <div> "... you can be insolvent for two types of reasons, one: you get yourself into trouble with the way you've managed your debt and you can't roll over your debt as it becomes due, or you run into trouble with the value of your assets. </div> <bR> <div> "The rest of the world's problems, Europe and American's problems were problems with their bad assets, our problems were the problems of excessive reliance on a source of debt that turned out not to be reliable...</div> <bR> <div> "We've had a couple of times in history when banks have been ... or when the economy has been heavily reliant on foreign debt and foreign debt dried up. </div> <bR> <div> "In the 1890s, we had the Great Depression of that time, when most of our banks went bankrupt in those circumstances. The time of the Great Depression, more of the debt was government debt, so it didn't give rise to that situation. </div> <bR> <div> "This time, the banks were in trouble with their debt, and the Government stood behind them" (Ross Garnaut, <I>Ross Garnaut joins The 7.30 Report</I>, abc.net.au, October 12, 2009).</div> <bR> <div> "One of the widely drawn lessons from the financial crisis is that banks should source more of their funding from deposits and less from short-term debt markets...</div> <bR> <div> "Banks in Australia have reasonably diverse funding bases: deposits account for 43 per cent of funding, split fairly evenly between households and businesses; domestic capital markets provide a further 19 per cent of funding; and <B>foreign capital markets 28 per cent</B>. Securitisation and equity account for 3 per cent and 7 per cent of funding respectively..." (Ric Battellino, <I>Some Comments on Bank Funding</I>, rba.gov.au/speeches, December 16, 2009).</div> <bR> <div> Will Australia, in the next crisis, have both types of trouble - trouble with foreign debt and trouble with asset prices?</div> <bR> <div> <B>Is Australia an exception to the rule?</B></div> <bR> <div> From <I>The Economist's</I> House price indicator, economist.com, March 19, 2009:</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="471" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="226"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="226" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP WIDTH="226"><div> % change 1997-2008</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="226"><div>    Ireland</div> </tD> <tD VALIGN=TOP WIDTH="226"><div> 193</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="226"><div>    Spain</div> </tD> <tD VALIGN=TOP WIDTH="226"><div> 184</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="226"><div>    Australia</div> </tD> <tD VALIGN=TOP WIDTH="226"><div> 163</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="226"><div>    Britain</div> </tD> <tD VALIGN=TOP WIDTH="226"><div> 150</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="226"><div>    USA*</div> </tD> <tD VALIGN=TOP WIDTH="226"><div> 102</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="226"><div>    USA**</div> </tD> <tD VALIGN=TOP WIDTH="226"><div> 84</div> </tD> </tR> <tR> <tD VALIGN=TOP COLSPAN=2 HEIGHT= 32 ><NOBR><div> * Case-Shiller ten city index  </div> <div> ** <I>Office of Federal Housing Enterprise Oversight</I></div> </NOBR></tD> </tR> </TABLE></div> <bR> <div> "Ireland's decade-long housing boom ended after borrowing costs rose and demand for property cooled. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>House prices have fallen in every month since May 2007</B></FONT> <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>and are now 45 percent below their peak earlier that year</B></FONT>, according to Friends First" (Colm Heatley, <I>Irish Building Activity Slows to 6-Month Low, Ulster Bank Says</I>, bloomberg.com, December 14, 2009).</div> <bR> <div> "<FONT SIZE="2" COLOR="#6600FF" FACE="Verdana" ><B>Australia is the third least affordable country in which to buy housing, ranked only behind Spain and Ireland</B></FONT>..." (Mark Russell, <I>Property avoids the plunge, at a cost</I>, theage.com.au, August 23, 2009).</div> <bR> <div> From 1998-99 to 2009 "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>the median house price rose 168 per cent, from $156,600 to $420,600</B></FONT>.</div> <bR> <div> "...<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>the median Australian property now costs 5.5 times the average household income, and about eight times income in Sydney</B></FONT>.</div> <bR> <div> "<FONT SIZE="2" COLOR="#6000C0" FACE="Verdana" ><B>That compares with a ratio of 2.5 times household income in the US and five times income in Britain</B></FONT>.</div> <bR> <div> "<FONT SIZE="2" COLOR="#005000" FACE="Verdana" ><B>Property prices in the US and Britain have collapsed, but neither country approached Australia's peak of six times income even before their markets crashed</B></FONT>" (Nick Gardner, <I>Wealthy migrants pricing locals out of Sydney property market</I>, news.com.au, January 17, 2010).</div> <bR> <div> "Despite Australian house prices having had a stronger run up than those in the US and UK, they have fared remarkably well by comparison over the last couple of years. US house prices have fallen 32% from their peaks and UK house prices have fallen 19%...</div> <bR> <div> "The downside is that having dodged a bullet this time, given Australia's very high household debt to income ratio,it would leave Australia very vulnerable to the next global economic downturn" (Shane Oliver,  <I>Australian house prices on the up again - Is it sustainable? </I>Oliver's Insights, ampcapital.com.au, August 6, 2009).</div> <bR> <div> * Nick Gardner, <B>Household debt tops national income for first time</B>, news.com.au, December 27, 2009: </div> <bR> <div> BORROWERS have set a new record: <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>for the first time we owe more in household debt than the entire Australian economy earns in a year</B></FONT>. </div> <bR> <div> Reserve Bank figures show mortgage, credit card and personal loan <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>debts now stand at $1.2 trillion</B></FONT>, up 71 per cent from just five years ago and <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>equating to $56,000 for every man, woman and child in the country</B></FONT>.</div> <bR> <div> Our spending binge, fuelled most recently by the Government's First Home Owner Grant, means personal debt now totals 100.4 per cent of Australia's annual GDP - one of the highest ratios in the developed world...</div> <bR> <div> <B>Mortgages account for almost 90 per cent of annual GDP, up from 17 per cent in 1990</B><FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B> </B></FONT><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >and by five per cent in the last year alone as first-home buyers have flooded the market...</FONT></div> <bR> <div> <B>Australian families now owe more than their counterparts in the recession-stricken US - previously regarded as the credit capital of the world</B><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >. American household debt stands at $US44,000 (about $50,000) per person...</FONT></div> <bR> <div> There are also concerns rising rates will create a belated "credit crunch" as banks pull back on lending to heavily indebted customers. <FONT SIZE="2" COLOR="#FF6600" FACE="Verdana" ><B>When that happened in the US and the UK, house prices plummeted</B></FONT>.</div> <bR> <div> <B>"Our debt is our Achilles heel, there's no question about that," Shane Oliver, chief economist at AMP Capital, said</B><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >.</FONT></div> <bR> <div> The test for Australian house prices comes "in the next global economic downturn" - a crisis that the world has never experienced to such a degree before.</div> <bR> <div> This article argues that Australia is not an exception to the rule.</div> <bR> <div> Future Watch argues that the present "crisis years" are following a historical pattern of contraction, expansion and contraction.</div> <bR> <div> At the time, the co-ordinated Central Bankers' intervention of December 2007, in response to the crisis, suggested from history that there would be one more global boom/recovery before the real crisis would begin. The recovery began in 2009.</div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >This implies that the Australian bust will come in the second contraction. The bust will be aggravated by</FONT> <A HREF="id89_australia_s_version_of_the_us_subprime_crisis.htm" TARGET="_top" TITLE="Australias Great Depression">Australia's own version of the American sub-prime housing crisis</A><FONT SIZE="2" COLOR="#000000" FACE="Verdana" >.</FONT></div> <bR> <div> What had the potential to become a crisis in 2007-2009, but prevented from occurring due to favourable circumstances - monetary and fiscal stimulus and China, etc. - will become a crisis in the future.</div> <bR> <div> The world economy, will experience a severe depression rivaling the Hoover recession - the first contraction of the Great Depression.</div> <bR> <div> The intervention will not only aggravate the seriousness of the coming crisis but will limit the effectiveness of the government's response to provide some support for the most vulnerable.</div> <bR> <div> <B>Post WW2 - This time it is different</B></div> <bR> <div> 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.</div> <bR> <div> "A common myth is that house prices only go up, never down. This is nonsense... house prices do fall. However, <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>in the past the adjustment has been masked by high inflation which allowed real house prices to fall without nominal prices necessarily coming down</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>It is unlikely we will have this luxury this time around with inflation now very low</B></FONT>. 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, <I>The beginning of the end for the house price bubble?</I> Oliver's insights, amp.com.au, December 8, 2003).</div> <bR> <div> "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...</div> <bR> <div> "The Anglo-Saxon consumer debt and Chinese overcapacity will likely become the main factors in causing cyclical deflation as the current cycle turns down...</div> <bR> <div> "In addition to the risk of experiencing some cyclical deflation ahead, the risk of secular deflation remains..." (Andy Xie, <I>To deflation</I>, morganstanley.com, June 10, 2005).</div> <bR> <div> <B>Previous falls</B></div> <bR> <div> The "boom and bust" cycles of the 1880s-1890s, 1920s-1930s-1940s and 1980s-early 1990s, provide clues to understanding the direction of the fallout of the latest property boom of the late 1990s-2000s-2010s.</div> <bR> <div> <B>Bust 1890s</B></div> <bR> <div> "The crash began in 1891. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Land values fell to levels around one half their boom levels</B></FONT>. 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, <I>Three Australian Asset-price Bubbles</I>, rba.gov.au, 2003, pp.22-23).</div> <bR> <div> <B>Bust 1920s/30s</B></div> <bR> <div> "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, <I>Sydney Boom Sydney Bust</I>, (Sydney, George Allen & Unwin, 1982), p.169).</div> <bR> <div> Over ten years, from 1925 to 1935, average <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Sydney housing prices fell 30.3 per cent</B></FONT>.</div> <bR> <div> <B>Bust early 1990s</B></div> <bR> <div> "... the <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>commercial property</B></FONT> bubble inevitably burst, and when it did property <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>values halved</B></FONT>. 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).</div> <bR> <div> "... 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, <I>Beware the bang if the property bubble bursts</I>, smh.com.au, June 15, 2005).</div> <bR> <div> <B>Second stage of crash - What to expect</B></div> <bR> <div> " ... the wealthiest areas could be hit hardest.</div> <bR> <div> ""<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>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</B></FONT>," he [Morgan Stanley chief equity strategist Gerard Minack] said.</div> <bR> <div> ""<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>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</B></FONT>."</div> <bR> <div> "Blaxland MP Jason Clare said the Bankstown sheriff's office had a list of 30 homes to be repossessed in the next few weeks.</div> <bR> <div> ""<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>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</B></FONT>," he said.</div> <bR> <div> ""They said that was one of the most terrible things they'd seen"" (Angela Saurine, <I>Property slump worsening</I>, news.com.au, April 12, 2008).</div> <bR> <div> <B>Fragile Financial Sector</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The Economic Sphere never appreciates how its behavior and fortunes are dictated by the Financial Sphere</B></FONT>" (Doug Noland, <I>Digging a Little Deeper into "Financial Sphere" Analysis</I> prudentbear.com, April 29, 2005).</div> <bR> <div> 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.</div> <bR> <div> <B>Two Australian Depressions, One Banking Collapse</B></div> <bR> <div> Chay Fisher and Christopher Kent in a June 1999 Research Discussion Paper entitled "Two Depressions, One Banking Collapse" outlines the Australian experience:</div> <bR> <div> "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...</div> <bR> <div> "<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>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</B></FONT>. 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:</div> <bR> <div> (i) the level and nature of investment;</div> <div> (ii) property market speculation;</div> <div> (iii) credit growth;</div> <div> (iv) capital inflows;</div> <div> (v) degree of risk management within the financial system; and</div> <div> (vi) competitive pressures in the financial sector.</div> <bR> <div> "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.</div> <bR> <div> "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.</div> <bR> <div> "Historically one of the major causes of financial instability has been rapid increases in bank lending in conjunction with unsustainable rises in asset prices. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>In recent times the catalyst for this process has been financial deregulation</B></FONT>. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>In a way, this force was also present in the 1880s</B></FONT>. 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).</div> <bR> <div> ""The old theory says investors are "rational." <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The </B><I><B>fact</B></I><B>, however, is that fear is stronger than greed</B></FONT>, <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>which is why financial markets fall more rapidly than they climb</B></FONT>" (Robert Folsom, <I>If It Works in Practice... Will It Work in Theory?</I> elliottwave.com, May 25, 2005).</div> <bR> <div> Responsible government is required to protect people from themselves. Greed and fear are powerful forces that can play havoc in an economy.</div> <bR> <div> <B>Australia's uncharted waters</B></div> <bR> <div> "... 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, <I>Warning on interest burden of rising debt</I>, smh.com.au, February 6, 2007).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <IMG SRC="10c00440.png" border=0 width="512" height="324" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div> [Chart Steven Keen, <I>Why Did I See it Coming and "They" Didn't?</I> debtdeflation.com, November 2, 2008].</div> <bR> <div> "... 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.,).</div> <bR> <div> "Thanks to rising asset prices - the so-called wealth effect - we've been able to get richer without the grind of having to save...</div> <bR> <div> "But here's the rub<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>: our net wealth has been increasing largely due to our willingness to take on more debt</B></FONT>" (Annette Sampson, <I>Old-fashioned thrift is suddenly cool</I>, smh.com.au, February 9, 2008).</div> <bR> <div> <B>House prices losses - asset-inflation gains wiped out</B></div> <bR> <div> "The whole world economy is at risk... The housing boom was fun while it lasted, but <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>the biggest increase in wealth in history was largely an illusion</B></FONT>"(The Economist, A<I>fter the fall</I>, June 18, 2005, p.11).</div> <bR> <div> "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.</div> <bR> <div> "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.</div> <bR> <div> ""<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>Typically, real house prices give up 70 per cent of what they gained in a boom during the bust that follows</B></FONT>" Professor Kelly said. "This is a remarkably robust relationship, holding across very different OECD housing markets over more than 30 years"" (Bloomberg, <I>Irish owners not smiling</I>, AFR, July 5, 2007, p.57).</div> <bR> <div> The busts of the last thirty years occurred against a background of inflation/disinflation.</div> <bR> <div> The Australian house busts of the 1890s and 1930s occurred against a backdrop of deflation and depression; so will the coming bust.</div> <bR> <div> How far, then, will house prices collapse? A historical precedent:</div> <bR> <div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >"The depression-era drop in U.S. housing prices </FONT><B>wiped out the </B><I><B>total gain</B></I><B> during the inflationary boom</B><FONT SIZE="2" COLOR="#000000" FACE="Verdana" > dating back to World War I...</FONT></div> <bR> <div> "British data show a similar pattern in prices of private homes and farm land for the previous "Great Depression" that began in 1873. <FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>It too</B></FONT>,<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B> wiped out the whole inflationary gain during the preceding boom</B></FONT>. 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...</div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>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</B></FONT>" (James Dale Davidson & William Ress-Mogg, <I>The Great Reckoning</I>, (London: Sidgwick & Jackson, 1993), pp.403-404).</div> <bR> <div> If we say that the inflationary gains equals the doubling of house of house prices then values would have <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>to fall 50 per cent</B></FONT>.</div> <bR> <div> The first global housing bust will be severe as it also coincides with the restructuring of the global economy for the Information Age proper.</div> <bR> <div> 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<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B> to fall 80 per cent</B></FONT>. (The Dow Jones Industrial Average fell 89% from September 1929 to July 1932).</div> <bR> <div> 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 60 years from the beginning of the Computer Revolution (say, the UNIVAC 1 computer of 1951).</div> <bR> <div> <B>Australian 'Booms and Busts' and American Booms and Recessions</B></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> 'If the United States sneezes the rest of the world catches a cold'</div> <div>                                                                          - an old saying</div> <bR> <div> "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, <I>Australia in the Global Economy</I>, (Cambridge: CAP, 1999), p.85).</div> <bR> <div> 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:</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="697" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 16 ><NOBR><div> <B>Australian</B> <B>Economy</B></div> </NOBR></tD> <tD VALIGN=TOP COLSPAN=3 WIDTH="489"><div> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" ><B>American</B></FONT><B> Expansions</B> <FONT SIZE="2" COLOR="#000000" FACE="Verdana" >&</FONT><FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B> Contractions</B></FONT></div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="189"><div> <B>Boom 1920s</B></div> </tD> <tD VALIGN=TOP><NOBR><div> Jul 1924 - Oct 1926</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Oct 1926 - Nov 1927</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Nov 1927 - Aug 1929</div> </NOBR></tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="189"><div> <B>Bust 1930s</B></div> </tD> <tD VALIGN=TOP><NOBR><div> Aug 1929 - Mar 1933</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Mar 1933 - May 1937</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> May 1937 - Jun 1938</div> </NOBR></tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 ><NOBR><div> <B>Boom 1960s-1970s</B></div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Feb 1961 - Dec 1969</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Dec 1969 - Nov 1970</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Nov 1970 - Nov 1973</div> </NOBR></tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="189"><div> <B>Bust 1970s</B></div> </tD> <tD VALIGN=TOP><NOBR><div> Nov 1973 - Mar 1975</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Mar 1975 - Jan 1980</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Jan 1980 - Jul 1980</div> </NOBR></tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="189"><div> <B>Boom 1980s</B></div> </tD> <tD VALIGN=TOP><NOBR><div> Nov 1982 - Jul 1990</div> </NOBR></tD> <tD VALIGN=TOP COLSPAN=2 WIDTH="325"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="325" HSPACE="0" VSPACE="0"></tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="189"><div> <B>Bust 1990s</B></div> </tD> <tD VALIGN=TOP><NOBR><div> Jul 1990 - Mar 1991</div> </NOBR></tD> <tD VALIGN=TOP COLSPAN=2 WIDTH="325"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="16" ALIGN="bottom" WIDTH="325" HSPACE="0" VSPACE="0"></tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 ><NOBR><div> <B>Boom 1990s-2000s</B></div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Mar 1991 - Mar 2001</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Mar 2001 - Nov 2001</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> Nov 2001 - Dec 2007</div> </NOBR></tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 16 WIDTH="189"><div> <B>Bust 2000-2010s</B></div> </tD> <tD VALIGN=TOP WIDTH="161"><div> Dec 2007 - ????</div> </tD> <tD VALIGN=TOP><NOBR><div> ??? ??? - ??? ?????</div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> ??? ??? - ??? ?????</div> </NOBR></tD> </tR> </TABLE></div> <bR> <div> 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.</div> <bR> <div> 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.</div> <bR> <div> 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.</div> <bR> <div> 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.</div> <bR> <div> The structural change and economic dislocation in the 1970s was less severe than the 1930s.</div> <bR> <div> 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.</div> <bR> <div> This change will be aggravated by a major and serious turning in the <A HREF="id10_the_anglo_american_hegemonic_cycle.htm" TARGET="_top" TITLE="Britain and America">Anglo-American Hegemonic Cycle</A> 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.</div> <bR> <div> The following section looks at Australia in the 'booms and bust' from the chart above.</div> <bR> <div> The emphasis, where applicable, is on the second/last stage of boom, property boom, debt, trade, the stockmarket and impact of the 'bust'.</div> <bR> <div> Why the stockmarket emphasis?</div> <bR> <div> "Simply put,<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B> </B></FONT>the socionomic hypothesis is that social mood generates social events, not the other way around. This is why <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>the stock market </B></FONT>- the primary historical database of collective optimism and pessimism - <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>turns </B><I><B>before</B></I><B> pivot points in the economy and cultural expression</B></FONT>" (<I>How Can You Use the Tax Revolt Indicator? </I>elliottwave.com, June 27, 2007).</div> <bR> <div> 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.</div> <bR> <div> <B>Boom and Bust 1920s-1930s</B></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> "... Forget Crocodile Dundee and rugged individualism, the country was built by state governments"</div> <div> - The Economist, <I>Oz and the monarchy</I>, November 6, 1999, p.14</div> <bR> <div> "In the decade before 1930,<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B> borrowing</B></FONT>, mostly from Britain, amounted to £250,000,000, and after 1925 no year had a favourable balance of trade. <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Very few saw this imbalance as an ominous sign for the future</B></FONT>" (John Molony, p.244).</div> <bR> <div> <B>Boom and Bust 1960s-1970s</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>Sydney had never experienced a property boom on the scale of that between 1969 and 1974</B></FONT>. 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...</div> <bR> <div> "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).</div> <bR> <div> "<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>The 1972-1974 bear market proved to be the worst for Australia in this century</B></FONT>. The declines of the Great Depression were mitigated by the strength in Gold and other resource stocks" (Dr. Bryan Taylor, <I>The Global Financial Data Guide to Bull and Bear Markets</I>, globalfinancial data.com).</div> <bR> <div> <B>Boom and Bust 1980s-1990s</B></div> <bR> <div> "<FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" ><B>The housing and inner city office boom of the late 1980s was the precursor to Australia's most prolonged recession in over 50 years</B></FONT>..." (ACOSS, <I>More Affordable Housing</I>, acoss.org.au, October 2003, Paper 352, p.2).</div> <bR> <div> "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, <I>The Bold Riders</I>, (Sydney: Allen & Unwin, 1994), p.27).</div> <bR> <div> "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...</div> <bR> <div> "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).</div> <bR> <div> "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).</div> <bR> <div> "<FONT SIZE="2" COLOR="#FF0000" FACE="Verdana" ><B>A major reason for the sluggish recovery from the 1991 recession was the need for the corporate sector to unwind its high debt levels</B></FONT>. 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).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Property and borrowing boom of the 1980s</B></div> <bR> <div> Business credit as a %of GDP, 1982-2003</div> <bR> <div> <IMG SRC="0885afc0.png" border=0 width="346" height="252" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div> (Source: Simon, 2003 - (ACOSS, p.11)</div> <bR> <div> <B>Boom and Bust 1990s- 2000s</B></div> <bR> <div> To follow.</div> <bR> <div> <B>The Great Depression of the 1930s in Australia</B></div> <bR> <div> "Germany was easily the largest debtor nation, and in the period 1925-1929 she borrowed four times as much as <FONT SIZE="2" COLOR="#0000FF" FACE="Verdana" >Australia, the next largest debtor</FONT>" (C.B. Schedvin, <B>Australia and the Great Depression</B>, (Sydney, Sydney University Press, 1970), p.39).</div> <bR> <div> "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).</div> <bR> <div> "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).</div> <bR> <div> "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...</div> <bR> <div> "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].</div> <bR> <div> "... 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.</div> <bR> <div> "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.</div> <bR> <div> "... we will not be able, in a future debt crisis, to fight our way to solvency with such ruthless cuts in imports.</div> <bR> <div> "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, <I>Our extended Australian family: over-extended or third time lucky</I>, The Australian, March 2, 1990).</div> <bR> <div> 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, <I>Could this decade be the next 1930s? </I>gold-eagle.com, December 13, 2002).</div> <bR> <div> The Australian sharemarket rose 196.1% from December 1916 to February 1929. It then fell 46.3% from February 1929 to August 1931.</div> <bR> <div> The sharemarket recovered its 1929 high in October 1934. (Brian Taylor, ibid.,).</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <A HREF="id99_m.htm" TITLE="Australian Property Crash">Top of Page</A>                       <A HREF="index.htm" TARGET="_top" TITLE="Future Watch">Home Page</A></div> <bR> </td> </tr></table></body>