“Australia’s gravity-defying economy is finally showing signs of bending toward the laws of physics,” says Clara Ferreira Marques on Breakingviews. After managing to dodge a recession for almost three decades, the economy only grew by 0.3% in the last quarter, taking year-on-year growth down to 2.3%. As the population is expanding rapidly, however, GDP-per-head has shrunk for two successive quarters, the first time this has happened in a decade.
Australia’s property bubble began to deflate last year. In the five years leading up to 2017, house prices increased by 50%. Prices in two of the most overvalued markets, Melbourne and Sydney, have now dropped by 7.4% and 12.4% respectively since the 2017 peak. Meanwhile, the boom in mortgage lending increased Australia’s household debt from 45% of GDP in 1996 to an eye-watering 121% at the end of 2018. Consumers owe 200% of disposable income.
Australians have become “addicted to debt” in recent years, says Jason Murphy on news.com.au. “Now we’re trying to wean ourselves off it. The question is whether we can survive the withdrawal symptoms.”
What goes up comes down
The credit boom is now set to go into reverse. Households have no room left on their balance sheet for more debt, and are currently saving a mere 1% of disposable income. While unemployment is low, income growth has been subdued. House prices are on the slide now that the property market is returning to earth. All in all, then, the outlook for consumer confidence and household spending, which comprises 50% of GDP, is discouraging.
A study by Morgan Stanley, taking into account household debt, the cost of servicing it, and household assets, identified Australia as the economy “most at risk of household deleveraging”. Meanwhile, banks, who have been ordered by the government to tighten property lending standards, will be even less inclined to lend as the value of the assets they have lent billions against declines and threatens to dent their balance sheet. Shrinking credit in turn dampens overall activity, undermining consumer confidence further.
This downward spiral will quicken if there is a shock such as a sharp slowdown in China or globally. What’s more, interest rates are at an all-time low of 1.5%; as banks borrow heavily from abroad, where rates are rising, they will pass on the cost to their customers, further dampening credit. Expect the hiss of air escaping from the Australian property and credit bubble to grow louder.