Reinflating Australia’s housing bubble

Melbourne © iStockphotos
House prices in Melbourne have slipped by 12% in a year

Australia’s voters were “too scared to rock the country’s economic boat”, says Clara Ferreira Marques on Breakingviews. Australia’s centre-right prime minister, Scott Morrison, scored a shock victory in last weekend’s general election, defying polls that had given the opposition Labor party a clear lead. Labor wanted to remove tax breaks and increase spending. Voters opted for Morrison’s promise of tax cuts instead.

The country’s benchmark S&P/ASX 200 rallied 1.7% on news of Morrison’s surprise victory to hit an 11-year high, but investors shouldn’t get ahead of themselves. There seems little scope for a surge in growth.

Australia dodged the global financial crisis and has gone 27 years without a recession, but the economy has started to wobble. In the first quarter, the annual pace of GDP growth was a mere 1.3%; the long-term average is around 3%. GDP only grew by 0.2% in the final quarter of last year and has shrunk on a per-capita basis for two successive quarters. The US-China trade war has undermined confidence in China’s growth prospects, which bodes ill for Australia’s coal and iron-ore exports. When China’s credit boom slowed in 2014 the Reserve Bank of Australia stepped in to cut interest rates, says The Economist. But that only pumped up a housing and credit bubble. Australian household debt stands at 200% of disposable income. (America’s 2007 household debt peak was 125% of income.) That bubble is now hissing air. House prices in Sydney are down 11.8% in the 12 months to April, says

The Sydney Morning Herald, while those in Melbourne registered a 12.6% decline over the same period. The number of house sales has fallen 20% in a year to its lowest level since 1996, says George Tharenou of UBS. Along with sluggish wage growth, the housing slowdown is proving a “key factor” in “souring consumer sentiment”, notes Chelsea Bruce-Lockhart in the Financial Times. That hardly bodes well for consumption.

A last gasp?

Given the inauspicious backdrop, perhaps it’s no surprise that the authorities are contemplating reinflating the housing bubble. The minutes of the last central bank meeting said a cut in interest rates would be appropriate if the labour market did not improve, and there is also talk of letting banks relax their mortgage lending requirements (tougher rules in this area had reduced demand).

As consumers have already gorged on debt and mortgages, it’s hard to see this moving the needle; in any case, as we learnt during the financial crisis in America and Britain, housing busts tend to develop their own momentum regardless of rate cuts. Australia seems ever more unlikely to extend its growth streak much further.