Australia avoided recession in 2009, and the “remarkably resilient” economy looks set to grow by 2.5% this year, says the IMF. But there’s still some “unfinished business”, cautions Capital Economics. While most of the Western world is grappling with the fallout from burst housing and credit bubbles, Australia’s have kept inflating.
Australia has been lifted by its exposure to China’s stimulus. This bolstered demand for its commodity exports. A banking system that had avoided toxic paper helped too. So unlike in most countries, the fiscal stimulus went straight to consumers. It boosted disposable incomes by 4% in the year to 2009’s fourth quarter, says Gerard Minack of Morgan Stanley. A series of interest-rate cuts added another 5% (most mortgages are based on floating rates). The government also promoted spending by boosting the housing market through a rise in the subsidy for first-time homebuyers, enticing “Australians back into mortgage debt in droves”, says Steve Keen of the University of Western Sydney.
All this fended off a downturn, but leaves the housing market and the private sector looking ever more overextended. House prices have risen 15% to new records since early 2009 and the ratio of prices to earnings is 40% above the long-term average. Houses in major cities are “severely unaffordable”, according to Demographia.
The private sector’s capacity to take on more debt “is virtually exhausted”, says Keen. Household debt is now at 100% of GDP or 160% of disposable income; the latter figure is higher than America’s. The private sector had actually started to shed debt in 2008 before being encouraged to take on more mortgages. Australia has taken the “‘hair of the dog’ approach to a debt hangover”, but that can’t work forever.
Now cracks are appearing as interest rates rise. Fujitsu Consulting believes that by December half of the 250,000 first-time buyers who entered the market in the past 18 months will have trouble meeting payments. “This is eerily reminiscent of early-stage delinquencies” in US subprime in 2005, says Edward Chancellor in the FT. “The lucky country’s luck” may not last much longer.