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a deflating housing bubble means.... « Previous | |Next »
July 4, 2005

Ross Gittens mentioned this a while ago in terms of the consequences of falling house prices. His scenario was built around big problems from rapidly falling housing prices. That looked unlikely because the housing boom was ending with a whimper--running out of puff--- rather than a bang--- being choked off by a steep rise in interest rates, which precipitated a serious recession in 1991.

Gittens highlights the heavy dependence of the Australian economy on housing. We can imagine the negative scenario happening in a more complex fashion.

The Age carries a story that Australians will see their wealth decline for the first time since the last recession of 1991. The argument is that, as housing prices fall, we are entering a period where declining household wealth will play a significant and ongoing drag on growth.

A drag on economic growth means increasing unemployment and that means reduced household income. That means reduced ability to pay off household debt, which has arisen from a decade-long debt binge, fuelled by low interest rates and doubling house prices.

It is not just the slow deflation of the massive bubble in house prices. Households have been extracting large amounts of equity from their homes to maintain their high levels of consumer spending relative to their after-tax incomes. So a deflation of the housing bubble would also have an indirect negative impact on consumer spending.

Secondly, the household sector is now much more exposed to economic shocks than 1991. Households are now more sensitive to higher interest rates and to increases in unemployment; they have to make more provision for superannuation and health; and the elimination of unfair dismissal laws for firms with fewer than 100 employees means that it is much easier for employers to shed workers to protect profits from weak consumer demand due to lower economic growth.

Matt Wade observes in the Sydney Morning Herald:

Australia has not yet fully road-tested this new financial scenario, where households are more responsible for retirement incomes, have an unprecedented burden of debt and fewer employment protections. Because the financial risk borne by households has risen sharply since the last recession in 1990-91, we have moved into uncharted financial waters. No one really knows how households, and the whole economy, will cope when the next big financial crisis arrives.

As the International Monetary Fund said in its recent review of global economic stability, the household sector "has increasingly and more directly become the shock absorbers of last resort in the financial system".

And we have not even mentioned the trade deficit and the failure of the exports of coal and iron ore to cut back the deficit. Exports are increasing, but so are imports. That vulnerability should have Treasury worried.

| Posted by Gary Sauer-Thompson at 10:56 AM | | Comments (4)


Which is why there is a gathering backlash against the Howard IR changes.

People are now getting scared about how they are going to pay for their excesses, excesses which government policy has encouraged.

The last thing they want is the additional insecurity of being able to be terminated with no comeback. Or to have to negotiate alone with their employer, knowing that in the end they can't afford to not have that income stream.

I can feel a mammoth hangover coming on.

Don Edgar in The Age takes your point about households now being at risk a bit further. He says:

What is likely to happen now, in the new industrial relations world, is a strike of families, not a strike of unions.

Individual workplace agreements are a threat if individuals lack bargaining power, not if they can sell their labour to employers who are more responsive to their family responsibilities.
He then puts the reaction to the nasty employers, who will use the new IR legislation to bully workers into accepting job conditions that ignore their rights and needs, quite well. Unfair dismissal is, now seen as the most basic threat to family viability.

Edgar says:

They [the workers] will not accept working conditions that undermine their ability to raise children, lead a balanced life, meet their caring responsibilities to even older parents. They will shop around, as will young people coming out of training or advanced education wanting a more balanced life than their parents have had, for the ethic of individualism leads to a pursuit of self-exploration and life satisfaction, not simply a big pay packet; a search for meaning, not just affluence. And the signs are there that this combined new demographic force - caring women, older down-shifters, young life-aspirants - will refuse to work for employers who ignore the family and community needs of their employees.

Edgar argues that big changes are on the way, as the battle has now shifted ground away from industry-wide awards to a battle between employers and their workers' families.

This is new political territory.

That's the whole crux - how many people feel at all comfortable in negotiating with their employers? Especially among the lowest paid workers?

So much for us all feeling relaxed and comfortable.

Michael Costello, in a column in The Australian last week, maps some of the politics of the new political landscape that supports your account. He says:

There is a real strategic political danger that Howard's industrial relations proposals could undermine the central message he gave to Australians in the lead-up to the 1996 election when he said he wanted Australians to be "relaxed and comfortable". And his potent message at the 2004 election was "trust me" - that is: I am the steady, reliable hand who will bring security from our enemies, and stability and security to your personal and economic life.

Howard's industrial relations proposals threaten the relaxation, comfort and security of millions of employees and have every chance of endangering the trust people have in him. If this is how things play out, industrial relations may paradoxically turn out not to be Howard's holy grail, but his poisoned chalice.
Maybe. The reforms opens up possibilities of unsettling the blue collar voters who decampe to Howard in 1996.

Whether these possibilities develop into Howard's poisoned chalice largely depends on the ALP.