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July 04, 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.
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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.