Wednesday’s national accounts release for the March quarter confirmed that Australia’s FIRE economy – Finance, Insurance and Rental, Hiring & Real Estate Services – continues to scorch the economy, increasing its share of the Australian economy to a record 11.4% (see next chart).
Since financial markets were first deregulated in the mid-1980s, the FIRE economy has grown at nearly twice the pace of the rest of the economy, sucking the life out of the productive sector:
The FIRE sector is loving life at the moment. Households are re-leveraging, as evident by the steady decline in the household savings rate over the past two-and-a-half years:
And the ratio of mortgage debt-to-GDP has risen to a new record high 90% of GDP:
The banks have also resumed borrowing offshore like drunken sailors, funding the huge balance sheet (read mortgage) expansion:
Indeed, gross external liabilities outstanding as at March 2015 hit a record $800 billion, a $94 billion increase over March 2014.
With that growth, the ratio of offshore borrowings to GDP is a whisker under the pre-GFC high:
And the net result is that Australian house prices have completely decoupled from rents as capital has flooded into non-productive housing:
Of course, a key ingredient behind the surge in credit growth, house prices, and the FIRE economy’s growing share has been the explosion of property investors, whose absolute size and share has risen inexorably over the past two decades, and exploded over the past two years, of course assisted by Australia’s peculiar tax laws (e.g. negative gearing and CGT concessions):
Meanwhile, businesses continue to gasp for air, with the proportion of lending going to businesses falling to record lows:
And with overall housing credit growth still expanding at 7.2% in the year to April 2015 – much faster than nominal GDP (1.2%) – the FIRE economy is set to continue pushing to new highs, taking Australian risk straight back to GFC levels, but this time with a failing Budget and less interest rate cuts still in the chamber.
