You can hear the gunning of an engine in the distance. And it’s rapidly turning from an approaching whine to an extant roar. It’s the politco-housing complex and, like some blood thirsty Chevy from a Stephen King novel – panels beaten, paint fading, upholstery thread bare, demonic grin forged in its grill – it’s coming for us all!
The monster truly has no idea what it is doing, not the slightest conception that it is done. It was designed to rev and rev is what it will do, through our media, politics and economics fraternity. And nothing, not even the end of the road, an approaching brick wall, behind which is a bottomless cliff, will stop it.
That’s how it feels this morning when I read this from the national broadcaster (or any number of other sources):
New figures show big sections of Australia that are unaffected by the mining boom are effectively going backwards.
…Right at the heart of the economic weakness is the construction of new houses, or lack thereof.
“We are seeing that certainly the eastern seaboard is finding conditions very, very difficult when it comes to the housing sector,” Mr Sebastian said.
“New South Wales in particular has seen the dwelling starts have been very, very weak. And it’s a similar story for the likes of Queensland as well.”
The sting comes when you consider just how much the housing sector contributes to overall economic growth.
“You’ve just got to take into consideration when a new home is being built the amount of work that goes into it; the resources that are required; and then also in furnishing that new house, the tiling, the kitchens, the furniture, the floor coverings. And that all adds to retail activity,” Mr Sebastian said.
Stephen Koukoulas, the managing director of Market Economics, says the housing sector is a significant part of the economy.
“Housing is one where the cycle is very acute. So the weakness now is actually compounding the weakness we’re seeing in other parts of the economy, the services sector for example, education, tourism and manufacturing, where the strong dollar’s hurting them,” he said.
We have got the eastern and southern parts of Australia really struggling to grow. In fact some of them are probably in recession.
“So in a sense housing is one of the reasons why we’re having this economic under-performance right now.”
Mr Sebastian says Australians simply are not out there borrowing money to build homes.
Demand is in fact now just bouncing off 34-year lows.
“Property is a very attractive longer term investment, but I think potential homebuyers are still not committing to signing on the dotted line. And that’s going to take potentially another rate cut to try and inspire some confidence,” he said.
Is this supposed to be analysis? Why are Australians not borrowing money to build homes despite huge stimulus still being available? There are three reasons:
- falling house prices have pushed new home valuations below the price people have to pay for them. Would you buy such a house? Let alone the fact that banks will demand a larger deposit from you to make up the loan to valuation gap
- yes, folks don’t want to borrow, quite sensibly, especially for homes that are worth less than the price that they pay for them
- this is the unavoidable result of a correction in household borrowing that the nation has NO CHOICE but to make in the global new normal where debt comes at a price.
- the government is addicted to the politics of surpluses
- the RBA has been overly mean
- we have Dutch disease
- our banks are greedy
It is because, as a nation, we borrowed WAY too much in the past business cycle from offshore sources and stuck it in assets that do not produce national income without further borrowing. That is, housing. The borrowings were channeled through our banks. When the GFC arrived, these borrowings had to be guaranteed by the government. They still are, implicitly. Thus, for foreign creditors to keep rolling over the existing debt, the guarantee from the government must be credible, which means the Budget must be stable. That is, in surplus. This has been stated openly by the rating agencies.
Since the GFC, the banks have been able to wean themselves somewhat from the nation’s foreign debt addiction by borrowing closer to home in the form of more stable deposits. But if we borrow more, as the above economists want us to, then this will cease. Deposit growth will fall, and offshore borrowing will resume. This will lead inexorably to a rising risk profile for Australia and its banks. This has been stated openly by the ratings agencies.
The economy is in a trap. The way out is doing what every other economy on the face of the earth is currently doing, find demand that is outside the economy and pump it for all it’s worth. That, and increase productivity.
Everything else is just the revving of that dumb, undead engine.