The FIRE that is Australia’s Finance, Insurance and Rental, Hiring & Real Estate Services has just gotten a little bit bigger, now matching the towering inferno reached just prior to the Global Financial Crisis.
This week’s national accounts data for the December quarter, released by the Australian Bureau of Statistics (ABS), showed the FIRE sectors’ share of the Australian economy rising to an equal record high of 10.8% of GDP (see next chart):
And since financial markets were first deregulated in the mid-1980s, the FIRE sectors have grown at nearly twice the pace of the rest of the economy (see next chart).
It is no coincidence that Australian house prices decoupled from rents at roughly the same time as the FIRE sectors’ growth decoupled from the rest of the economy, as the deregulation of the financial sector ignited credit growth, most of which has been channeled into housing (see next chart).
Or that Australia’s housing obsession is starving productive sectors of the economy, with housing’s total share of lending hitting a record high in January, just as business’ share hit a record low (see next chart).
Like Frankenstein’s monster, the financial sector, which once acted merely as an enabler of the productive economy, is now pulling its master’s strings.
As noted previously, Australia’s unique mix of tax concessions, such as negative gearing, and the constipated supply system are at the heart of the problem. The former has increased the relative attractiveness of housing investment, boosting demand, whereas the latter has materially dampened the supply response. The end result is too much of the nation’s capital tied-up in housing, which has chocked-off productive areas of the economy.
One can only wonder how Australia would look if the billions of dollars of excess capital that had been poured into pre-existing housing had instead been funneled into businesses and infrastructure, as occurs in places like Germany. Instead, Australia has been left with non-mining companies that are struggling to compete and an infrastructure deficit that former Treasury secretary, Ken Henry, claims is hindering Australia’s ability to provide goods to Asia.
