At the Urban Development Institute of Australia conference yesterday, the man most singularly responsible for Australia’s bubble economy, Peter Costello, warned that time is up as interest rates rise:
If money is more expensive, asset prices must fall. Not all prices in every situation but overall they must fall.
It’s going to be slow and it could be painful and the question is will it be a hard landing or a soft landing but it’s going to be a landing.
…Because we made money so cheap. And we made money cheap because we wanted them [households] to borrow, that was the whole idea…We wanted them to borrow so they’d get the economy moving.
The problem is now that you’ve borrowed so much, how do you normalise?
There is only one problem with this outlook. The cash rate is going fall not rise. Though it must be acknowledged that banks might edge up mortgage rates. That said, I still think the bust will come with the next external shock.
Aside from that, what you do to prick the bubble and get on with life is the reverse of what Peter Costello did:
- unwind his negative gearing and capital gains tax concessions;
- don’t engage in any more demand-side stimulus;
- cut immigration to levels that allows the housing demand/supply balance to correct;
- unwind Costello’s structural deficits in middle class welfare, and
- launch massive productivity reforms plus work towards rebuilding Australia’s tradable economy.
In short, whatever Bubbles Costello says, do the opposite.
