CANBERRA OBSERVED: by News WeeklyNews Weekly
Foreign debt binge threatens economy
, April 19, 2003
If Australia's prudential regulators and officials needed a good reality check they should take a visit to picturesque Hobart.
Just like every other Australian capital city Hobart is enjoying its own mini housing boom, though not quite on the scale of Sydney, Brisbane and Melbourne, with house prices rising about 10 per cent last year, following an eight per cent rise in the previous year.
What is this based on?
Has there been a large influx of skilled workers and migrants to Tasmania? Unfortunately, no. Has there been a massive increase in private investment to the state? No again. Has the state's eight per cent plus unemployment rate suddenly evaporated? Definitely not.
The stark truth is Tasmania continues to see population drift across Bass Strait, especially of its talented youth, and not enough babies to replace the older Tasmanians it buries each year.Underperforming
Compared with the rest of the country, Tasmania has a seriously under-performing economy. Even the Federal Labor Party has decided to break with tradition and is not holding its biennial conference there this year.
In outer Hobart there are many vacant houses in a city that sits on a harbour which could accommodate a population 10 or 20 times its present 195,000 people.
In short, Tasmania's housing boom has nothing to do with supply and demand, but is a mirage based on lax money, careless lending by the banks, and a belief that the next person to take the parcel will pay more than the present owner.
It is a microcosm for the rest of the country which has seen spectacular growth in housing assets in a country living way beyond its means. There is in fact a kind of conspiracy by Australia's politicians, financial institutions and financial regulators, especially the Reserve Bank, to keep this illusion going.
The Reserve Bank has belatedly begun warnings about householder debt, but this seems more to cover itself rather than taking decisive early action to head off a bust.
Certainly no politician wants to be the one to prick the housing bubble, and the Howard Government has helped exacerbate the problem through its ill-conceived first home owners' grants.
The housing boom is supported not through Australian savings but from borrowings overseas which have now reached almost 75 per cent of Gross Domestic Product.
Through the 1970s and early 1980s (pre-deregulation) gross foreign debt was less than 15 per cent of GDP, but increased rapidly after 1981 to 1987 from 13 to 45 per cent of GDP.
There was a steady rise to 61 per cent of GDP to 1999, followed by the latest crazy rise in overseas borrowings to its current rate of 75 per cent of GDP.
Putting it another way our gross foreign debt is 3.4 times the value of exports of all our gas, iron ore, wool, gold and other products. Or, in even more basic terms, foreign debt per capita was $600 for each Australian man, woman and child in 1981. As of June 2002 it was $16,800 for each of the same.
Without raking over the tired 1990s economic argument that foreign debt should not be a problem provided it is owed to foreign banks by private companies and individuals and not governments, there are some deeply disturbing aspects of Australia's borrowing binge.
A very large percentage of foreign debt has simply gone into housing and consumption rather than productive investment. Sure housing employs bricklayers, tilers and carpenters in the immediate term, but in the long term no economy can be based purely on housing.
Secondly, household debt has jumped from about 56 per cent of household income to 125 per cent of household income in less than a decade as borrowers dip into their equity to pay for holidays, school fees, dental bills and - yes even more houses and flats.
Thirdly, in an unregulated banking environment, banks have opted to borrow more than half of their portfolios in short-term borrowings - alarmingly 40 per cent in 90-day loans.
This hot money was the cause of the problems for Mexico, South Korea and Indonesia in the 1990s when overseas borrowers suddenly got nervous and wanted their money back pronto.
All it would take would be for another international financial crisis and a concern about the sustainability of Australia's economy and we would be in serious financial meltdown.
The decade-long continual growth in the Australian economy has been based on one simple premise: that overseas lenders have seen fit to lend us money because they believe we have the capacity to pay it back with regular interest.
If interest rates rise or Australia's economy takes a nose dive a big dent will hit that belief after which Australia's house of cards could well collapse.