Well, this is an interesting topic. I'll do my best not to make this a rant, but will probably be unsuccessful.
Here in Mackay, we are experiencing a definite bursting of the bubble. The banks probably won't talk about it openly, but the end of the mining boom has left many properties worth less than the amount that the owners owe on them. Big incentive for the owners to declare bankruptcy and leave the bank with the fallout. Moranbah? We won't talk about that.
Can't help thinking that we are seeing the tip of an Australian iceberg similar to that which the rest of the world hit 8 or 10 years ago. Except that in our case, capital city prices are being held up for now by foreign buyers and low interest rates. If foreign cash dries up or domestic interest rates increase, look out below...
As a nation, we have squandered the spoils of the mining boom on extravagant spending at the expense of the future. By now, we could have been in a position to have weathered any economic downturn for quite a few years, but we find ourselves in a situation of deficit spending with little savings to back up our (bad spending) habits.
Both major parties point to each other as the cause of our situation, but in a democracy, we get the government we deserve. If the nation as a whole was looking to live within our means, the government would respond accordingly. We have ourselves to blame, and I am afraid we are going to learn the same lessons as Japan, the US and Europe, even though we have been warned by their experience. The greatest part of Australian debt is private, not government debt. However, another financial crisis could easily transfer the private debt to government via a bank bailout. And who is the government? We are a democracy, so it is you and me, and we will have to pay for it.
We were cushioned from the worst effects of the GFC by stimulus from China, which appears at least partially to be continuing, but distortions in the Chinese economy are surfacing, and the opaqueness of the Chinese situation makes the outlook uncertain. Continuing money printing in Japan and Europe is keeping the world economy from collapsing, but cannot continue forever. The world has to face up to a mountain of debt, and try to work out who is going to pay for it. Unfortunately for anyone who has saved money, a government which is facing a crisis has only one place to plunder. That is, from people who are not in debt. Take a look at what happened in Cyprus for an example of a "bail in" rather than a "bail out".
Think about the domino effect of a real crisis in the Australian real estate market:
Real estate market crashes (caused by increased interest rates or exodus of foreign buyers).
Home owners default on their loans.
Bad loans put banks in crisis.
Depositors look to extract deposits from banks en masse.
Banks in crisis cause government to bail out banks.
Government in crisis looks to savers (i.e those with money in the bank or superannuation) for cash to "save the nation".
So effectively, anyone with money in the bank bails out the bank's debtors.
Still think that money in the bank is as "safe as houses"? Maybe it is, but only because houses aren't safe either.
"That can't happen here", you say. Well, that is what they said in Iceland, Ireland, Italy, Spain, Greece etc in 2006/7. The governments of those countries may not have overtly stolen their citizen's (or foreigner's) cash, but they are trying their hardest to make it worthless by printing money to inflate the debt away. Either way, savers suffer.
To date, Australian governments have relied on the Reserve Bank to keep the situation stable. But the RBA is in a cleft stick. Lowering interest rates means exacerbating the housing bubble. Raising rates deflates the bubble, but causes the Australian dollar to increase in value making our industries uncompetitive with the rest of the world. The only other alternative would be to restrict lending for housing in some way, but this is unlikely to be electorally unpalatable.
So i'm afraid that there isn't a good solution to our situation, but to buckle up, enjoy the ride, and use our view of the universe to realise that this is only "small stuff".
Regards,
David.
