Trends to Watch In Australia – We Could Soon Be Dragged Into the Global Recession

Living in the USA as an Australian has been a very unique experience. I have been able to watch the global financial crises ‘from the inside’ while knowing that my home country has so far escaped the worst of it. There seems to be a certain level of smugness emanating from the Land Down Under. Somehow Australians were more clever; our banks didn’t collapse and our Government’s response to the crises was supposedly very effective. I however, think that Australia has just been darn lucky up until now and I don’t think ‘the lucky country’ (as we like to call it) will avoid this Global Recession.

There are two large systemic risks which I believe could drag Australia into the recession which has been impacting the rest of the world for the last couple of years. The first of those risks is the deflating of the Australian property bubble. The second, the collapse of exports to China. I have been keeping a very close eye on both of these trends as I consider that they will have the largest impact on how Australia weathers this global storm.

Australian Housing Bubble

While most industrialised nations have watched their housing prices plummet, Australian property prices are still heading into the stratosphere. Last October I wrote a post about the looming Australian housing bubble. Since then, all the risks I identified have only increased. Housing is now even more unaffordable, individuals (especially first home buyers) are in more debt and interest rates have continued to rise.

There are starting to be more articles in the news confirming my suspicions that the housing market is overheating. Today’s news is particularly interesting because for the first time ever, the Governor of the Reserve Bank of Australia has gone on commercial television to warn of the risk. To my mind, this is big news.

THE nation’s top central banker has taken the unprecedented step of being interviewed on commercial television, in doing so warning property buyers not to borrow too much. Some analysts have interpreted the unusual appearance as indicating that the Reserve Bank is concerned that the property market may become overheated.

 In the first of a series of excerpts from the interview, being broadcast on Sunrise this week, Mr Stevens cautioned against property investment as a “riskless” path to riches.“I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is to be leveraged up into property,” he said.

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Most pundits who believe that housing prices will just keep growing say that the demand from new immigrants is what will keep prices rising into the future. The Australian population has been growing at roughly double the rate of other industrialised nations however just recently there have been more vocal discussions about whether all this immigration is a good thing for Australia. If this movement gains traction, this could have an impact on the future of housing prices.

Kevin Rudd has made it clear that he believes in a big Australia. In a recent speech he declared that migration was “good for our national security, good for our long-term prosperity, good in enhancing our role in the region and the world”.

But the Federal Opposition and the Greens said questions needed to be asked about Australia’s immigration plans. Opposition immigration spokesman, Scott Morrison, told the ABC there should be an inquiry into how many people the nation can support. “It’s about what the carrying capacity is,” he said.  “We need to get that perspective from regional areas as well as metropolitan areas, where issues of congestion and housing affordability are major problems as well as public transport.

Greens Leader Bob Brown said there should be an independent national inquiry into Australia’s population target. “So that politicians do have an idea of the carrying capacity of this country, its infrastructure, its ability to deal with those quite worrying projections of 35 million people by 2050,” he said.   “We’ve got to do better than just say well let it happen.”

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Collapse of exports to China

Australia is heavily reliant on trade with China and China’s seemingly miracle growth of the last decade has certainly been good for the Australian economy. While most of our other trading partners have been impacted by the global recession, Australia has been mostly coasting along on China’s coat tails.

However, all is not as it seems in China. A debt-fueled credit bubble has been responsible for enormous investment in infrastructure and now entire cities still remain empty. This is a huge trend to watch, as the outcomes of this will not just affect Australian exports, but could reverberate around the world.

FITCH Ratings warned that banks in China face the greatest “bubble risk” of any Asian country, one day after it downgraded two mid-sized Chinese banks due to the rising threat of bad credit.

The agency’s comments in an Asia-wide assessment of the banking sector come as concerns mount that Chinese banks may be headed for trouble over bad debt after a record lending spree last year.

“The agency views ‘bubble risk’ as greatest for Chinese banks given their 32 percent loan growth in 2009; this looks likely to be followed by a further 20 percent in 2010,” Fitch said in a statement.”Credit growth of more than 50 percent over a two-year period in an economy where bank credit is already quite large relative to gross domestic product almost inevitably involves some misallocation of credit,” it added.

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Prospects For the Lucky Country

Yes…Australia has been lucky to escape the worst of the Financial Crises until now, but that luck might not last. There are a couple of large, systemic risks which if realised could quickly drag Australia into a recession the magnitude of which we haven’t experienced in our lifetime. Trust me…sitting here in California, it’s not pretty.

We have been given this opportunity to get our ducks in a row (so to speak). These couple of years could have been put to good use in preparation for what is coming. Now is the time to make sure you have emergency funds in place in case of job loss, get out of debt as much as possible and generally get prepared to hunker down through some hard times.

Photo by Garry – www.visionandimagination.com

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5 comments

  1. This all sounds very familiar. We lived in South Florida until 2005. When we left there, housing was still going up in prices, condos, high rises, shopping malls were being built on every inch of land that could be found, and you could find a job in a day or two. During all of this, the midwest had already begun to feel the reality of job loss, home price slumps, etc. Then in 2006, 2007 the bottom fell out for Florida too.

  2. Hi,

    I have to say I have been, and am still, very much of the wait and see variety when it comes to the economy over here in Aus.

    I absolutely agree that the stability of our export markets to this point are the biggest contributor to our current lack of pain. Aus has definitely been no more than lucky thus far. Anyone who things we have earned the right to be smug really doesn’t understand that all it is going to take for us to be in real trouble is for the manufacturing companies in Asia to say “sorry, we don’t need your materials cause our products aren’t selling”. This country that used to make the bulk of it’s money from “the sheep’s back” is now totally dependant on other countries to buy our resources.. and as we no longer have very much of a manufacturing industry ourselves we don’t have the capacity to turn inhouse and value add. It’s a precarious place to be for sure.

    I have to say what I am seeing in the housing market also has me concerned. It just keeps going up and up, to make things worse the rental market is uber tight as well. I actually thing the rental market is pushing people into the real estate market that generally would choose to wait longer, of course all those government handouts to first home buyers didn’t do anything to help the situation. I really don’t want to see the carnage when this bubble bursts, too many people over here are buying the government’s “see we fixed it” line and many many young families and other financially vulnerable people are going to get hurt very badly.

    Kind Regards
    Belinda

  3. Mmmmm, I agree with you and Belinda, and I’m quite stressed about it. The forecast for housing interest rates rises in the next 18 months are going to see a lot of families who did OK up until now, really go to the wall. And what stresses me about the resources ‘boom’ is the rate at which we are quietly selling up our mines and lucrative farms (cotton etc) to Chinese businesses – when they own it all we won’t be making any money from exporting it any more and I think that will be a lot sooner than most people realise… Cheery thought!

    Cheers,
    Julie

  4. I have to say the whole selling Aus land and resources to overseas interests has always concerned me. My concern really kicked into high gear when I heard the extent of our farming land and water rights being sold to non Aus but I have to say the last straw for me was last year’s Gas Deal. That one really just convinced me that the government is either ignorant or negligent… and I seriously doubt ignorance is the cause.

    Kind Regards
    Belinda

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