The fifth daily dispatch from BusinessSpectator correspondent Rob Burgess who is accompanying economist Steve Keen on his walk to Mount Kosciusko.
Surely, then, the Australian economy can enjoy strong house price growth for another 20 years before the housing market collapses?
No, says Dr Doom as more ointment is slapped on to his thigh – the US has historically been able to carry more debt than Australia, he says, because it has retained a broader manufacturing base than Australia’s ‘houses and holes in the ground’ economy.
Keen doesn’t believe that 7 per cent house price growth can continue much longer without triggering a mammoth ‘Minsky moment’ (as David Llewellyn-Smith discussed on Monday in relation to the dotcom bust) – the tipping point at which debts become too big to service on current incomes, leading to buyers leaving the market, prices falling, and finally a cascade of forced sales leaving Australia with an economy looking a little too much like the first instalment of the Mad Max movies. (Watch for a spike in muscle-cars and gun sales…)
Even without embracing this cataclysmic view, it’s clear that the growth in Australia’s stock of debt finance has failed to produce adequate housing infrastructure – recent reports suggest the affordability problem is getting worse, despite the Australian economy carrying four times the private debt per unit of output it had in 1990, in real terms.
Optimists argue that after a period of overheated growth in prices, the market will cool to reach a new equilibrium. Alan Kohler wrote on Friday, for instance “a plateau this year would hardly be surprising; in fact another 12 per cent rise [on the 2009 figure] in the national median house price in 2010 would be staggering”.