Known for having predicted the global financial crisis precipitated by a popping of the US property bubble, Nouriel Roubini has now issued more warnings about something similar happening in Australia. In particular, he openly criticised the poor timing of the dogmatic neoliberal imposition of harsh austerity measures on the economy by the Abbott government:
Bottom line: Australia’s economy is one of the most vulnerable to a slowing China (which takes 37% of Australia’s exports) and … we expect terms of trade to suffer. Low interest rates are spurring housing, but the coal and metals mining boom is set to end over the next few years, despite the government’s scrapping of the mining tax.
Austerity is poorly timed, with a planned 1.6% of GDP of fiscal tightening over two years. GDP will fall below 2% in 2015, weakening the Australian dollar and persuading the Reserve Bank of Australia (RBA) to cut interest rates; outcomes that are out of consensus, despite continued softness in PMIs and leading indicators.
The housing boom is continuing unabated, and looks increasingly out of line with fundamentals, especially alongside PMIs for both manufacturing and services that are stuck below 50 (indicating contraction), and rising unemployment.
Quoted from Roubini Monitor, 8th October, 2014
Property prices in Australia keep rising, driven by investors, despite the fundamentals of the economy plummeting. The mineral boom is over and iron exports are sinking rapidly. Rising asset prices despite falling fundamentals represents the very definition of a bubble. The Abbott government has helped to push Australia closer to the recession it secretly craves for.
The RBA knows the economic fundamentals are worsening and wants to cut interest rates now, but finds itself unable to out of fear of exacerbating the real estate bubble. Just as fundamentals tank, the Australian Federal Government introduces a ill timed austerity policy, as part of its multipronged suicide strategy for Australia.
At some point, however, Australia’s 24 year recession free run must come to an end. The likely trigger for this is the end of the mining boom. It is hard to see how real estate prices would not also return to pre-mining boom levels.
Christopher Joye, in his blog for the Australian Financial Review even quotes an anonymous banking as saying that the RBA should increase interest rates:
The Reserve Bank should simply bite the bullet and lift interest rates by 25 basis points to send a shot across the bows of borrowers to remind them that the lowest home loan costs in history cannot stay with us forever
Joye was famously someone who had once vigorouslsy argued against the very existence of a property bubble, but has now dramatically changed sides to argue that the bubble poses one of the chief threats to the Australian economy. It is the same position taken by Lindsay David in Australia Boom to Bust:
In their books on economic crashes, Kindleberger and Aliber state that after periods where currencies are overvalued, as the Australian dollar has been for the last five to ten years, there often follows a swing towards undervaluation. This is often a precipitant of an economic crisis, as it will cut off the flow of liquidity to Australian banks that is the source of easy money for mortgages.
When real estate bubble bursts it often takes the banking system down with it. This contrasts to when stock market bubbles crash, since stock market speculators uncommonly take out large mortgages to invest.
In any case, stock market bubbles are often driven by technological innovations such as the nineteenth century railway and the recent dotcom bubble. After the stock market mania is over, the technology remains a growing source of social productivity. Not so the case with real estate which contributes little to productivity.
Roubini has also put out a statement anticipating that the Australian dollar will plunge around 20%, likely due to the end of US quantitative easing coinciding in a untimely manner with the rapid waning of the mining export boom with China importing less and less iron ore and coal.
Worse too is that Australia has done precious little to transition the economy towards a post-mining boom manufacturing and services driven model of productivity. Growth in real estate does relatively little towards increasing productivity and represents a dead end. Instead of stimulating the productivity index of the nation to prepare for the next phase of development, the Australian Abbott government has prematurely pushed a European styled neoliberal austerity programme onto the nation.
As Roubini states, the results of austerity combined with popping asset bubbles in the face of a rapidly falling Australian currency and mineral price could spell disaster for the nation. Australia could soon be following in the path of post-property bubble America, Japan, Spain and Ireland.