An article published in the Australian newspaper today of a senior Treasury official warning of the house bubble in Australia has almost gone viral.
The comments stem from the preparation of the RedBook, a briefing for the incoming of the new government. Two months ago, in September, we published comments from the report rising concern about the level of debt Australian households were in and the significant economic risks it posed:
“Highly indebted households, together with high dwelling prices, further heighten the vulnerability of the economy to shocks. While household finances are in good shape overall, and arrears rates and other financial stress measures remain much lower than in the early 1990s, households are more exposed than previously to adverse shocks.”
It appears now the Australian has obtained emails under the Freedom of Information laws showing treasury was divided when preparing these reports and that many of the risks Australia face may be watered down. Steve Morling, the General Manager of the Domestic Economy Division wrote in an email that the report should make a bit more about the risks.
According to the Australian, Steve Morling wrote in an email reply on June 15th :
“The elephant in the room is house prices or more specifically the risk of a precipitous drop in them, perhaps from an external shock or perhaps from their own internal dynamics when affordability constraints or capacity debt levels see prices and expectations of house prices start to move in the opposite direction”
There appeared to be an exchange of emails debating what fundamentals, if any, were responsible for such high real estate prices and how Australia could have maintained a house price bubble in excess of 6 years, which Mr Morling replied with “(I) think price expectations can take over from the fundamental drivers that you have identified for extended periods, including generating house price falls”
These comments from the Treasury is going to make another bailout of the Australian property market by the government even more difficult this time around. If another first home buyers’ BOOST was to be announced in coming months due to the weakness in the housing market, currently worse than in 2008, strong questions would be raised why the labor government continues to load young Australians up with crippling mortgage debt for the sole purpose of preventing the unsustainable housing bubble from popping. Treasury Executive Minutes on the First Home Saver Account show that “The short term stimulus [BOOST] was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.” This time round, there is proof the government has been adequately briefed on the sustainability and consequences of skyrocketing debt.
» Treasury warning on home price ‘bubble’ – 20th November 2010.
It’s nice to see that treasury is considering the ‘fundamentals’ as opposed to the ‘sentiment’.
It is the sentiment that is driving house price growth (based on even higher capital gains), not the fundamentals.
It is a welcome relief to see someone at Treasury who really understands what is happening. Steve Morling is a hero in my book.
Will the government listen to them is the question? They seems to want to keep propping up the housing market with more ‘initiatives’. I suppose no one wants to be in government when the prices crash. They quickly take responsibility for the low interest rates so the average Jo will blame them when things go bad.
@MissMoneyPenny. I’m with you, they won’t listen. Only today, the Treasurer is urging Australians to take out loans with the credit unions, rather than the banks. Treasurer Swanny comments “Obviously the cash rate of the Reserve Bank is 4.75. The banks are charging around 7.8. There is a capacity to have competition to reduce that.”
He just ignores the white elephant in the room – debt and focuses on interest rates. Sadly it’s years too late anyway, Australia will be in a depression with in years.
The current Government and Treasurer Swanny could not manage a chook raffel ! As the market implodes they will continue to pump good money into stupid ideas to try and keep the house of card from falling over but its too late now to stop the correction that we had to have!