look out below...................[This is the print version of...

look out below...................

[This is the print version of story http://www.abc.net.au/insidebusiness/content/2007/s2288984.htm]


ALAN KOHLER, PRESENTER: At the heart of the credit crunch has been some woefully unsustainable lending practices that have caused a savage fall in house prices in the US and the UK.

So is it just a matter of time before we tumble down the same dangerous path?

I spoke to an astute thinker on the subject, chief investment strategist at HFA Asset Management, Jonathan Pain.

Jonathan you've called your report this week the beginning of a new era; what new era are you saying we're beginning?

JONATHAN PAIN, EXECUTIVE DIRECTOR: We believe that in fact in the years ahead the global economy could be facing a number of very, very significant headwinds indeed. In particular the credit crisis and the ever growing credit crunch will manifest itself in a number of ways around the world - first and foremost obviously US house prices falling the greatest amount since the great depression. We've seen house prices falling very, very sharply indeed in United Kingdom...

ALAN KOHLER: And do you think house prices in Australia will fall as well?

JONATHAN PAIN: Well in fact I do, very sadly. I think we could see a 20 to 25 per cent decline in residential house prices here in Australia over the next several years.

ALAN KOHLER: And what effect do you think that will that have on the Australian economy?

JONATHAN PAIN: Well clearly, obviously the outlook for discretionary spending here in Australia will remain soft, consumer confidence I believe is currently at a 16-year low. I mean the reality check for us here in Australian, notwithstanding that we are of course the lucky country with more beach per person than any other nation on earth, is that of course we have similarly seen an extraordinary rise in house prices. In actual fact, our house prices have risen more than they have done in Britain and the United States of America.

And we here in Australia very, very sadly have also turned our homes into glorified bank ATMs, and hence as a consequence of that household debt in Australia now is at an all time record high as in absolute terms and as a multiple of income.

If you look in fact at house prices in Australia over the last 80 years on an inflation adjusted basis, we are currently approximately 30 per cent above that 80 year trend line. So in actual fact for us just to get back to the trend line we would need to decline by 30 per cent so a 20 to 25 per cent decline is possibly quite conservative.

Our economic future is increasingly underwritten by the rise of Asia...

ALAN KOHLER: Well in fact it will make a huge difference won't it? It is the big difference between Australia and the US and the UK isn't it?

JONATHAN PAIN: Oh very much so. I mean we obviously are a massive beneficiary of what is happening within Asia. And I mean the reality there is of course is that we have witnessed over three-billion Asians having embarked upon the path of economic development. But we must accept the reality that our housing market is obscenely expensive. And in any kind of valuation framework our house prices are massively overpriced and therefore very sadly I believe that residential house prices could fall very meaningfully over the next several years.

ALAN KOHLER: You've also said that the era of cheap energy is behind us as well so what impact will that have?

JONATHAN PAIN: Well a very significant one. I think it was enough of a problem for the world to have to deal with the worst housing crisis in the United States since the great depression, the sub-prime mortgage debacle and the credit crunch that flowed from that.

We now have to accept the - excuse the pun - the crude reality that oil prices are going to remain high for much longer than most had anticipated. Let's once and for all acknowledge that we are at or close to the peak in oil production.

Let us also acknowledge what is driving and underwriting the rise in crude oil prices. It is quite clearly the motorisation of the two most populous nations in the world. Less than five per cent of the Chinese population own a motor car; less than two per cent of the Indian population own a motor car. So once we're through this energy crisis the world will actually probably be a better place. It'll certainly be a cleaner place in much of the developed world. But we must accept the reality of the extraordinary macroeconomic headwinds that face us at the present time.

ALAN KOHLER: Thanks for joining us Jonathan.

JONATHAN PAIN: No thank you.