The financial sector in Australia is a very large part of our equity market. I once read that we are second only to Spain in this respect. The interconnectivity between the banks, their lending practices, the housing market and peoples superannuation savings is consequently bigger than other places in the world so we remain susceptible to any turmoil that may arise in the financial sector IMO. Personally I think it is important for the RBA to send a strong signal to the speculators in the property markets that the jig is up (ie hold rates steady) no matter how much collateral damage that might cause the economy in the short term. We need to restore the concept that savings not debt make people and nations rich. So far we have been able to withstand the shocks because fortunately for us the GFC arrived smack bang in the middle of the China boom and we still have the advantage of having interest rates levers at our disposal. In the end the degree of fluctuation in a countries interest rates (irrespective of external drivers) comes down to its political, social, economic and financial system stability and those are the things that determine the risk ascribed to the debt it issues. I have read books by economists that say the only way to achieve real growth is through productivity improvements and innovation. As far as productivity I suppose it's hard thing to measure but from a casual observers perspective Australians seem to be hard working (although the two things aren't necessarily the same). I come from Perth and we have the Swan River which is dotted with yacht clubs housing leisure craft big and small. The thing though is if you drive along the river on week days you'll be very lucky to see even one person out on the water enjoying their boat. I think this is testimony to the work ethic that people in WA have, I'm not sure about other states. So we seem to be at work but whether we are being productive I don't know for sure. You've only got to go on a holiday to Greece to know why they are in so much trouble. Italy is another story. People there are hard working and innovative but the institutions are archaic and nepotistic and dominated by old people. The young are not given a chance to thrive and bring with them fresh and new ways of doing things more suited to the workings of modern economies that need to be far more adaptable.
In terms of Australia and innovation I worry because although we have a subclass of highly educated and innovative people in our learning institutions the innovation doesn't extend widely into the broader economy. Our obsession with middle class welfare through housing tax breaks drains investment and economic endeavour away from where it is most needed. Where we invest outside of housing we actually have a lot of innovation as far as I can see. The energy and mining industries are testament to our abilities to deliver for the economy.
The only benefit I can see from the overinvestment in housing is that the houses we have built still represent the fruits of our labour and some form of wealth (our assets). The problem comes if those assets are exposed due to rapidly rising interest rates and widespread overleveraged. Houses that remain unoccupied because people can't afford to live in them become a burden on society as was the case in the US during the GFC. I think there is some danger in Australia due to this overconcentration of investment in the housing sector so we need to correct it. Will our government (whoever it maybe) provide policies that can change the direction of our endeavours? Frankly I haven't heard anyone talk about a real plan for the Australia of the future (post the mining boom, post the housing boom). I don't think there is one and that's a little worrying.
