The government added fuel to the fire but is not willing to douse the flames.
Pascoe: Housing bubble gets dangerous... 2 September 2003 8:00:00 AM by Michael Pascoe
The combination of today’s June quarter GDP figures and yesterday’s housing approvals and corporate profit figures underlines why Australia should (but won’t) take the apparently-contradictory policy prescription of sharp fiscal stimulus plus an interest-rate rise.
While the big companies reporting results to the Australian Stock Exchange have been telling good stories of profit growth, the overall corporate sector fell. The stock market doesn’t reflect our overall economy, especially the impact of the continuing drought. The 6.9-percent fall in profits in the latest quarter is not nice.
The June quarter GDP figures out this morning are expected to be flat at best and quite possibly negative, showing that the economy remains a captive of the weather and sluggish international growth.
And while that has been happening, the housing bug has continued to bite hard. Yesterday’s housing approvals figures showed the speculators and developers are still hard at it, with a sharp jump in building approvals, particularly in the unit and townhouse sector.
The housing boom has been good for the economy, keeping the ball rolling when the rest of the world was dead, but now it has reached the point of becoming dangerous.
The surge of real estate investor interest shows no sign of easing, despite the pitifully-low yields now being earned on investment properties. It will take a lift in interest rates to knock the bubble on the head before it gets even sillier.
As I have written before, though, the rest of the economy doesn’t need dampening, so a tightening of monetary policy to cool the landlords needs to be matched by a surge in fiscal stimulus — the Federal Government needs to open its wallet and go into deficit instead of pussy-footing around the pretence of a small surplus.
Unlike the individual consumer, business overall is not carrying much debt. Lifting interest rates one percentage point wouldn’t do much to the corporate sector, but it certainly would be felt by the 100-percent-geared unit owner.
But such co-ordination between the Reserve Bank and Treasury is most unlikely to occur. Politically, the Howard Government is at a low ebb. The cynical excesses and indulgences that mark a ‘ripe’ government become increasingly common. At the most cynical level, this government wouldn’t want to be seen as having any hand in pricking the real estate bubble, despite its lip service to being concerned about first home buyers.
So the RBA’s hands are tied on monetary policy by the still uncertain state of the global economy and the drought. Interest rates stay where they are, keeping the music playing for the housing investment game.
The most promising thing RBA board members can consider at their meeting today is that there are increasing signs that maybe the stock market is right, that there is a lift in global growth. Some of it is fragile and in Europe’s case it’s very early days, but the possibility exists that the international economy is on the mend.
If that’s the case, watch those interest rates jump in the New Year.
