It is an indication of both John Howard’s complete dominance of federal politics and the strength of the current housing mania in Australia that one of the more loopy Prime Ministerial ideas of recent times barely earned a rebuke.
John Howard is encouraging the Menzies Foundation – the Liberal Party’s taxpayer-funded think-tank – to flesh out a proposal for young people who can’t afford a deposit on a home to go into partnership with the banks.
The idea is that young people would “go halves” with the bank and build equity together with one of the partners buying out the other some years down the track. Presumably, the same bank would also lend money for the mortgage.
When he was alive B.A. Santamaria would sagely refer to such proposals as “moonbeams from the larger lunacy”.
Such a scheme would result in a serious conflict of interest on the part of the banks which would inevitably encourage property to inflate even further, following the same catastrophic investment paths of the Japanese banks which are now almost all insolvent.
Strangely though, Howard’s idea was seen as “good politics”, and likely to give his battling state colleagues in opposition a boost in forthcoming elections in New South Wales and Victoria.
The Labor Opposition, lost in a morass of debate about fifty-fifty and safe seats for women, let Howard off the hook. So too did economists, stockbrokers, and otherwise sensible media commentators who hardly made a murmur.
Had the Labor Party put forward a similar idea when in government the business lobby and economists would have denounced it as not only naive but downright dangerous. But there is a coalition of forces, both political and economic at the moment, which is happy, if not desperate, to hear anything which will keep the current housing boom alive.
The reason is that the stakes are enormous. The Government has helped fuel the boom through its first home owner scheme and generous tax breaks on negative gearing; the Reserve Bank has also kept interest rates at artificially low levels for too long; the banks have been happy to engage in reckless lending to promote “investment” in apartment construction; while self-interested housing industry groups have participated in the name of creating “jobs”.
Rather than encourage borrowing in productive investment, the Government has negligently stood back and watched as the banks have quadrupled Australia’s foreign debt through borrowing for unproductive housing. For their part, ordinary Australians are also following the lead of their American cousins by borrowing against the inflated equity in their homes, to buy new cars, furniture and holidays.
For more than a year the Reserve Bank, whose charter it is to prevent inflation, has been trying to “talk down” the market without even a modicum of success. Yet it has resisted hiking interest rates because the fallout would be a recession.
Ordinary investors know the bank has been bluffing and have carried on borrowing regardless.
In fact, recent Australian Bureau of Statistics figures show the housing investment boom is actually accelerating. The Howard Government, for its part, knows too that it has a potential disaster on its hands when the party eventually stops, but it has placed enormous pressure on the central bank not to press the interest rate button.
“The market” is actually ignoring all the warnings from the Reserve Bank and Treasurer Peter Costello.
And why wouldn’t they? Housing has been an opportunity for ordinary folk to become millionaires.
Sydney’s big selling Sunday Telegraph recently predicted average Sydney house prices to eclipse the one million dollar mark by Christmas.
The mania is simply following the pattern of all manias of history.
Where and when will it end?
When is impossible to say, but it is quite possible for the boom to run on for some time yet.
So accustomed to seeing their home prices increase in value, Australians simply do not believe the Jeremiahs who are predicting a bursting of the property bubble.
At worst, people believe property will simply “plateau” for a while before resuming its inexorable climb.
But some shock or trigger, either internal or external, will prick the bubble and property will rapidly lose its lustre.
With $300 billion in foreign borrowings to make Australians the best housed nation in the world, it is not inconceivable that the IMF will take an interest in Australia’s extraordinary misallocation of borrowings.
The reality of Australia’s demographics, of a internationally mobile young workforce, and the unreality of housing returns will hit the country like a brick in the face.
The latter part of John Howard’s political career has been marked by extraordinary luck, but whoever holds power in Canberra when the IMF knocks at the door will be swept from office.