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 "According to the Reserve Bank, property investors have been the biggest winners. But that is history. What the future holds, is anyone's guess." - Mark |
| The challenge of a downturn in house prices |
| Editorial in the Australian |
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May 10, 2004 FOR the past 18 months, warnings in The Australian that the property bubble might be about to burst have risked making us sound like Chicken Little. Well, figures released by the Reserve Bank last week showed property prices fell by an average 8.4 per cent in the March quarter. The RBA cited private research showing house prices dropped by 14.5 per cent in Melbourne and 10.5 per cent in Sydney. The first weekend in May was the worst for house auctions in Sydney in more than a decade, with nearly two-thirds of properties failing to find buyers. This is more than just an acorn falling from a tree. The deflation of the property bubble carries both opportunities and risks. An incredible one in six Australian households owns an investment property. The lure of buying and renting out an inner-city apartment in Sydney or Melbourne has been vastly enhanced by the halving of capital gains tax, and by the attraction of the negative gearing tax break in an environment where the top marginal income tax rate cuts in at only 1.3 times average earnings, compared with 15 times in 1960. Above all, it has been enhanced by the particularly Australian delusion that house prices never fall. Those who, inspired by the cult of TV shows such as The Block, have gone too deeply into hock to invest in property – ignoring hints of looming regulatory risk from the RBA and the Productivity Commission, falling rental yields and editorials in The Australian – could find themselves in serious trouble if prices continue to fall. Also exposed, to a lesser degree, will be the millions of Australians who have borrowed against the rising value of their homes to buy everything from boats to holidays to wide-screen TVs. Nevertheless, if the RBA's two interest rate hikes in November and December of last year, totalling half a percentage point, have done the trick and reined in both the price bubble and the credit splurge, our economy may also have dodged a bullet. Australia has enjoyed a period of unprecedented economic growth stretching back more than a decade. Unemployment, currently at 5.7 per cent, has now been held at its lowest level in decades. And the RBA expects inflation, currently down to 2 per cent, to ease further by the end of 2004. The imbalance in the economy caused by the excessive rate of household borrowing has been one of the main threats to these rosy numbers – which are the result of 20 years of microeconomic reform, the creation of an independent central bank and reasonable spending restraint by the Howard Government. The other threat has been a rising dollar that, in concert with the drought, has made the economy too reliant on cheap imports, pushing out the deficit on the trade balance – the ledger of what we buy from the world, and what the world buys from us – to worrying levels. A slightly weaker $A, demand for Australian commodities in China, strong growth in major export markets such as the US and Japan and – just possibly – an easing of the drought are factors that hold out the promise of an improving trade balance. But if the property bubble had been allowed to inflate any further, culminating in the inevitable crash – or what the RBA last week called a "damaging correction" – the results could have been disastrous, not just for borrowers, but for growth and jobs. A report by the International Monetary Fund last year showed housing bubbles are much more likely to burst than stock market bubbles, and can do twice the economic damage. In Australia, where state governments have indulged in all sorts of spending commitments based on the lucre they have reaped from stamp duty, the pain would only be exacerbated. It is too early to say if what we are seeing is a gradual deflation of the bubble, or a crash: if we knew that sort of thing, we wouldn't be slaving over our keyboards. The RBA statement points out that if an adjustment had to come – and it did – then it comes best at a time when most other areas of the economy are strong. As well as keeping inflation and interest rates down, a cooling of the overheated property market would finally give first-home buyers a real look-in, just as they are being offered some long-overdue stamp duty relief by the state treasurers. There is no doubt the phenomenal strength of property helped sustain growth through challenges such as the dotcom collapse and the Asian economic crisis. Now the challenge may be to make do without it. No future in driving our best minds away FRESH faces, fresh ideas – this was the key to the thinking behind the Future Summit that concluded in Sydney on Saturday, and that The Australian was proud to sponsor. The summit brought together 250 prospective future leaders in brainstorming sessions with experts in science and technology, business and politics. Those who read the profiles of some of the young leaders attending in The Australian must have felt a little more optimistic about our future. They included people such as Janie Dickenson, 29, who became a Launceston city alderman at the age of 25, and a year later the youngest mayor in Australia; or Ellie Wainwright, 32, the foreign policy analyst who came up with the blueprint for Australia's military intervention in the Solomon Islands. A key issue at the summit was the policy settings needed to encourage research and innovation in Australia. As Jonathan West, an Australian professor at Harvard University, argued at the summit and in these pages, boosting funds for research and innovation – as the Howard Government did last week, to the tune of $5.3 billion – can do only so much to make Australia a player in a field such as the biotechnology revolution. First, a culture of entrepreneurship is required in technologically sophisticated sectors. But just as important, you need a taxation system that doesn't place further obstacles in the way of an area of investment that already carries unusually high risks. Professor West asked whether the special tax incentives offered on investment in bricks and mortar – see above – may not have hamstrung sunrise industries. Australia lacks the resources to follow every promising new research direction, but the idea of "picking winners", of rewarding some disciplines at the expense of others, carries its own risk. Yet this seemed to be part of the point of last week's funding announcement, which favoured commercial ventures over pure research. As renowned astrobiologist Paul Davies pointed out at the summit, the value of fundamental scientific knowledge is not easily quantified in dollar terms: it is valuable for its own sake now, and may create economic spin-offs in the future. As he argues on the opposite page that one obvious reason we are exporting some of our brightest ideas, rather than exploiting them here, is that we are exporting some of our brightest minds. When a country expects people on medium incomes to cough up 48.5c in the dollar for tax, many of those people are going to respond to the strong demand for their services overseas. "You won't have a clever country while you've got a stupid tax system," he says. We need to get this right, before we lose more bright, young people such as those at the Future Summit. Reference: The Australian 
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