In comparative terms, Australia has only been mildly affected by the economic crisis. Whatever’s enabled us to sidestep the worst of it so far, it’s still fair to wonder whether this good fortune can last.
A recent research update by two University of Chicago professors (hat-tip Calculated Risk) might have some relevance to this question. In a brief article at Planet Money (Lessons From The Fall), Atif Mian and Amir Sufi discuss the study:
The central lesson we as economists have learned from the crisis is that an unsustainable increase in household debt is one of the most serious threats to the U.S. economy. Going forward, policy-makers, regulators and researchers must recognize the central role of household financial health in causing economic turbulence if we are to avoid repeating this painful episode. This is not the first time excessive household leverage preceded a severe economic downturn, and the effect of household debt on the economy is not unique to the United States.
Rather than simply looking at US statistics in aggregate, they compared household leveraging and subsequent economic performance across counties:
A cross-sectional analysis of U.S. counties shows that areas with modest increases in leverage from 2002 to 2006 have experienced only a minor economic downturn, whereas counties with large increases in household leverage from 2002 to 2006 have experienced a severe recession. Our findings suggest that the process of household de-leveraging is likely to be the major headwind facing the economy going forward.
The consequences have been dramatic; the most highly leveraged decile, for example, saw their unemployment rate (to the end of 2008) rise by 4%, while for the least leveraged it rose 1.3%. More generally: “Default rates for low credit-quality homeowners rose by more than 12 percentage points in places where housing was scarcest and prices had risen most. In elastic cities, by contrast, the increase was less than four percentage points.”
Does any of this, interesting though it may be, have any relevance for us?
I think yes, but then again I’ve thought for a long time we were vulnerable and been surprised at how we have to date sailed through relatively unscathed. I’ll be interested to see what others think about why, and how, we’ve managed to do this.
First, though, a few of the figures that underlie my doubts:
- Our residential real estate/GDP ratio was 306.7% as at the end of March this year. At the peak in the US housing market, their equivalent ratio was about 165%.
- In terms of household indebtedness, as at the end of the first quarter ours was 119.5% of GDP, the US about 98%.
- Net external indebtedness is $633 billion ($726 billion if you include the equity deficit).
- Our current account deficit crept up to 4.5% in the June quarter after briefly getting down to 2.6% and 2.1% in December and March quarters as imports plummeted while iron ore and coal exports were still at the old contract levels.*
(These latter two sets of figures also suggest our dependence on the China story turning out well).
One thing the Mian and Sufi report reinforced was the tight correlation in the downturn of almost everything in the US (and elsewhere) to the fall in residential real estate. Not exactly news, but this dynamic may go some way towards explaining why we’ve escaped a more serious downturn.
What it doesn’t tell us, of course, is whether the relative buoyancy in our housing market will continue. According to the RBA figures, the value of dwellings fell by 3.8% in the year to March 2009 but things have apparently ticked up a bit in recent months under the influence of some combination of the FHBG, low rates and a growing belief that we may have seen the worst.
For a bit of perspective, this chart (from the National Housing Supply Council State of Supply Report) provides a long-term overview of real house prices, rents, construction costs and household income. Quite a remarkable picture.
Will it continue? Can it continue? And if housing does finally turn down in a more serious fashion, will the broader economy follow as it has elsewhere?
* (all Australian figures from RBA and ABS / US from the Fed Z.1 Flow of Funds report)