Bubble Trouble For Economics Boss As That Word Slips From The Room
Sydney Morning Herald
Wednesday September 17, 2003
``Housing bubble" are words the nation's economic guardians are loath to utter, and when Australia's senior economic bureaucrat, Ken Henry, used them in a speech yesterday he did not want it to leave the room.
Unfortunately for him, a handful of journalists had turned up to what he thought was a closed business seminar at a Canberra hotel, and his confession soon hit the airwaves and newswires.
Dr Henry, the Secretary of the Treasury, admitted that the economy was being threatened by a housing bubble that refused to deflate.
``We have been surprised by the continuing strength of dwelling investment in particular," he said.
``We have been a little surprised, too, I would have to say, by the continuing growth in real house prices [that] has occurred, notwithstanding a fairly substantial reduction in rental yields."
Despite the fall in rental returns down more than two percentage points in the past decade, he said the appetite of residential investors has not dwindled.
Lending for investment properties hit a new record in July despite signs that the unit market favoured by investors is over-extended.
As well as the housing bubble, Dr Henry said ballooning household debt and a possible global financial shock caused by the huge US current account deficit posed threats.
He said: ``The short- to medium-term challenges are in these areas: the drought, the housing bubble I use that word advisedly and not for quotation outside this room consumer debt, international outlook, the exchange rate, national security and defence."
Dr Henry, who has a seat on the Reserve Bank board, advocated a cut to official interest rates as recently as June, but some economists interpreted his comments to mean the Federal Treasury had shifted its position.
There is a growing consensus among economists that interest rates will rise in the first half of next year.
The Opposition Leader, Simon Crean, seized on Dr Henry's remarks, saying the Treasurer, Peter Costello, had not done enough to manage the home price boom.
Dr Henry said consumer debt, and its potential to eventually crimp consumer spending, could also cause economic damage.
Household consumption which has helped drive Australia's strong economic performance recently had outstripped national income, causing the household savings ratio to plunge into the negative. This indicates that households overall are spending more than they earn.
Dr Henry said consumption could fall dramatically. He also warned that the huge US current account deficit, which is tipped to blow out to 7 per cent of that country's GDP next year, also presented a risk.
The deficit is unprecedented and could destabilise the global financial system, according to some economists.
Dr Henry said the value of the US current account deficit would be 1 1/2 times the value of the Australian economy.
He said this was ``uncharted territory" and cast a ``cloud" over the country's economic prospects in the medium term.
© 2003 Sydney Morning Herald