Saturday, March 31
I copped a bit of grief for suggesting that the decline in the growth rate for housing credit was a step towards national economic sustainability. Apparently I was supposed to think it was ugly. I agree, going forward, it probably means a lower rate of GDP growth (and therefore an increase in the unemployment rate).
But ugly? More like necessary. My version of ugly is the following. In the 30 years prior to the GFC, Australia's private debt grew from around 40 per cent of GDP to 150 per cent.
The proportion of this private debt that went to productive business purposes fell from more than 60 per cent to less 40 per cent of the total. Housing credit has grown from a touch over 20 per cent to almost 60 per cent.
In anyone's books, it's a bubble. The best we can hope for is a slow, well-managed deflation. But there is a risk that the structural change in the marginal propensity to save/consume we have seen post GFC could blossom into a precautionary self-reinforcing downwards spiral in housing prices and the demand for housing credit.
On the other hand, if the housing credit growth rate returned to where it was for the 30 years prior to the GFC, GDP growth would pick up and unemployment would fall ... for a period ... if we are lucky. But the bubble would still be inflating. And the ultimate deflation would be all the more dramatic.
Posted by Mark Graph