For many years this blogger has tracked the great Australian housing bubble with increasing incredulity. It eventually concluded that is was so vast, so institutionalised and so vital to the savings of the middle class that the bubble was only going to burst when all of its many supports faced no available choice to keep it inflated.
Hence this bloggers' contention that only an offshore crisis that crushed the banks and the Budget simultaneously would burst the bubble.
The above chart makes the point clearly enough. The shift to mortgage-led growth has been far more profound in Australia than either the UK or US.
However, there is another way to view the history of Australian credit, and although this blogger doesn't share it, the Reserve Bank of Australia does. Rick Battelino gave a very important and largely overlooked speech recently to the Property Council of Australia in which he argued that:
The third episode I want to talk about is the pick-up in business credit that began in 2005. This cycle was not as pronounced as that in the 1980s but, nonetheless, for a time business credit grew by about 20 per cent per year.
Part of this debt was to fund investment which, as you know, has been very strong, but a significant part was also for financial activity. There was a general increase in gearing in the corporate sector, as boards worried that they could be seen as having lazy balance sheets, making them takeover targets for private equity. Over the four years to 2008, the gearing ratio of the corporate sector rose from around 60 per cent to over 80 per cent.
The global financial crisis brought a change in thinking by both businesses and their lenders, and there has been a sharp slowing in business credit. Over the past year, business credit has fallen by about 4 per cent.
This has not translated to a sharp weakening in economic activity, as was the case in the early 1990s, because a shift is taking place in the way businesses are funding themselves. Helped by the pool of funds that has been built up through the superannuation system, businesses were able to raise substantial amounts of equity when debt markets dried up during the financial crisis. Most importantly, however, internally generated funding from profits has also been very strong. As such, the total availability of funds to businesses has continued to increase at around its long-run average rate.
To prove his point that business continues to fund itself at boom levels, Battelino offered several graphs in support of the argument:
A similar line of thinking was apparent in yesterday's statement on monetary policy:
While there has been a degree of caution in private spending behaviour thus far, the rise in the terms of trade, which is now boosting national income very substantially, is likely to lead to stronger private spending over the next couple of years, especially in business investment. (italics mine)
The RBA is of the firm belief that the historic trend of mortgage-led growth for the economy is being overtaken by a business investment boom funded form various sources. And, it will not sit on its hands and watch consumers join the party.
Now, if the RBA is right, this is welcome news indeed. Australia may escape an historic bust in its asset prices as real economic activity rises to fill the productivity and external deficit voids left behind by the last decade of mortgage-driven growth.
However, as the RBA clearly demonstrated yesterday, in this scenario, housing is still stuffed. It may not bust spectacularly but it sure as hell won't be going up either. In fact, if the commodities boom ran a decade, housing will lag other assets most of the way because rates will have to be so much higher. You could watch your house devalue 40% without it dropping a cent. Steve Keen's bet with Rory Robertson could end in a dead heat.
And then there is the possibility that the RBA blunders and overdoes its rate rises, in which case housing is also stuffed.
If the RBA is wrong, and the business investment boom peaks in the next year or so, with commodity prices beginning a long term decline, which is this blogger's view, housing may be supported a little longer by lower rates but is still stuffed as falling national income bites.
It looks to this blogger that, one way or another, the historic trend in mortgage-led growth is over.