January 11, 2012
Tremors from Australia's crash will reach our shoresPosted in International Economy · 200 comments ·
This week, the column is going to focus on the one country that has been receiving thousands of young Irish people for the past three or four years, giving them a chance when there were none at home. The question I pose this week is: what will happen to Irish emigration to Australia when the Australian housing market goes bang?
For those of you with family in Oz, you will be aware that there has been the mother and father of a housing boom all over the country. You will also be aware that reports of its demise have been frequent and persistent. Up to now, nothing has happened and the boom has more or less continued.
Just over two years ago, I spent a few weeks working in Australia and found myself on Bondi Beach on Australia Day. Bondi Beach, and particularly Bondi Junction, were full of young Irish workers. The stories were typical: young professionals, who had been working in Ireland and had been laid off in the boom, were starting over in Australia. They worked in the waterfront bars and cafes of Bondi, getting back on their feet in the hope of rebuilding careers Down Under.
Even back then, there was talk of the possibility of a wobble in the housing market. But the few who were worried were more than outnumbered by what Aussies call “spruikers”. A spruiker is a snake-oil salesman who ramps up the prices by talking up the market. We know all about these lads. The spruikers generally work for the real estate or the finance industry and are still on the TV all day talking about ‘great opportunities’. As was the case in Ireland, these were the “supply and demand” merchants, who claimed that the ridiculous increase in house prices was simply a reflection of demand which was related to population growth.
But as we in Ireland know, the demand for houses is not a result of the growth in population but the growth in, and availability of, credit. The key driver for house prices is debt. No debt means there’s no house- price inflation — plain and simple. If the banks are financing every Tom, Dick and Harry there will be an unsustainable boom. When prices start to fall, the credit dries up and the market collapses.
This is the lesson of the past five years worldwide. The best leading indicator of this will be the currency. The currency, if a country has one, is the canary in the coal mine because when the economy shows signs of overheating, the financial markets will pre-empt the fall in asset prices by selling the currency first because it is a liquid asset and can be traded — unlike houses, which we know here in Ireland are illiquid assets. The Aussie dollar, like sterling before it, has fallen ahead of the housing market.
Australia’s housing market looks like it will be the last great housing boom to go bang in a great, rolling, global-housing boom/bust cycle which started to crack in the US in 2006/7, Ireland and Dubai in 2007 and the UK in 2008. Up to now, Australia’s boom has managed to keep going, but it is beginning to falter.
The reason the Aussie market has managed to keep going is down to China. Australians sometimes refer to their own economy as “China’s quarry”. I have seen this for myself, having spent time filming a documentary in Port Hedland in the Pilbara mining region of Western Australia, where enormous diggers gouge out the iron ore. We followed that same ore to the Chinese port of Ningbo where it is smelted into steel for China’s booming export industry. (www.addictedtomoney.com.au)
The Chinese money, which bought the ore in the first place, swells the coffers of Australian banks, and these banks lend this recycled Chinese money to Australians to buy houses. As long as the Chinese buy up the ore — or other minerals — the money supply of Australia will expand, making credit available to Aussies. The more credit there is flowing around, the more the good times roll. Morgan Stanley, the investment bank, revealed that Australians are now as indebted as Americans and in the past four years, mortgage borrowing has run far ahead of all other types of borrowing.
But what if the credit stops? What if China doesn’t want to export — or more accurately can’t export at full tilt?
This slowdown is already happening in China. In October alone, Chinese industrial exports were down 17pc on the year and the omens for the Chinese economy, with the world slowing down this year, are not good. The Chinese authorities will try to manage this decline by pumping money into the system. For example, bank lending in China rose 15.6pc in November, however, the falling export demand for Chinese goods will impact on the amount of Chinese money going to Australia. This will put the squeeze on credit, and in so doing, the fall in house prices seen in the past three months will continue.
We know from our experience here in Ireland that housing markets do not correct in an organised fashion. There is never a soft landing. It is likely that once house prices begin to fall, which they have done in the last few months, they will drop like a stone.
What does this have to do with us? It affects us because it affects the job prospects of our emigrants who have gone to Australia. It will affect not just those directly involved in construction because, as we know, when the tax revenues from construction dry up, so too do government jobs as there is less money for nurses, doctors and teachers. Last year, according to Australian government statistics, there was a 68.8pc increase in primary visa applications from Ireland for business (long- stay) visas. The majority of them were to New South Wales, followed by Queensland and Victoria. Over in Western Australia, visas granted to Irish citizens increased by 149pc last year. Many of these jobs were in the mining industry.
When the property market slumps in Australia — which is likely to be this year — the job opportunities will go too. This cycle of money and jobs from Western Australia to China and back to Australia, which drives up the amount of credit, and thus the increase in house prices, has enormous ramifications for people in this country.
The opportunities in Australia entice people over. Initially, they can work in bars and cafes because demand is buoyant in Australia because of the wealth effect of rising house prices. The higher the house prices, the more credit is extended and the more cash there is in circulation. But when this merry-go-round stops, it shudders and then, as sure as night follows day, it goes into reverse. And tremors will be felt in Galway and Donegal, as they are in Sydney and Melbourne.