The Housing Bust: not a question of 'if' but 'when?' and 'how bad?'

Historically, we know that a boom - embodying excessive asset-price inflation - is followed by a bust - a sharp decline in asset prices. It happened with the tulip boom, with the South Sea Bubble, with a whole series of stockmarket booms, including the one that led to the Great Crash of 1929, and with innumerable housing/real-estate booms in Australia and many other countries. The certainty that asset-price inflation will be followed by asset-price collapse may not be quite as sure as death and taxes but, historically, it appears to belong in much the same league.

So we know that the present housing boom in Australia will - almost certainly - be followed by a housing bust.

After that bust, the smart league - including most of the banks - will soldier on with their pockets stuffed but many, especially in the middle-income and poorer brigade, will be in thrall to the banks through crippling mortgage payments for years to come. If they can hang on long enough, they might get their money back when the next boom comes. Hope springs eternal ...

So the question is not so much whether we'll have a bust but when it will come, how long it will last and how distressing to how many people it will be.

The deeper question too is how savagely it will affect the entire economy - fixed-capital investment, public and private spending, the trade and payments balance.

At this late point in the boom, there is very little prospect that the bust can be avoided or even that it can be substantially moderated.
The only effective way of avoiding a bust is to avoid or manage the boom that otherwise would inevitably precipitate it.

To discover how this can be done, we need no exotic theories or obscure precedents. We need only to go back 30 to 60 years or so and reflect on our own experience towards the end of World War Two and in the quarter century afterwards.

At that time, two crucial policy instruments determined our economic and social destiny. They were the commitment to full employment embodied in the White Paper on Full Employment of 1945 and the Banking Act of 1944.

The commitment to full employment gave us stable rates of economic growth and social welfare that did not rule out booms and busts of whatever kind but did ensure that all our human resources - or most of them - could and would be used to meet the variety of needs of our society at low to negligible rates of inflation.

We cannot be sure by what percentage a given rate of unemployment reduces our gross domestic product. We cannot be sure that a 10 per cent jobless rate will cut a GDP of, say, $500 billion to $450 billion but we can be sure that the cut in available resources to meet the needs of the community will be substantial - and that the need to divert resources to support the unemployed will dilute supply to meet capital and consumer demand.

Let me add too that the past 30 years have shown how hard it is to get back real growth and real investment - to retrieve industry that has been lost and jobs that have migrated - once they have been lost.

The end of World War Two was a period of acute housing shortage, accentuated by an influx of migrants just about as large as, if not larger than at any time in our previous history.