Sunday, January 23, 2011

Bubble trouble?

This extends a comment I made here.

Something that Australia generally does well is migration, following the principle that, when going for migration, go multi-source. Australia has a considerably bigger percentage of its population overseas born than the US, and manages that pretty well in large part because our migrants come from lots of different places. (The only real misfire in migration was accepting a lot of Muslim Lebanese in a big lump in the 1970s, and even that is a problem only in Sydney, which is -- by Australian standards -- a dysfunctional city; Christian Lebanese have proved to be no problem because they plug into the Catholic networks.) We are also very good at cherry-picking our migrants – being an English-speaking island-continent helps.

That being said, Australian has two economic "bubble" issues. The first is we are currently exporting a lot to China: since China's economy now looks a lot like the Asian economies prior to the 1997 Asian Crisis and the Japanese economy prior to the 1991 Bubble Economy collapse, a bit of a worry. Admittedly, we rode out the 1997 Asian Crisis well and, more recently, a massive dip in commodity prices.

The issue is, how resilient is the Australian economy if the Chinese bubble economy bursts, or if some other economic shock comes along? Which leads into the second problem, that our housing now looks like California/UK/Ireland before their housing collapses, only more so. Since 1990, owner-occupied and investment property credit has expanded its share of total credit from 23% to 58%. (Business credit has dropped from 63% to 34%.) One-in-ten Australians owns an investment property (pdf). While I agree with Scott Sumner that housing is an asset, that credit pattern still looks very unhealthy to me. As do the house price trends it is all based on. (Australia has the British/Californian system of complete official control over land use and building, not the Texan/German system of open land use.)

Australia had its own "bubble economy" burst in 1974 when an extended mining boom within an economic policy regime based on suppression of risk (the Federation/Deakinite system of white Australia; industry protection; civilised wage and arbitration system; state paternalism, and imperial benevolence, though white Australia was in the process of being abandoned) met global stagflation: our economic performance was flat for the next decade.

I agree entirely with Scott Sumner that you can reliably predict neither the time nor level of tipping points: if there was such a reliable predictor, you would not have asset price bubbles because people would not buy at prices which would get "caught" so the tipping point would happen earlier, so people would not buy at prices to get “caught” by that, in a regress which would preclude any bubble happening in the first place. The inability to predict tipping points is necessary for bubbles to happen. (Besides, how can you predict future information?)

But, after the event, you can look back and say "that was a bubble" because you now know to what degree the expectations of income growth/continuing capital gain were not realised. We do not have an excess of housing, but we have a lot of highly leveraged housing investment based on an expectation of indefinitely continuing capital gain: that is why prices are so high, due to systematic discounting of downside risk as a result of the dynamics of regulation-constrained supply generating surging house prices. (Just as price controls have quantity effects, so quantity controls have price effects.) All of which might still be vulnerable to a terms of trade shift. Say, from a collapse of the Chinese bubble economy?

So, the Australian economy might be in for some bubble trouble.

ADDENDA The US and UK both had surges in household debt which have recently peaked and declined. Looking at the Anglosphere, only Australian house prices are still surging: Ireland, US and UK have seen house prices peak and fall, NZ and Canada they have recently plateaued. In the UK, households are finding credit harder to come by as they pay off debt, increasing equity in their houses. (All via.)


  1. Lorenzo, I can't remember where I read this, but I strongly suspect it was a link from you. Somebody in the US crunched the PISA numbers, and controlled for various variables such as state, race, immigrant status, and so on.

    What this revealed was the very great variation among US states. If you compare just say Connecticut, or Wisconsin with Finland or China then the US comes out very well. Similarly, they were able to crunch the numbers by isolating whites, Asians, Latinos, blacks, and immigrants. The US performance increases dramatically when immigrants and blacks are excluded. Now, I think a lot of the aforementioned is at minimum, impolite, but more likely gross!

    Nevertheless, there was a fascinating statistic about Australia. Australia was the only country whose immigrant population got higher PISA scores than the locally-born. The ONLY country.

    I say thank god John Howard became PM. Could you imagine what our PISA scores would look like had Keating stayed on, and their disastrous immigration policy, cum ALP branch-stacking exercise? ;)

  2. Oops, I see one of your links shows the Australian PISA point.

  3. Peter, the PISA scores graph came from this post. A post on US state PISA results, spending and ethnicity is here.

    The post with employment data indicating that (male) second generation migrants in Europe were dis-assimilating is here.

    The Howard Government ran a relatively high immigration intake with the least Eurocentric intake in our history. But successful cherry-picking as the PISA results indicate.

    But that continues a tradition that goes back decades, though intensifying over time. The worst lapse was Fraser letting in a large lump of Muslim Lebanese in the 1970s, and that is only really a problem in Sydney, our most dysfunctional city.

    I don't know enough about the Keating Government immigration policy to comment.