Will a slowing economy lower house prices in Australia?
Airdate: 
Tuesday, September 9, 2008 - 20:30
Channel: 
SBS One

The Housing Industry Association says housing affordability is
at a 24-year low. Yet economists are divided over whether Australia's troubled economy will work for or against those struggling to buy a
home or maintain a mortgage.



Economist Steven Keen has claimed Australia is heading for
the worst recession since the Great Depression, and predicts housing prices
will drop by over 40 per cent.

The ANZ’s Saul Eslake warns this is a dangerous assumption, while economic journalist Ross Gittins believes we are in uncharted waters, with household debt at an all-time high.


Home owners mortgaged to the hilt, economists, housing and construction representatives, government and opposition meet on Insight to discuss who could benefit from a big economic dip.

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Transcript


TRANSCRIPT:

JENNY
BROCKIE:
Last week finally saw some good news for home owners. For
the first time in almost seven years the Reserve Bank cut interest rates. 12
back-to-back interest rate rises have taken a big toll and, with personal debt
levels high, house prices now seem to be flattening, or falling. But commodity
prices are strong and there's solid business investment in some areas.


Confused? Well, tonight Insight
will try to make sense of what is happening, particularly in relation to house
prices and we will look at what the future might hold for home owners, renters
and buyers. Here's Kim Camberg.


HOME OWNERS STORY:
REPORTER: Kim
Camberg

It's auction time
on this leafy Auburn street in Sydney's
west and, with a sign revealing an urgency to sell, the crowd are hoping for a
bargain.


MAN: I'm
here to buy my first home. I've been looking around, shopping around. It's time
to buy. It's tough times but property, rents are going high so I'd like to buy
my own house first.


REPORTER: Tell me
about why you're here today?


MAN: I
want to buy an investment property.

WOMAN: My friend,
she's hopefully going to buy it. She sold her house for less than what they
wanted. They're just struggling at the moment so we're hoping to get this one.


While these home
owners haven't defaulted on their mortgage, across the road it's a different
story for Ismet.

ISMET ASLAN: When
we bought this house about two, three years ago so we was paying about $2,000.
Now we're paying more than $3,000.

REPORTER: In
interest?

ISMET ASLAN: Yeah.

REPORTER: For your
mortgage?

ISMET ASLAN: Yeah,
it's eight or nine times since they put the interest up. I work seven days, I
don't even have a day off, any sick days, I keep working. We still can't
manage, we still can't pay for it.

REPORTER: What
have you decided to do?

ISMET ASLAN: We
talking about it seriously, like when we going to sell, so I came up for Australia for a
better life. The life is not getting better, it's getting worse so I'm thinking
of going back to Turkey.

Ismet is not
alone. The stress of multiple mortgage increases in the past few years is
pushing some home owners out of the market.

DAVID PENTECOST,
CONTRACT AUCTIONEER: As a contract auction near that works all over New South
Wales, it's quite scary to me that I'm seeing an increasing number of mortgagee
possession sales and that's been increase over the last couple of years, so
that's quite a scary trend, I'm afraid.

REPORTER: What
sorts of emotions are you seeing from people, either buying at auctions or
being forced to sell at auction?

DAVID PENTECOST:
Well, some of the scary stuff or the worst stuff I've seen is people crying as
they're losing their home and that's a pretty awful thing to see.

ISMET ASLAN: A few
houses before a few months ago they couldn't pay just there. The bank just took
it.

REPORTER: What
happened to them?

ISMET ASLAN: I
don't know.

Across the road,
the auction is under way.

DAVID PENTECOST:
Who's going to be brave enough to kick me off? 320, there he is. 32, 332.
$332,000. What are we doing now? 332 the bid.

MAN: 335

DAVID PENTECOST: 335
the offer.

MAN: 44.

DAVID PENTECOST:
44, why not? $344 345. 345 the bid. 355, good bidding, that's what I want to
see. 355 the upper.

MAN: 56.

DAVID PENTECOST:
356, 356 the bid, don't give up, don't give up. 356 I'm offered. 356, going,
going - sold to the gentleman here. Thank you very much, ladies and gentlemen.

REPORTER: How do
you feel? Are you happy?

Inside, the
sentiment is a little different as Jana signs the papers, officially ending her
family's 23-year stay. Only a year ago their house was on the market for
$100,000 more.

MAN: Done,
congratulations.

JANA SHALALA: Thank
you very much.

MAN: A
good result, a very, very good result.

JANA SHALALA: I'm
not happy.

MAN:
You're not happy?

JANA SHALALA: I'm a
little disappointed not the price that we want but it's alright, I think.

REPORTER: Your mum
was saying she felt disappointed.

CECILIA SHALALA:
Yeah, it wasn't the price we were looking at, but we expected it. So, you know,
to be a little bit disappointed is understandable.

JENNY BROCKIE:
Welcome, everyone. Good to have you all here. I know everyone has an opinion on
housing so let's get under way. Hotim, I know you live, I think, a couple of
streets in a street nearby that street we saw there. Now, you bought your home
for $400,000 in 2004.

HOTIM HAWAT: Yes.

JENNY BROCKIE: Is
that right? and you sold it three days before last week's rate cut.

HOTIM HAWAT: Yes, I
did.

JENNY BROCKIE: How
much did you get for it?

HOTIM HAWAT: We
sold it for $3...sorry $351,000.

JENNY BROCKIE: So
you lost nearly $50,000 on the price you paid in 2004?

HOTIM HAWAT: Yes,
we did.

JENNY BROCKIE: If
you'd known that rate cut was coming would you have hung on, do you think?

HOTIM HAWAT: No,
still would have sold.

JENNY BROCKIE:
Why?

HOTIM HAWAT: Too
late. It's not a matter of too little, too late - it's just very late. Too
late. Um, that's one cut, too many rises, and when we first initially started
we were paying around about $2,300 a month so the $500 that we had aside for us
to live off comfortably has now all gone back into the mortgage, and more so.

JENNY BROCKIE:
Kathii and Simon, you have two small children with you here tonight and you
bought your house in Sydney's
west for $395,000, I think, three or four years ago. You borrowed $370,000 to
buy it?

SIMON WOODS: Yes.

JENNY BROCKIE: How
much do you think it's worth now?

SIMON WOODS: Um,
it's interesting. We've tried to refinance last year when we wanted to sort of
try to fix interest rates again - we're fixed for three years. I think $370,000
back then so it was definitely, I think, worth less on the market than what we
paid for it.

JENNY BROCKIE:
Than you paid for it. Again, three or four years ago.

SIMON WOODS: Yeah,
it was right at the peak of the Sydney
boom.

JENNY BROCKIE:
Now, you earn good money, don't you? You earn around $100
,000?

SIMON WOODS: Yeah.

JENNY BROCKIE: A
lot of people would consider that good money. How are you managing?

SIMON WOODS: Oh,
look, it's tough. I suppose we've got the luxury where Kathii at the moment
doesn't work. We've got the luxury, made a decision for her to stay home for
the kids and look out for them. It's definitely tough. You get paid monthly,
you pay your mortgage off fortnightly and you sort of struggle through those
months but then when you get three mortgage payments in one month. We're
talking sort of close to $4,000 in one month for just a 4-bedroom clad house in
Sydney's west.

JENNY BROCKIE: How
do you feel about being a home owner then?

SIMON WOODS: Oh, I
think it's important in terms of stability for the family and the kids and that
sort of thing but, you know, sometimes you definitely wonder if it's worth the
struggle.

JENNY BROCKIE: Do
you feel that way too, Kathii?

KATHII WOODS: Yeah,
we went from having no debt. We had no debt of any sort before we bought our
home. We've obviously gone from having no debt to very large deal. We had to,
um, think at the time, "Well, it could come to a point where we might lose
the house," but it was an opportunity that we took - if we didn't get in
when we did, then we thought we might never own our own home.

JENNY BROCKIE: And
how do you feel about the rate cut? Is it going to make much of a difference?

SIMON WOODS: Oh, I
think it will. We fixed not long after we first bought and we were fixed 100%
for 6.55%, it was, and then, you know, you see the mortgage increases come
through and it was that's alright, you know, $40 increase, but then finally we
come off the fixed.

JENNY BROCKIE:
Come off the fixed.

SIMON WOODS: Our
rate's currently over 9%, it's 2.5%, 3%. Any sort of rate cut's definitely in
the right direction But you know, $30 or $40 a month will make a difference.

KATHII WOODS: We
need more of them.

JENNY BROCKIE:
More of them. Chris Bowen, that's what they're saying. Hotim's saying too
little, too late. More of them. Is it too little, too late, the rate cut, and
do we need more of them?

CHRIS BOWEN,
ASSISTANT TREASURER: Oh, well, any relief is welcome, of course, and future
movements are a matter of the Reserve Bank. But I think the best thing the
Government can do to help is to put downward pressure on interest rates and
help the Reserve Bank do their job, which is what we're trying to do so that we
do see more relief coming into the future.

JENNY BROCKIE: Can
these people expect lower interest rates, though, do you think, in the near
future?

CHRIS BOWEN: I
mean, as I say, that's up to the Reserve Bank but what we need to do is get our
government expenditure under control so that the Reserve Bank is actually
helped in their task and it's not interest rates who are, which are the only
things putting downward pressure on the economy, but the rest of government
policy is heading in the same direction. So that we don't see so much pressure
on interest rates.

JENNY BROCKIE:
Christine Smith, your landlord sold the property that you were renting
recently, leaving you pretty well homeless. Now, the local newspaper stepped in
to help you, didn't it?

CHRISTINE SMITH:
Yes.

JENNY BROCKIE:
Where are you now? You have two children living with you, teenagers?

CHRISTINE SMITH:
Yes, I have two. My landlord had to sell because he couldn't afford, he had
three small houses that had rented out and, um, so he actually first gave me a
week's notice, which was really frightening because there's no way I would be
able to find a place in a week, and I went to Fair Trading and I got four weeks
notice and I'd been trying to get a house to rent. I've looked at roughly 8 to
10 houses every week, competing with 15 to 20 families.

JENNY BROCKIE: How
much were you prepared to pay?

CHRISTINE SMITH: I
was paying $300 a week and I couldn't find anything for even less than $340.
Housing Commission housing, there's a 10-year waiting list. Real estate agents
wouldn't even consider me, listen to me, look at me, because I'm a single
parent. So I was either taken to housing that was not very glamorous, to say
the least, and, yeah, I'm actually living with other people at the moment
because I did end up being homeless with nowhere to go.

JENNY BROCKIE: I'm
interested in sort of injecting into this discussion the fact that house prices
are flattening or falling at the same time that we're hearing about the
unaffordability of housing. Taylor, you've got another story altogether to some
of these stories in a way, haven't you? You've just bought your first house in Perth. Did you get a good
deal?

TAYLOR WEBB: Yeah, I did. The house was on the market for
$350,000-plus and after looking around for a few months I still would have
liked to have bought the house so I put an offer in of $325,000 and they
accepted it, so I know for a fact that the house was on the market previously
at $360,000 so, I mean, you're saving $25,000-$30,000 right there.

JENNY BROCKIE: And
have you borrowed a lot to buy that house?

TAYLOR WEBB: 80%.

JENNY BROCKIE:
80%, and what sort of income do you have to support that?

TAYLOR WEBB: Well, I'm a teacher and on about
$60,000-$65,000 a year.

JENNY BROCKIE:
Gee, so it's a stretch?

TAYLOR WEBB: It is, yep, very tight but it's doable if
you're good enough.

JENNY BROCKIE: And
why did you think it was worth doing?

TAYLOR WEBB: Um, I think it was the right time. Like you
said, the prices were flattening, there was a lot of houses on the market for
sale and not a lot of buyers and you could offer a lot less than what they were
asking and, if they were desperate to sell, like a lot of people were, you
could get it at a good price.

JENNY BROCKIE: OK,
so you're seeing opportunity in all this?

TAYLOR WEBB: Yep, definitely.

JENNY BROCKIE:
Ross Gittens, what do the different stories tell us about what's going on?

ROSS
GITTENS, ECONOMICS COLUMNIST, SMH AND
THE AGE: Well, they tell us that
the slowdown in the economy is very much concentrated on households, that
what's happening to house prices differs a lot around the country, that western
Sydney is the worst in Australia, probably, but house prices have slowed down,
stopped rising in some places, are falling in other places. Obviously that's
bad news for people who've just bought in reasonably recently but it's good
news for first-home... would-be first-home buyers who, um, find that these prices
at the moment are too high, and they really are too high.

JENNY BROCKIE:
Graham Wolfe, you study housing affordability. With prices falling or
flattening, is it a good time or a bad time to be buying a house right now or
to be trying to get into the market?

GRAHAM WOLFE,
HOUSING INSTITUTE OF AUSTRALIA: Well, there's an inevitability that house

prices are going to increase over the next few years. Prices of new homes are
going to go up, prices of existing homes are probably going to flatten for a little
bit longer and then start increasing. The reduction in interest rates are
certainly going to encourage first-home buyers into the marketplace. We're
likely to see investors sharpening their pencils and looking at the rising
rental prices and the potential for capital gains. I think we're going to start
seeing prices moving upwardly within the next 12 or 18 months.

JENNY BROCKIE:
Moving upward?

GRAHAM WOLFE:
Moving upward.

ROSS
GITTENS: That sounds like a sales pitch from the Real Estate Institute.

JENNY BROCKIE: Go
ahead, Ross.

ROSS
GITTENS: Look, I'm not at all sure house prices are going to take off any time
soon. I think it's a lot easier to believe they'll stay as they are or go lower
in the next year or two, much easier to believe that because I don't think the
slowdown in the economy is going to go away.

JENNY BROCKIE: The
question is, how much lower?

ROSS
GITTENS: It is. Some pessimists have said that interest rates might - sorry -
house prices might fall by 30%. Well, I hope that's not the case but I'm not
certain it won't be the case. We're in uncharted territory here because got
house prices higher than they've ever been in our history and we've got
households more indebted than they've ever been in our history.

JENNY BROCKIE: Graham.

GRAHAM WOLFE: We
aren't building enough homes. We simply are not building enough homes. We need
to build 190,000 homes in this financial year. We will build about 145,000. We
will see rental costs going up at double-digit rates for at least the next 12
to 18 months. We are squeezing too many people into the existing stock and not
building enough homes.

JENNY BROCKIE:
Ilya, you looked at over 1 million mortgages. You've had a close look at 1
million mortgages. What's the picture nationally and where is the stress
highest at the moment and where are people...?

ILYA SEROV, MOODY’S
INVESTORS SERVICE: What we're finding is the mortgage default rates are
increasing across the country gradually. There are certainly some areas which
are particular hot spots. Western Sydney has come up a couple of times here
today already and, you know, if you line up areas in Australia where mortgage
default rates are highest, top five are in western Sydney. 12 out of the top 20
are in New South Wales - you know, people
default in western Sydney
three, four, five, six times higher than the national average.

JENNY BROCKIE:
Jago, is that still where it's concentrated, or is it shifting?

JAGO DODSON, GRIFFITH UNIVERSITY:
Western Sydney seems to be one of the places where the stress on households
with mortgages is the greatest but there's a phenomenon that's not just
restricted to western Sydney.
I mean, mortgage stress is distributed around the outer suburban areas of most
Australian cities.

JENNY BROCKIE: I
suppose the question is whether it's spreading beyond that as well, because
we've seen in the inner city of most capitals that prices have held up pretty
well.

JAGO DODSON: Yeah,
the research I've done with any colleague Neil Sype at Griffith University
shows that over the last five or so years there's been an encroachment of the
higher levels of stress inwards from the outer suburbs towards some of the more
middle-located suburbs in Australian cities.

JENNY BROCKIE:
Saul Eslake, how significant do you think the downward pressure on house prices
is and do you think people can expect prices to go down or prices to go back up
again in the near future?

SAUL ESLAKE, CHIEF
ECONOMIST, ANZ: I think in the
short term they're more likely to go down than up, particularly in those areas
of the country where unemployment is more likely to rise, where there's been a
greater presence of landlords who don't have to stay if they think prices
aren't going to go up or where non-traditional lenders who are much more likely
to foreclose in the event of payments being missed have had a bigger market
share than in other parts of the country. But over the longer term, especially
if, as the remarks of the Reserve Bank are suggesting, that inflation will come
down to less than 3% by 2010, that means interest rates will probably come off
over that period or shortly afterwards by at least 1.5 percentage points from
present levels, once interest rates get down to those kind of levels then I
think prices will move back up again.

JENNY BROCKIE:
Chris Bowen, I know we've heard a lot about western Sydney
here and I know that your seat in New
South Wales sits amongst the highest
mortgage-defaulting suburbs in the country. What are you saying to your
constituents as the new government that's come in and with people seeing this
situation evolve as it has?

CHRIS BOWEN: This
is a situation which has been developing for a couple of years and in western
Sydney we see about in various places - the area I represent, about 1% of
mortgages more than 90 days behind, but against that, real estate agents saying
to me, for example, that about 20% of the houses for sale are either
foreclosures or people selling because they are heading in that direction and
to avoid that. It comes back to what I said before. The biggest thing the
Government can do to help is to put downward pressure on interest rates. You
can do other things but, really, when it comes down to it, it's interest rates
which are the killer and what you can do as a government is to help put downward
pressure on them. That's the biggest single thing that we can do. That's what
my constituents say to me and that's what I say back.

JENNY BROCKIE:
Tonight Insight is talking about housing and a slowing economy is taking its
toll on small business. Here's Kim Camberg with one woman's story.

LETICIA’S STORY:

REPORTER: Kim
Camberg

After arriving in Australia from the Philippines in 1978, Leticia de
Mesa's dream was to own her own home.

LETICIA DE MESA:
It was hard. I had to work two jobs. I worked during the day at Telstra and in
the evening I had to work with Pacific Laboratories. This is when it was sold.
It had "for sale" in there.

Leticia's hard
work paid off and in 1985 she bought a home with her husband in Sydney's south-east.

LETICIA DE MESA: When we bought this new house, it's a
dilapidated house and we said we could live in that and then maybe build up
later on once we had put a bit more money.

15 years ago,
Leticia was able to build her dream home. With the house now worth a lot more, they
decided to borrow against it to start a business.

LETICIA DE MESA: We approached the bank and they assessed the
value of the house and at that time they assessed about $900,000 so from
$90,000 to $900,000 and they said I could borrow up to $500,000. So we went
into that and that is the capital that we started our business.

The business
supplies wrapping paper for flowers.

LETICIA DE MESA:
Anyone called yet?

MAN: The
telephone is dead. Sometimes I check it, if it is working or not.

But now the
business is in trouble.

LETICIA DE MESA: We were earning, in the December quarter last
year, we had at least about $98,000 earnings and then it gradually dropped down
to $30,000 and for the last two months, for a month we only had about $3,000.

REPORTER: So
you're saying that your earnings dropped from $90,000 for a quarter down to...?

LETICIA DE MESA:
Well, for this quarter it's almost $7,000 so it's a big drop. Just yesterday I
asked We had one came in and I asked, "How's the market?" and they
said, "Dead." And I said, "What do you mean by dead?"
"Well, no-one's buying. "Even the florist, you know, they are not
selling." So I don't know where to from here.

Even Leticia's
long-term clients aren't buying.

LETICIA DE MESA:
How's things?

MAN: A bit
quiet.

LETICIA DE MESA:
So what's happening with the plastic? Not buy anymore?

MAN: I do
buy when I need, though.

With business
slowing and her mortgage repayments becoming harder to meet, Leticia is
considering the unthinkable.

LETICIA DE MESA: The worst thing would be to sell the house
and if I sell the house, I lose all, you know, the hard work, the achievement
that we did.

JENNY BROCKIE:
Leticia, thanks very much for joining us tonight. I know that was probably
upsetting watching yourself there but, um, you've just turned 64.

LETICIA DE MESA:
Yes.

JENNY BROCKIE: And
your husband is 70.

LETICIA DE MESA:
Yes.

JENNY BROCKIE:
What are you being advised to do now? What sort of advice are you getting?

LETICIA DE MESA: They said to close down but I can't because,
if I close down, I lose. I will still be indebted with the bank and the bank
will definitely get my house.

JENNY BROCKIE: Do
you think, is it possible that you just made a bad business decision, that it
was just not a good decision to go into that kind of business at all or do you
think that really it is about the economic circumstances?

LETICIA DE MESA:
I don't know. I think about that as well. Sometimes, me and my husband will
discuss that we made the wrong decision. But at that time the business was
doing well but only the past two years that it's been going down.

JENNY BROCKIE: And
I guess you thought because you'd managed to get ahead with the house that
you'd similarly get ahead with the business, yeah?

LETICIA DE MESA:
That's right, yeah.

JENNY BROCKIE: And
borrowing the money wouldn't be a problem?

LETICIA DE MESA:
Yeah.

JENNY BROCKIE:
Anne, now, you've owned two lighting shops for more than 20 years. How does...
what's happening now? What are you seeing now in business, in small business,
compare to previous periods where there was slowdowns in the economy?

ANNE PARNHAM: Well,
the previous one was the recession we had to have, where it was mainly people
had their mortgage and a lot of people were worried about losing their houses
as they were worried about losing their businesses, but I found now that
there's a lot of personal credit as well, that people are in debt to... which
affects my business in retail. But what we're doing, we've just cut back. Because
I've been through it before I cut back. I'm doing probably the work of three
people myself. I'm doing six days a week, long hours. I've gone from 10
full-time people to 2 full-time and 6 part-time and casuals. You're just really
conscious, once you've been through it before, I find it's you're very, very
aware of making sure that you minimise all your expenses, there's no waste.
Even my staff sometimes laugh at me when I turn the airconditioning off in the
shops, but things like that where you really do cover every angle and every
expense.

JENNY BROCKIE: So
is that because you're cautious because you been through it before or is it
because you absolutely have to do it or are you anticipating things?

ANNE PARNHAM: I'm
anticipating because I don't ever really want to be in a position like I was
before where I thought I was going to lose not only my business but my house.

JENNY BROCKIE: But
how are sales actually going?

ANNE PARNHAM: Well,
sales are down. Sales have been down in all business, all retail. I know for
quite a considerable time, for 18 months to two years, some businesses are down
50% - that's not my business, but mine's still down. We've also got cheaper
imports which we're selling a lower-priced article as well. We've still got
customers who have got quite a lot of money to spend but in general the
day-to-day sales are down in nearly all retail businesses.

JENNY BROCKIE: I
find this story very interesting, and I'd like to ask a few of our economists
about this because there's an element of sentiment in these decisions, isn't
there, Ross Gittens, about having been through a recession before, acting
before you get into trouble to get rid of staff?

ROSS
GITTENS: I think that's actually quite an interesting aspect of it, that people
who have seen a recession before are better prepared. But really you see in
those stories just how tough it is for small business. First, small business
tends to be connected to retail, retail sales, the consumer spending, and
consumer spending is the part of the economy that's really been weak and the
other thing is that bank lending to small business is often, almost always
these days, done on the security of your home and that means that when you have
trouble in the small business you have a very high chance of losing the house.

JENNY BROCKIE: But
given that we still have relatively high levels of employment in the country -
I know job vacancies are down, but still, you know, there's a reasonable level
of employment in Australia - are people not spending because they haven't got
the money, do you think, or are they not spending because they're fearful of
the future?

ROSS
GITTENS: I think you've put your finger on it. Right now they're not spending
because they're worried and they're worried about times seem to be getting
tough. "I've got all this debt. What am I going to do about it? I know,
I'll pull my horns in, I won't spend as much, I'll try and pay off a bit of the
debt and get myself into a better position"just in case I was to lose my
job or something like that." So, yes, that's all anticipation and it's all
about sentiment and what's clear is that people, ordinary people in households,
are a lot more anxious about the future than they were and that is causing them
to cut their spending especially on discretionary items like flowers.

JENNY BROCKIE: And
that in fact in turn affects a business like this.

ROSS
GITTENS: Yep.

JENNY BROCKIE:
Steven Keen, you've gone out on a limb. You say we're heading for a recession.

STEVEN KEEN,
ECONOMIST, UWS: It's calling it sentiment and focusing on those psychological,
and if we felt better the situation would be better. The reality is households
are carrying seven times as much debt per income as they were carrying back in
1990 and when you put on the fact that interest rates are half what they were
then, the burden is 3.5 times as bad as the depths of the 1990s recession and
that's why people are cutting back on spending. Flowers have gone down, alcohol
has gone up. I think it's a worst sign when flowers go down than when alcohol
does.

JENNY BROCKIE:
That's sad. I think that's sad, yes.

MICHAEL HART:
Jenny, I think they've hit the nail on the head with this confidence thing.
It's about confidence of, um, the people to go out there and borrow money.
People of my age can remember that we were paying 17% interest at one stage.
Now, that was OK when you borrowed $30,000 for your first house and that was,
like, twice your salary in a year. Now when you're borrowing $300,000 or
$400,000 and it's four or five times your salary, the damage can be done really
quickly.

JENNY BROCKIE:
Now, Michael, you just sold your business, your manufacturing business.

MICHAEL MCNAMARA:
Yes, I have.

JENNY BROCKIE:
Why?

MICHAEL MCNAMARA: I
probably procrastinated over that for a number of years and I really wish I'd
done it a year ago but I finally sold my business last Friday and I did it
because of a lack of confidence in the economy.

JENNY BROCKIE: Was
the business in trouble or did you just...?

MICHAEL HART: No,
no, my business, it's a great business, but I did it because of my lack of
confidence.

JENNY BROCKIE:
Chris Bowen, how do you deal with something like that? Someone whose business
isn't in trouble but they're fearful about the future and so they're going to
sell the business? Is that part of your problem at the moment?

CHRIS BOWEN: We've
seen confidence rates fall around the world. It's quite remarkable, actually.
In almost every developed country in the world, you see confidence rates fall
from the recent levels back to about 1992 levels. Here, in the United States,
around the world. I do think confidence is an issue because we need to be
careful here. The fundamentals of the Australian economy are strong. I mean, we
have, we have a strong budget surplus, we have a big inflow of money from China.
The fundamentals are strong.

JENNY BROCKIE: But
the Opposition's accused you, though, of affecting confidence by talking things
down - that's what they're saying. The Government's talked the economy down.

CHRIS BOWEN: Well,
they would, wouldn't they? Well, they would, wouldn't they? But they don't
acknowledge that confidence has fallen around the world in every country for
pretty obvious reasons - petrol prices, international financial turbulence.
It's pretty obvious why confidence would fall in every country around the
world.

JENNY BROCKIE: OK.
Fundamentals are sound, Saul?

SAUL ESLAKE: At the
moment it's true that more people are pessimistic and that's not surprising
when you consider how much interest rates have risen, how much grocery prices
and fuel prices have risen. Households are doing it tough compared with the
rest of the economy.

JENNY BROCKIE: But
is Chris Bowen right when he says the fundamentals are sound?

SAUL ESLAKE: Many
of them there, some of them are not. We have a big current account deficit, for
example, and that's probably one of the reasons why the exchange rate has
fallen. But if the economy were to fall into recession - and that's not my
forecast, unlike Steve's - but if it were to fall into recession, then the fact
that Australia, unlike most of our major OECD peers, is running a large budget
surplus means we have far more scope than they do to take measures to deal with
it by cutting taxes and increasing government spending.

JENNY BROCKIE:
Steve, you were scoffing at the idea the fundamentals are sound.

STEVEN KEEN: Every
time people say fundamentals are sound, you ask them what do they mean by
fundamentals, they will never answer "the level of private debt". If
you include that in your level of fundamentals, we've got a level of private
debt that's not only worse than we've ever had in history but twice as bad as
we got during the Great Depression. You call that one of your fundamentals and
the system is really, really fragile and that's why people are seeing the
results in retail now because that level of debt simply can't be carried
forward.

JENNY BROCKIE:
Chris Bowen, debt?

CHRIS BOWEN: Of
course debt is high. It means, for example, as other people have said, that
debt repayments are higher now than they were when interest rates were 17%. The
percentage of people's income going on debt repayments percentage of debt is
higher. But I come back to my original point. I don't step away from the fact
that Australia
is very well placed to get through the most difficult economic time in 25
years.

JENNY BROCKIE:
Some of our businesspeople want to comment? Yes.

ANNE PARNHAM: With
the personal debt, I've had people come into my shop who have tried to use up
to 10 credit cards that have all bounced. I mean, the personal debt out there
on credit cards, some people are really minimising. I've seen them in banks
going in for a lower interest rate on their cards but they're coming in. I even
had a lady try to use a credit card from an interest-free other business. I
mean, they're getting a bit desperate out there. Some people are tightening up
and being very sensible about it but the level of personal debt is very, very
high and this is where it's very difficult for each individual.

JENNY BROCKIE:
We're ranging across a whole lot of stuff here. I'd like to swing us back to
housing because that's very much our focus tonight. Tim, you're 22 and you're
Michael's son. Now, you bought a unit two years ago on Dad's advice, right? And
now he's told you to sell.

TIM HART: Yep.

JENNY BROCKIE:
Will you lose money?

TIM HART: No, I
won't. I'll actually make a fair bit and that's part of the reason I'm selling.
I think it's better to have that money in the bank and add my mortgage
repayments to that so I have extra.

JENNY BROCKIE: How
much do you think you'll come out ahead?

TIM HART: $60,000
or $70,000.

JENNY BROCKIE: OK,
and how long has that property you want to sell been on the market now?

TIM HART: Two
months now.

JENNY BROCKIE: Two
months, and do you think you will sell it soon?

TIM HART: No, I
think I've just missed the boat for selling it.

JENNY BROCKIE: So
you might not get your $60,000?

TIM HART: No.

JENNY BROCKIE: You
also just lost your job at a luxury boatbuilding company now, despite having
been an apprentice of the year at one stage, I think - is that right? - at the
company?

TIM HART: That's
right.

MICHAEL HART: Three
years in a row.

JENNY BROCKIE: Two
years in a row?

MICHAEL HART: Three
years.

JENNY BROCKIE: Three
years in a row. So how come you lost your job?

TIM HART: Well, the
Aussie dollar, oil and a lot of cheap American imports - they had to cut right
back.

JENNY BROCKIE:
Because we're hearing about job vacancies being down, Chris Bowen, and we've
got a few people here. I'd like you to listen to a few of these stories and
then get your reaction to them. Maxine, you took voluntary redundancy from your
job at the SPC factory in
Shepparton, in Victoria
- why?

MAXINE THORP: Oh,
it was a long, hard thought I can also see that the company, SPC, is being taken over by a multinational a few
years ago and, although we were told that they would not bring in stuff from
overseas and put it on the Australian shelves, if you go out there you can see
it and I also know that our warehouses are bringing in more and more foreign
product. It does have the SPC
label on it but, if you look at it, it's not made here.

JENNY BROCKIE: But
what did they offer you and why did you decide to take the redundancy?

MAXINE THORP: We
can't see into the future so for me at this stage it's time to move on and try
and find something else.

JENNY BROCKIE: And
take the money and run, yeah?

MAXINE THORP: Yes.

JENNY BROCKIE:
Tony, you and Maxine have a joint mortgage and you work for a pool building
company. How's business looking where you are?

TONY MIZZI: Pretty
bad, very bad, actually. It's just gone down hill in the last two years, yes.

JENNY BROCKIE: So
what are you going to do?

TONY MIZZI: Look
for another job, yeah, or try.

JENNY BROCKIE:
What about you, Tim? You have a temporary job at a business your dad has just
sold. You're now working for the company Dad's just sold. Would you consider
moving for work? Is that an option?

TIM HART:
Definitely, sure is.

JENNY BROCKIE:
Have you got your eye on the mines, like a lot of other people your age?

TIM HART: I do
actually, yes. I'll have to do some courses and get some experience in civil
engineering but that's where I'm looking.

JENNY BROCKIE:
What have you heard about the job situation there?

TIM HART: In the
mines? A lot of money, and I gather they're crying out for people.

JENNY BROCKIE:
Chris Bowen, two different things happening here. How does the Government deal
with that?

CHRIS BOWEN: It's
one of great challenges for economic policy-making for us and the Reserve Bank
at the moment. Some people say Australia
has got a 2-speed economy. I think it's more like a 5-speed economy personally
and you have the situation where they are absolutely crying out for workers in Western Australia. You
go there and the place is booming and the biggest constraint is trying to get
people. But you do have pockets of growing unemployment elsewhere.

JENNY BROCKIE: And
do you think those divisions are going to become more pronounced over the next
few years, those different-speed economies? Do you think we're going to see
more of a difference between the haves and the have-nots.

CHRIS BOWEN: Well,
over time you'll find these things to some degree being balanced out as the
money from Western Australia and Queensland flows through
and you find the economy adjusting. So over time you will find that adjustment
but it won't be an easy period or an easy process.

JENNY BROCKIE: Insight
is talking about housing and I'd like to talk about the resources boom in a
minute but before we do, Hugh, I'd like to ask you about a study that you did
which found that Australia, in terms of housing, has the least affordable
housing in the English-speaking world.

HUGH PAVLETICH,
CO-AUTHOR 'DEMOGRAPHIA REPORT’: To give you some idea of that, I'd say at this
point that housing should not be any more than three times household income for
it to be affordable. But just at this point it appears to us that Australia is
sitting at seven times household income, New Zealand about six, the United
Kingdom at about five, and Ireland at about four and the United States and
Canada just a little bit above three, a wee bit over three times household
incomes.

JENNY BROCKIE: So
why the big difference between Australia
and other countries?

HUGH PAVLETICH:
Households shouldn't be carrying any more than 2.5 times their annual income on
debt but we're just hearing stories here tonight four, five, six times annual
household income, and that's the real problem. So the whole issue of housing
affordability, opening up land, getting houses on the fringes at about $140,000
for starter homes, where people can have about $125,000 mortgages and, if you
like, the lot's cost should not be any more than about $30,000, the house
construction $110,000 - that's where the housing prices should be on the
fringes of the cities in Australia.

JENNY BROCKIE:
What do you think listening to that, Ross? Dreaming?

ROSS
GITTENS: I think it is a bit and I certainly don't think that problems with making
land available at the edge of the city, I don't think that that does very much
to explain why house prices generally rose so high. I think that was much more
about Australians responding to low interest rates by saying. "You beaut!
Now I can buy a much bigger, better home because interest rates are so much
lower."

JENNY BROCKIE: So
you put quite a bit down to greed?

ROSS
GITTENS: When everybody says that roughly at the same time the main effect of
that was just to bid up the price of houses. A lot of what was going on in the
housing boom was people, established home owners, people who are on their
second or third home, saying, "Now that interest rates have fallen, I can
move closer to the city, I can move to a better location, a better located
house." It wasn't about first-home buyers not being able to afford houses
on the edge of the city.

JENNY BROCKIE: I'd
like to get a comment from Denis.

DENIS HICKEY, CEO RESIDENTIAL, STOCKLAND: Yeah, I mean, there's
been a lot spoken today about the driver of what's happened to the increases in
house prices but one thing that has happened is that Australian population
continues to grow and we have a supply/demand imbalance and what's happened
probably about five to ten years ago, State governments around Australia
decided to restrict land supply and they underestimated the population growth
and underestimated the amount of demand that was going to be for housing which
has led to, as Ross says, a bid-up of house prices.

JENNY BROCKIE: But
we hear the industry arguing this all the time - just release more land, build
more houses - everything will get a lot better. Chris Bowen, do you buy that
argument?

CHRIS BOWEN: I
think on balance I agree with Ross that this would have an impact at the
margins but there are a lot wider and more important factor as well.

JENNY BROCKIE:
Louis.

LOUIS MIKLOVITS, CEO, AV JENNINGS:
Certainly at the margin I think housing is overtaxed and the supply is
excessively restricted.

JENNY BROCKIE: But
if you lower the tax, everybody floods the market and the prices go up again,
don't they?

LOUIS MILKOVITS:
Not really. When housing activity, particularly on the western Sydney, has almost come to a standstill it's
partly because people can't afford it, the taxes are too high.

JENNY BROCKIE:
Jago, what do you think about the argument of releasing more land on the fringe
of the cities?

JAGO DODSON: You
started your show with a number of stories about house prices dropping so the
suggestion that some supply constraint is causing house prices to go up, that's
been disproven by the anecdotal evidence you're providing in the start of your
show and, if you look at the data, it's the outer suburbs where house prices
are declining and in part it's not just the affordability question, it's the
broader cost of living expenses as well and things like petrol prices, for
example, that have put huge pressure on household budgets and relative to
incomes.

JENNY BROCKIE: So
what do we do? So what do we do with housing unaffordable, with high interest
rates?

JAGO DODSON: Well,
what we've done is, we have put urban growth boundaries in but the governments
haven't produced a proper supply-side strategy for housing to ensure that there
is adequate housing being produced within the urban limits that we've set in
order to preserve that environmental quality. We haven't had a serious approach
to a supply-driven agenda in housing policy in Australia for a couple of decades
now. It's all been based on assuming that by fiddling with interest rates we
can manipulate demand for housing and that will be the sole measure by which we
can ensure that housing is adequately affordable. We haven't had that supply
side strategy for a long time.

JENNY BROCKIE: I
would like to talk a little bit about jobs because I think jobs are actually a
really important part of this equation.
Ross Gittens, what sort of impact do you think immigration and the
skills shortage have on housing prices? Do you think we're going to see them
going up further, demand making them stay high?

ROSS
GITTENS: Well, there's no doubt that increasing immigration puts upward
pressure on house prices, especially in cities like Sydney,
but also in States like Western Australia and
perhaps Queensland.
But I don't think we should assume that if the economy slows down and that
slowdown is sustained, we'll still have huge levels of immigration. I mean, one
of the things we know is that immigration is very cyclical and we don't have
high levels of immigration when the economy is slowing. The only qualification
to that might be if mining and construction are still going strongly, no matter
what's happening to the rest of Australia,
then we might be attracting skilled foreign labour into those industries and
those States.

JENNY BROCKIE: And
we're getting these 457 visas and so on the Government's introducing and we've
seen increased levels of migration under the previous government. Chris Bowen,
do you think that's going to continue, given the economic situation, because it
does all impact in the end and I keep trying to get back to housing, but it
impacts on housing - do you acknowledge that?

CHRIS BOWEN: Look,
I think the biggest constraint, the industrial expansion - I use the term
industrial broadly - on corporate expansion at the moment is the shortage of
labour. It used to be shortage of capital, the shortage of money. Now it's the
shortage of people.

JENNY BROCKIE: Is
that the case for our businesspeople here? Have you felt that? Yep, yeah. So
even though you're laying people off, there's a shortage of labour.

ANNE PARNHAM: Well,
yeah, there is a shortage of labour. It's also too... it's very difficult for
me because trying to get someone who's trained or wants to stay in the same
line of work. If I do advertise, I get quite a lot of people apply but not
everybody wants to do the work in some instances. So there's something else
comes into it as well.

ROSS
GITTENS: See, I don't think that can be sustained. You can make a special case
for mining and construction but I don't think you can have a situation where
the economy is very flat but employers generally are complaining that they
can't get labour. Those two propositions do not fit together. If we've got them
both existing now it's just a matter of time before they resolve themselves
and, as long as the economy stays pretty flat, then the outlook is for easing
pressure on labour and rising unemployment.

JENNY BROCKIE:
Yeah, rising unemployment, Chris Bowen?

CHRIS BOWEN: Well,
again we're seeing a slowdown in the economy around the world and part of that
is an edging up of unemployment but I think we are going to see unemployment
continue at historically low levels.

JENNY BROCKIE: But
how much do you think it will creep up?

CHRIS BOWEN: Well,
I think we'll see some increase but, as I say, I don't see it getting I don't
see significant increases. We saw I mean, the Budget had some predictions about
what would happen to unemployment and they are edging up over a period of time
rather than a massive increase.

JENNY BROCKIE: And
doesn't do much for sentiment, yeah?

CHRIS BOWEN: Well,
again, these conflicting forces on the Australian economy. We're seeing
business investment very strong and we're seeing consumer sentiment down but
these are the conflicting forces that all governments around the world are
grappling with.

JENNY BROCKIE: We
are going to have to wrap up but, Saul Eslake, I want to ask you We hear all
the time about the resources boom and the debate about whether it's going to be
our saviour or not in this situation, whether we'll withstand the pressures
that exist internationally because of resources. What do you think and again
then, what are the implications for housing.

SAUL ESLAKE: Well,
resources boom is being driven by the rapid growth in the industrialisation of
countries like China and India and if you look at where they are today compared
with where countries such as Japan and Korea have been as they've gone through
an essentially similar process, then my conclusion is that China's and India's
thirst for our resources has probably got another 15 years or so to run,
although that, hopefully, will increasingly take the form of a growing volume
of exports of resource products rather than simply ever-higher prices for them
and that will save some of the aggregate parts of our economy. That won't
necessarily prevent individual sectors and regions of the economy from feeling
a good deal of pain in the mean time.

JENNY BROCKIE: And
what do you think in the end it is going to mean for housing for the people at
home listening now, because I think a lot of the time they're trying to work
out whether in fact housing is going to become more affordable, whether they
should wait, what should they be doing in relation to housing?

SAUL ESLAKE: If you
look at the resources boom in isolation its effect will be to put upward
pressure on the pricing of housing in the areas that are the epicentre of the
resources boom.

JENNY BROCKIE: So Western Australia and Queensland.

SAUL ESLAKE: The
north of Western Australia, Central Queensland, those sorts of areas. However,
that's not the only factor impacting on the economy as a whole or on individual
housing markets. Things like interest rates, the availability of debt, levels
of consumer confidence will have much more of an impact in Sydney, Melbourne,
Brisbane, Adelaide, Tasmania than anything that's happening in the resources
boom and the picture varies across different parts of those suburbs. My own
sense is that house prices will stagnate for a while, fall in some areas, go up
a bit in some others, but they will not start to rise again until interest
rates have fallen by at least 2 percentage points from their present level and
that incomes and confidence have started to improve a bit. That's a couple of
years away at least.

JENNY BROCKIE: Steven.

STEVEN KEEN: I'm
with you here. I see about a 50% fall in houses being necessary to get back to
anything like affordability and, with the debt levels we've got, it will drive
pries down, not as rapidly as it's doing in America, but it will have to drive
them down over a very long period. If we look at Japan, house prices fell 42% in 15
years. I think we'll see a similar sort of pattern here.

JENNY BROCKIE:
40%?

STEVEN KEEN: 42%
across the country, 75% in Tokyo.

JENNY BROCKIE: So,
Steven, you'd be saying to people - don't buy now, wait.

STEVEN KEEN: I'd
say we're going to see a decline in house ownership because people are going to
make the decision with these prices, "I'd rather rent if I've got a
job."

JENNY BROCKIE:
Ross, are you that gloomy about the value of houses? It's gloomy depending on
which way you look at it, whether you're a home owner with a big mortgage or
not.

ROSS
GITTENS: Well, if house prices fell by 40% over 10 or 15 years that would be
terrific. The trouble is house prices tend, if they're going to fall, to fall
in a big lump over a very much shorter period and that is not good news for the
economy. That's not good news for anybody because that just scares the pants
off all of us and deepens any downturn that we have.

JENNY BROCKIE: Is
there anything much that you think the Government could be doing now to help
people in terms of home ownership or renting in Australia? Do you think there are
things they should be doing and they're not doing?

ROSS
GITTENS: I think the main direct short-term thing that they could be doing is
something that they've started doing but probably should be doing more of, and
that is subsidising the building of affordable rental accommodation, adding to
the rental market.

JENNY BROCKIE: Comment
up here.

MICHAEL MCNAMARA,
FORMER GM, AUST. PROPERTY MONITORS: Every time we talk about affordability,
someone says, "Let's just release more land, that will fix the
problem." Well, it won't. For a start, it's got to be affordable land. The
second thing that we've got to do is make fast, effective public transport
available to these areas. I'll give you an example in Sydney. If we had if we had fast, effective
public transport to Penrith or Campbelltown that would get you into the CBD within half an hour, it would give genuine
affordable options for first-home buyers and if governments back that up with
incentives to encourage employers to move to those districts you suddenly build
these satellite cities that give people genuine affordable options. And we just
don't seem to have that foresight.

JENNY BROCKIE:
Chris, it's a good point and I've heard this a number of times in this room
when we've done programs about sustainability, about housing and so on, that
governments really do need to start thinking decentralising in order to create
more opportunities for people in areas outside the centre of the major cities.
Do you agree with that and, I mean, what are you planning to do about it?

CHRIS BOWEN: In
broad terms I do agree. I do think we need the Federal Government interested in
urban infrastructure, interested in how cities work. Interested in the sorts of
transport out to the western parts of major cities.

JENNY BROCKIE:
Being interested and actually doing something are two different things, aren't
they?

CHRIS BOWEN: And
create an infrastructure investment fund to do it which will do it over a
period of time. I mean, you don't build a railway line in six months but you do
set up for the future.

JENNY BROCKIE: I'd
like to wrap up with some of our home owners that we started with and just to
get a sense of how you feel having listened to all this tonight. Simon, how do
you feel about still struggling to pay that mortgage?

SIMON WOODS: I
suppose it would be nice to have the sort of conversation about the time we
bought. I suppose when we bought it was at the peak of the market, the State
Government just announced the increase in the stamp duty exemption so we felt
at the time if we didn't get in then we'd never own a house. So you've got to
live somewhere, so I suppose at this stage, while we can service the mortgage
and have that sort of stability, we'll just have to keep battling away.

JENNY BROCKIE: Taylor, does your
decision still seem like a good one?

TAYLOR WEBB: Yeah, I mean, hindsight's a great thing but
you've got to get in at some stage. I think you're damned if you do and damned
if you don't. I'd rather be paying off my own house than renting at this stage.

JENNY BROCKIE: OK,
we are going to have to leave it there. Thank you very much, everybody, for
joining Insight tonight. Great to have you with us.

That is Insight for this week but keep talking online. In
fact, try out our new website at: sbs.com.au/insight Insight's repeated on
Friday at 1:30 and again on Monday at 3:30. Next week, courage - why do some of
us confront danger and act while others hold back, sometimes paralysed by fear?
Fascinating discussion about courage next week where we talk to the brave and
the not so brave. That's next week. Until then, goodnight.