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

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.


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.


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?


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.


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.


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?


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?


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?


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?


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.


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.


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.


JENNY BROCKIE: And your husband is 70.


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?


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.


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: 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.


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?


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?


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.


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.


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.


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.