Monday, December 06, 2004

Behind the facade of our miracle economy (Australia)

The debt-financed veneer of suburban prosperity will not last, writes Geoff Strong.

The woman was in her late 20s or early 30s, well spoken and well dressed - an unlikely image of a beggar, but begging was what she was doing. Equally unexpected was the location; not the Bourke Street Mall or Swanston Walk but a Shell service station among the bright new homes of Mill Park in Melbourne's north.

Here, to the backdrop of dreams that give the impression of being realised, she was walking along the line of folks who had stopped to fill their cars asking for money.

There was quite a queue because petrol had just fallen below $1 a litre for the first time in a while. Her pitch was not that she was homeless or that she needed food for hungry kids - it was that she needed fuel for a hungry car. The car, a 20-year-old Ford LTD, was a battlermobile - big and reliable but with the thirsty burble of a V8 under the bonnet.

She scraped together about $4, enough, she said, to get home. Was she simply caught short as she said, or was it a sign of something else - an image of things to come?

We were told last week that Australians are now in debt to record levels and we owe about $1.63 for every dollar we earn. Our savings are at record low levels and the money lent to us by our banks is, in turn, borrowed from overseas.

The houses I could see across the road from the service station, with their collonaded fronts, little turrets and fancy brickwork, were the architectural expression of nostalgia. There is little to be seen of the hard-edged forensic stainless steel and glass style favoured now in Melbourne's wealthier waterfront suburbs. Here people seem to want the reassurance of a time past: certainly stable and secure, but not unlike the set for a TV costume drama.

Over the past decade, financial institutions have been tempting us to borrow against the equity we have in our homes, based on perceived market value. Why wait to save, we have been told, when we can have new cars, overseas holidays, stainless steel kitchens, six-channel home theatres and wide-screen televisions. Those same wide screens open up to even greater delights, some of which did not even exist a decade ago. Most of them are imported and our weakness for them adds to the national debt.

Reserve Bank figures show that in 1992 household debt was 56 per cent of income. At the end of 2002 it was 125 per cent. Over that period the average mortgage went from $82,000 to $175,000. Over the same period income rose about 40 per cent and, at the same time, jobs became increasingly casual or part time and so less secure.

It was in outer suburbs such as Mill Park that people worried during the recent election campaign about how a possible interest rate rise would threaten prosperity. Yet because people on the outer suburban fringe are among the most reliant on the motor car, we now know higher petrol prices are having the impact of a de facto rate rise.

There is an interesting precedent for a glittering facade. Gregor Alexandrovich Potemkin was an 18th century Russian military leader, politician and lover to Empress Catherine the Great. His name comes down to us partly because of his construction of elaborate fake villages in the Ukraine and Crimea for Catherine to see during her royal tours. She was apparently unaware that the prosperity was a fake.

So are our suburbs a reflection of economic potemkinism?

Economist Peter Brain, who heads the National Institute of Economic and Industry Research, thinks it is a facade and thus unsustainable and liable to collapse.

"One of the problems of borrowing against home values is that values can fall, but the debt will not. House prices are static in most of Australia and have already started to fall in Sydney," he says. "We are borrowing overseas to fund consumption and leaving nothing to the next generations except debt. The next generations, X and Y, will have nothing to inherit."

So who will own the tracts of housing in a generation? Brain thinks that in 20 or 30 years, if we don't do something to stop the debt blow-out, much of our housing could be owned by overseas investors, the same sort of people who are lending money to the banks for us to borrow.

Begging at service stations might be more common by then.


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