IMF Warns Of Trouble With Costello’s Housing Bubble Simon Crean - Shadow Treasurer, Deputy Manager of Business in the House

Media Statement - 22 April 2004

Following it's warnings in 2002 and 2003, the IMF today joined with the Reserve Bank, the Secretary of the Treasury, the OECD, and the Council of Financial Regulators in warning about the dangers of the Peter Costello housing bubble.

While Peter Costello tells Australians they've never had it so good, the IMF's warning shows that his housing bubble and an economy driven by consumption and record household debt remains a major risk to Australia's economic outlook.

As Peter Costello prepares to fly out to the IMF, the IMF in its World Economic Outlook has noted its concerns about:

• The rapid rise in house prices (the ABS notes that house prices rose on average by 6 percent in the last three months of last year and are up 18.9 percent in the year)
• The potential for an adverse impact on consumption from a slowdown or reduction in equity withdrawal rates (noting that a 10 percent decline in house prices is on average associated with a 0.5 percent decline in consumption)
• The high vulnerability of Australian households on account of the rapid rise in the debt burden and rise in the mortgage servicing ratio (especially given the large proportion of variable-rate mortgages)
• The significant proportion of speculative investment in the housing market.

Despite repeated warnings, Peter Costello has continued to engineer a housing bubble which has resulted in:

• First home buyers being priced out of the market with the proportion of first home buyers falling to record lows (Chart 1)
• First home affordability falling to record lows with monthly home loan repayments for first home buyers now at $1917, according to the Commonwealth Bank and the Housing Industry Association
• Australians owe more than they earn with household debt as a proportion of income at a record high (Chart 2)
• Mortgage interest repayments now chewing up more of the family budget than ever before (Chart 3); and
• Australians spending more than they earn with a record low household saving rate of minus 2.7 percent.

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