Chris Richardson from Deloitte Access Economics joins me tonight to talk about what would happen to the Australian economy if China stumbled and housing affordability
Introduction: Housing Prices ‘Dangerously Dumb’
Ross Greenwood: Welcome back to Money News right around Australia. Imagine this scenario. Imagine that your house price immediately as of now is down by 9%, depending on where you live, more or less. In other words, it could be down 15, it could be down four, but down on average by 9%. Imagine that the stock market from now drops by 17%. What does that do to your super fund?
Imagine the Australian dollar drops from 75 U.S. cents to 60 U.S. cents. Imagine that the Australian unemployment rate goes through the roof. More than half a million more people do not have a job. As a result, rather than having 12 million people in work right now, we have 11 and a half million people. What does that do to property prices? Well, I’ve already told you. Well, that’s a scenario that is painted by Deloitte.
Deloitte Access Economics has put out what it calls an “over the horizon” report. It basically is saying that you should be conscious that at least this is a risk of taking place in Australia. It may not happen, but it’s also predicated on the fact that China slows down in a big hurry and that we are ill-prepared for that to happen. Chris Richardson is the chief economist at Deloitte Access Economics. He’s one of the authors of this report, certainly gave a significant speech today to the National Press Club, and he’s on the line right now.
Many thanks for your time, Chris.
Interview: Chris Richardson, Chief Economist, Deloitte Access Economics
Chris Richardson: Good day, Ross.
Ross Greenwood: Oh, man, that is doomsday scenario. A lot of people will be sitting there going, “No. That can’t happen. It’s no way known any of those things could happen.” Could it happen?
Chris Richardson: Look, it could happen. It’s not the most likely thing to happen. China is having a lovely year. Because of that, Australia is having a lovely year too, but it is an entirely plausible scenario. China’s having a lovely year in part because it’s still throwing money at its economy by way of stimulus. You can’t do that forever. Were China to stumble again, not what we expect but a plausible scenario, then that would throw a lot of bricks in Australia, which is less prepared to fight off a recession than we were ahead of the global financial crisis.
Ross Greenwood: Okay. When you say “less prepared,” what does that mean?
Chris Richardson: Interest rates, ahead of the financial crisis. We’re high now, they’re low. Same around the Australian dollar. It was high. Now, it’s low. Big federal budget was in the black. Now, it’s in the red. Since the global financial crisis, Australian families have borrowed up a storm, pushed it into property prices, and left the average Australian home really quite overvalued.
Ross Greenwood: Over what sort of period of time could this type of event if it were to occur? It would be a genuine black swan event for Australia. Over what period of time could it occur?
Chris Richardson: Look, between signs of trouble showing up in China, things like iron ore prices, coal prices, apartment prices in China, those troubles really starting to hit home in Australia. You’re talking nine months. You’ll see it coming down the barrel if it happens. Yes, it would hurt. This is not a scenario you want to happen across my professional lifetime. The true tragedies have been the recessions, unemployment jumps. It tends to be quite slow to come down again.
Ross Greenwood: Okay. You say right now, there are a number of amber lights flashing inside China that could at least be alarm bells for this scenario, which you say is the least likely scenario taking place. What are those amber lights right now?
Chris Richardson: That’s a nation that’s borrowed too much and built too much. That combination has led to oversupply. Too much capacity in everything from steel to housing. There are a bunch of businesses that truly cannot pay the interest-only loans. Let alone hand back the principle on those over time. The Chinese authorities continue to pump out that stimulus, which is great.
Again, it’s part of the reason why China’s looking lovely at the moment and so too is Australia, but stimulus is not a permanent answer. The more you rely on it, the more that China is avoiding that change in its economy. It needs to move away from construction and towards retail, raising the risks that the eventual transition won’t be a comfortable one, but ends up being a rocky ride.
Ross Greenwood: Okay. Bring me back to Australia for a moment, because you say that it is not the most likely scenario that Australia sees. That terrible situation where 550,000 fewer jobs, house prices down by 9%, the stock market down significantly also. What is the most likely scenario do you believe?
Chris Richardson: The most likely scenario is that we edge away from the two things that are currently good news, but also contain considerable risks. One is China’s pumped up. Things like iron ore prices and coal prices. That finally snapped that income recession that Australia has had a number of years from 2011 onwards. East China gradually slows its stimulus, then you see a gradual slowdown in some of those commodity prices, not throwing a particular whiplash at Australia’s economy. At the same time, our other risk, as interest rates start to rise further in the U.S. this year, that shows up in Australia in 2018.
Ross Greenwood: Okay. Just quickly to finish off. You said today that house prices in capital cities in Australia, Sydney, Melbourne, in particular, are dangerously down and 30% overvalued. What’s that based on?
Chris Richardson: That’s based on our model of undervaluation for housing prices. It does mean that the Reserve Bank has to go with baby steps on interest rates. It can’t go hard and fast. Every one percentage point increase in interest rates today is the equivalent of a two-and-a-half percentage point increase in interest rates a quarter of a century ago. We’ve borrowed to the gills. The good news is that it gives the Reserve Bank fingertip control, but it needs to be pretty careful, particularly the impact of higher interest rates on housing prices.
Ross Greenwood: I tell you what, Chris Richardson, as always, we appreciate your time. The chief economist of Deloitte Access Economics and that report there, “over the horizon,” gives a sobering view of what could take place if you find yourself overexposed or if the nation finds itself overexposed. Chris, thanks for your time.
Chris Richardson: Thanks, Ross.