Australian economic bubbles: which will burst next?

Bubbles are funny things – they grow from seemingly nothing, float around for a while and, all of a sudden, burst into thin air. An economic bubble is not as dramatic, but at the same time, we can acknowledge that they draw upon similar characteristics.

By definition, an economic bubble is created when an asset is allowed to unsustainably (and often irrationally) increase in value. We have seen, and continue to see, these trends occurring ‒ anything from tulip importation in Holland during the early 17th century to more contemporary bubbles, such as housing inflation and mining booms.

One would suggest that the real trick with economic bubbles is predicting which will be the next one to burst. When investing, for example, you’d want to catch a bubble right when it reaches its peak, before everyone else realises the same thing ‒ because, more often than not, it will burst.

Mining

The Australian mining bubble has been driven largely by a Chinese-fuelled pursuit of the nation’s natural resources, mainly coal and iron ore. Some would argue that this bubble has already burst. However, another one of our natural resources, nickel, continues to remain strong, maintaining the bubble for now. This investment boom brought about higher-paid jobs for skilled and unskilled workers, as well as a housing boom in remote mining towns across Western Australia and throughout Perth.

Although it seemed that China’s economic strength and domination would never end, we are now seeing a flatline within the mining sector, as China rethinks its investment strategy – this is only too evident from a decrease in housing value in Western Australia. How sustainable is it for the mining sector to continue to dig up Australia’s outback for foreign investment and gain? This bubble ‒ more so than others ‒ is likely to burst completely, sooner rather than later.

Housing

The Australian property market has arguably been the most topical economic bubble of recent years, and has affected far more people on a personal level. Property valuations have been stretched to unimaginable lengths, particularly in Melbourne and Sydney, encouraged by lending authorities and a tax system which rewards investment. In Australia, we are among the world's most-indebted with more than $1 trillion of mortgages. This increase in housing debt is both remarkable and concerning, partly because of the limited timeframe in which it has occurred and partly because it has transpired during a period of low wage growth and interest rates. What’s even more concerning is that a large, growing proportion of mortgages are funded offshore.

If markets crash, banks and credit institutions will be forced to seek taxpayer-funded, government bail-outs. Property debt – although it brings much-welcomed investment and resources into the country – is not sustainable for our economy at these current levels. Unwinding tax incentives could be one step towards balancing this bubble, and avoiding our next burst.

Personal debt and credit

A flow-on effect from Australia’s housing bubble is the development of a credit bubble. While Australia’s overall economic position is relatively strong, 2015 data from the International Monetary Fund suggests it has the worst debt trajectory of any developed country. Additionally, recent ABS figures have revealed that our gross national income has remained stagnant across 2015-16. If our population is presumably growing and national income is stagnant, then income per capita will, more likely than not, decrease.

This is a worrying sign because when incomes fall, it’s hard for people to adjust their expenditure to match. It’s natural to look to other options to assist with the decline, whether that be contributing less to superannuation or going further into debt. This is aided by increasing credit card debts to unsustainable limits or drawing funds off the mortgage.

Although this bubble can be credited to a number of factors, the main concern is that Australians are ultimately spending and consuming more and putting themselves into further debt. The current economy is no longer as strong as it was during the height of our resources boom to maintain these trends in spending.

When dealing with economic bubbles, it is more likely than not that when things grow and increase in value at a rapid rate, it is unsustainable. Australia has seen several bubbles form over its history – more recently the mining, housing and credit bubbles. Not only is it up to the government to help curve the sudden burst and potential consequences, it is up to the individual to be aware of the evanescent nature of economic bubbles and their benefits.

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