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After the House Party Ends...

February 18, 2006 THE defining structure of John Howard's Australia is the McMansion. The house with four or more bedrooms has been the trigger for record household debt, which is now one of the most tangible threats to the nation's longest economic expansion.

Our obsession with bricks and mortar has been stronger than the caricatures of politics and popular culture had thought, based on the latest unpublished official tables crunched by Inquirer.

The McMansion accounts for 60 per cent of the 1.2 million houses and apartments erected since 1995, the tables confirm. It is now the second-most common type of domestic house in the nation, behind the three-bedroom house. There are, in fact, 200,000 more McMansions than the total number of houses and apartments with one or two bedrooms.

The rise of the McMansion has reduced the three-bedroom house to less than 50 per cent of the total dwelling cake (see tables).

The Prime Minister and his Labor opponents of the past 10 years have assumed that the McMansion was the story of young families moving to the outer suburbs, and shedding their former working class loyalties.


As it happens, the politicians were only half right.

Families with one or two children were responsible for 48 per cent of the 716,554 McMansions erected between 1994-95 and 2003-04, the new Australian Bureau of Statistics tables show.

But childless households, namely those comprising a single person or couple, are responsible for another 42 per cent of the boom.

Kath & Kim were closer to the truth than their ABC stablemate SeaChange. Many empty-nester baby boomers have been trading up in the capital cities, not down-shifting to the coastline.

The template for the baby boomer McMansion is when Kath and Kel are alone with their gym equipment and gadgets.

Kath & Kim scripted their matrimonial home as a pit-stop between circuits of retail therapy.

The problem for the real economy is the trips to Fountain Gate are becoming shorter, and less exuberant, because the owners of McMansions are now trying to pay off their mortgages.

Reserve Bank governor Ian Macfarlane quantified the new mood in debtland in his opening address to yesterday's meeting of the federal parliamentary economics committee.

"The risks to the economy posed by the over-heating in housing and credit markets in the period up to late 2003 have eased," Macfarlane said.

"Households now seem to have entered a period of greater financial caution, and this may act as a restraining influence on the growth of household spending for a while tocome."

This is a mixed blessing for the real economy, because while consumer demand has cooled, and house prices have been flat, the amount of new money borrowed is still increasing by 12 per cent a year.

This week, the Reserve Bank revised its tables for household debt, and in doing so made Paul Keating's 17 per cent mortgage rate at the end of the 1980s seem relatively benign with the benefit of hindsight.

As Labor treasurer, Keating pushed the repayment burden on households to 8.4 per cent in the September quarter 1989. This figure measures the share of household disposable income devoted to interest repayments for all loans - the mortgage and consumer credit.

John Howard broke that benchmark in the June quarter 2003. By the September quarter last year, the repayment burden had reached a new high of 10.9 per cent, even though nominal interest rates are less than the half the level they were under Keating.

The previous Reserve Bank research had put Keating's worst at 8.9 per cent and Howard's at 9.8 per cent, a difference of less than $500 a year for a household with $50,000 in disposable income. This week's report recast the gap to $1250 a year against Howard.

The debt debate has taken on a new edge with these revisions.

Macfarlane warned yesterday that household debt would rise further before it stabilised. "For more than a decade, household indebtedness has grown at a rate well in excess of the growth in household incomes," he said.

"Simple rules of thumb would suggest that this cannot be sustained indefinitely.

"Yet there are a number of reasons why these ratios may rise further.

"In a low-inflation environment, nominal interest rates are also low, and households are able to service much higher levels of debt than they could in the past. A significant proportion of households still carry little or no debt, and in the years ahead might choose to borrow more."

Macfarlane said community attitudes were also changing. People were "more willing to borrow against assets later in life".

This is apparent in the Australian Bureau of Statistics tables supplied to Inquirer.

The home ownership rate in Australia has remained stable at about 70 per cent. What has shifted in the Howard era is the share of the population with a mortgage hanging over their heads.

In 1994-95, those who owned their homes outright were 41.8 per cent of all households, while those with a home loan were just 29.6 per cent.

In 2003-04, there were more people with mortgages than with freehold title - 34.9 per cent of the former versus 35.1 per cent of the latter.

Every household type, and every state and territory except the ACT have witnessed a fall in the share of who own their homes outright.

The reasons are complex, but all lead to the same conclusion - a population that is carrying more debt than ever before. Many young families, and baby boomers have been trading up, or borrowing against their title to fund renovations.

Also, the cost of entering the housing market is substantially higher than it was. All capital cities have seen prices jump many times faster than wages since the mid-'90s, nothwithstanding the corrections of the past two years, most notably in Sydney.

"It is quite possible that the rise in household debt ratios could go a good distance further," Macfarlane said. "The risk, of course, is that the process goes too far and that a painful correction ensues."

Those words "painful correction" should send a tremor through the Howard Government. The reason why Keating's interest rate regime led to the "recession we had to have" at the start of the '90s was that businesses had borrowed too much during the boom.

Household budgets, by contrast, were in good shape going into the recession. It was only when businesses started sacking people to reduce their overheads that the community suffered.

The roles are reversed today. Businesses are carrying significantly less debt than households, so they are less likely to begin a wave of retrenchments when the economy slows.

One way to see the switch is to compare the household repayment burden on domestic borrowings with the interest bill on the foreign debt, as measured against export income. The foreign debt repayment burden hit 20 per cent in the September quarter 1990, which was more than double the rate that households faced at the time.

This week's figures had business 1.6 percentage points better off than households, with the foreign debt repayment burden at 9.3per cent.

The McMansion helped to shape the last two election victories for the Coalition. In 2001, Howard managed to revive the housing market just in time, after the indigestion of the GST the previous year. In 2004, he ran a successful interest rate scare against Labor's Mark Latham.

Yesterday, Macfarlane played an interest rate card of his own. "It is more likely that the next move in interest rates would be up rather than down," he said.

Expect voters to be confused if that day comes. The public understands that higher interest rates are meant to stop the economy overheating.

But the economy as they see it is already well off the boil, because they have lost their taste for Fountain Gate.

"The political significance of a much earlier than expected slowdown in trend growth from the 3.75 per cent average of the last 14 years to a rate around 1 percentage point less has not yet dawned on Canberra - but sooner or later it certainly will," John Edwards, a former economic adviser to Keating said yesterday.

A weaker economy, rising interest rates and household debt setting new records virtually every quarter is a cocktail Australia has never tried before.

But this is the legacy of the McMansion. Sooner or later, the party must end. There are only so many things to buy to fill those extra rooms before it occurs to people that they should get their household budgets in order.


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