When I arrived in Australia and turned on the TV in my hotel room, I was bombarded with adverts for mortgage refinancing, equity withdrawal and cheap credit cards. One ad depicted a woman talking elatedly about how she’d managed to pay off $90,000 worth of credit card debt over just three years.
In St Kilda, a trendy district in the south of Melbourne, entire streets were covered in boarded-up shops plastered with the logos of various real estate companies. On one street, someone had taken a Sharpie and written “lower your rent” over every sign, and homeless men and women could be found sheltering in the unused doorways.
A few days later, I recounted my experience to one of the organisers of the political conference I attended, telling him that all the signs pointed to a property boom that was running out of steam. He nodded in agreement: “my house is worth no more today than it was when I bought it two years ago”.
After 2008, policymakers across the world claimed to have learned the lessons of the financial crisis. They recognised that the pre-crisis approach to regulation hadn’t worked — rather than predictable risks in individual institutions, they realised they should have been focusing on unpredictable, systemic risks.
But the financial crisis didn’t result simply from a failure of regulatory oversight. 2008 was a crisis caused by financialisation — and this means much more than simply bigger, under-regulated banks.
A financialised economy will have a thriving banking system, but it will also be characterised by rising household and corporate debt, soaring asset prices, huge capital inflows, deindustrialisation and growing income, wealth and regional inequality.
In the US and the UK, the deregulation of commercial banking and the removal of restrictions on capital mobility led to a lending boom in the 1980s. Banks faced far fewer restrictions on their ability to create money by extending credit, and mortgage lending in particular soared.
As the money directed into property markets increased faster than the housing stock, property prices boomed. Rising house prices allowed consumers to borrow even more by releasing the equity from their homes.
Capital from all over the world flowed into British and American property and financial markets, pushing up the value of the currency and harming exporters. As tax revenues from the sector flowed into Treasury coffers, the state’s willingness to regulate it waned.
Economists failed to pay attention to any of these indicators before the crash, instead dubbing the period between 1989 and 2007 the “great moderation” — a time of high growth, low inflation and generalised economic and financial stability. Only when the boom finally ended did they realise the veneer of moderation had concealed a wellspring of excess.
But the financial crisis did not spell the end of financialisation — instead, it heralded another phase of its expansion. Since the financial crisis, property prices in Sydney and Melbourne have risen 105 per cent and 94 per cent respectively. Private debt-to-GDP, which includes all household and corporate debt, has increased from 184 per cent of GDP in 2010 to 205 per cent today. Household debt is more than 200 per cent of average incomes, making Australian households some of the most indebted in the world.
As major cities have boomed, those areas less reliant on the finance, insurance and real estate (FIRE) economy have stagnated. Sydney alone produces nearly a quarter of the nation’s GDP, with Melbourne responsible for another 20 per cent. Wealth inequality has risen significantly and stagnant wages and rising profits have led the Australian Council of Trade Unions (ACTU) to conclude that Australia is facing US levels of inequality.
Wandering around the conference I was attending, there was a palpable sense of disappointment in the air. In allowing the boom to continue as long as they have, Australia’s political and economic elites have clearly prioritised short-term profits over the nation’s long-term economic health.
Yet at last month’s general election, which many expected to bring the opposition Labor Party to power, voters handed victory to the free-market Liberal-National coalition.
I was surprised by the shock over the election result. Radical governments don’t come to power when the finance sector is booming, property prices are rising, and billions of pounds worth of new money is being created out of thin air every day. It is only when the boom gives way to a bust, and peoples’ expectations of constantly rising living standards are shattered on the rocks of post-crash stagnation, that radical politics comes into its own.
Australia’s property bubble will burst at some point over the next few years — most likely when China’s post-crash boom comes to an end. When it does, the socialist resurgence might just find its way Down Under.