This whole idea of being excited because the value of your home was rising never did make sense to me. Given that most people only sell if they are upsizing, you just end up owing much more than you would if house prices had remained stable.

The only people who really benefited were those who could afford investment properties (and were able to realise the gains by actually selling them off), or older people who were downsizing; and most of those have had to use the money earned to help their children onto the housing ladder.

As for borrowing money against your house to buy expensive gadgets - that is just bizarre.

As the author points out, so much of our recent economic prosperity has been based on the false premise that we had heaps of money to spend. It was a bizarre and dangerous form of Keynsianism: make people think they were rich so that they would spend money, thereby creating more jobs and giving people even more money to spend. Unfortunately it's all paid for by creating masses of personal debt which will eventually have to be paid back.

If you want to create real wealth, you have to create something real, not a chimera. We need proper investment in new industries such as high tech - not just live on the strength of an asset driven economic bubble as we have been for the last decade or so.

So much for Howard and Costello's 'good economic management'.

Cazza. People can borrow, and spend, however they wish. If they are idiots who overborrow then that's their problem. If someone sells or lends something to these overborrowers and then discovers the debt cannot be repaid it is, likewise, their problem.

The Costello/Howard government inherited a huge debt with a massive servicing bill (about $9 Billion per year) which was being added to that debt. Despite the China-fuelled "mining boom" only beginning in about 2002..... see Craig Emmerson's Hyatt Speech May 2008...

"In the year 2000, before the mining boom began, mining contributed 7.6 per cent of Australia's GDP and the service economy contributed 63.2 per cent of GDP. In 2007, mining contributed 6.8 per cent of GDP and the service economy 65.9 per cent of GDP."

...this horrendous situation was immediately tackled and rectified. Australia..and it's banking system now stands firm...as a result

Seeing that the H/C Govt did exactly the opposite to the irresponsible "home-equity wastrels" you mention, can you explain what you mean by doubting that the Coalition govt WERE "good economic managers'? cheers.

Punter57, you ask a fair question.

Ultimately I suppose the issue comes down to how much the government of the day was responsible for the massive increases in house prices and corresponding blow out in private debt that we saw during the Howard/Costello years.

They certainly can't be blamed for all of it - after all house prices were also rising rapidly in the UK and US, although I don't believe they ever reached the giddy heights they did here compared to income levels. But there were specific policy decisions they took that clearly exacerbated the problem.

The reduction of capital gains tax, continuation of negative gearing policies and the introduction of the first home owner's grant, all helped add fuel to the fire.

Added to this they steadfastly refused to invest in anything that would help grow the real economy, holding to an ideology that maintains the private sector will do it all. All that money Howard squandered on middle class welfare and wasted government spending could have been much better used on creating a future for the country.

Therefore, while cutting down government debt had some advantages, by creating the lie that all government debt is bad while private debt is good, they encouraged the situation we have now - an economy based on commodities and debt-fuelled consumer spending.

Mind you, I doubt that the ALP would have done much better during that time given Blair/Brown's poor showing in Britain during the same period.

Helen, I enjoyed your well-written article which captures many of the issues driving the economic crisis in the US. I have just two points of clarification:

1) Mortgage interest is tax deductible in the US on primary residences (and holiday homes) so consolidating personal debt through a home equity line or refi seemed even more attractive because interest on personal debt, car loans, and credit cards is not deductible (note: there is a limit on interest deductions for a home equity line of credit but there is no limit if the debts are rolled into a primary mortgage through a refinancing)

2) California allows people to walk away from the home with no recourse available to the bank but this option varies by state. The IRS can also tax any write-off as it is classified as a "gift" from the bank.

The supply and demand of land/housing and therefore housing price is controlled by state governments, period. Over the past 12 odd years these state governments have predominantly been labor and nimby green restraints have prevailed detrimental to price.

The real problems started occurring back in the late 80's when non-bank lenders came onto the scene.

Prior to these cowboys one had to save at least 20% of the purchase price before the banks would even consider lending money for a house.

Then along came the cowboys with thier mortage insurance, our version of the US sub prime loans and thier re-draw facilities. A very clever trap so that fools would forever be in debt.

Then of cause there is the latest debarcle, the reverse mortage.

Now, not only can you buy a house WITH NO MONEY but you can also furnish it and PAY NOTHING for years.

Fools will always be fools. It's just a pitty that we humans are the only animals on the planet that support the weak.

Now I don't mind giving a 'hand up' to anyone, but when the hand up becomes a 'hand out' then I get snakey, esspecially when the hand out gets pissed away time and time again.

I have kids working for me taking home $600 to $800 per week and saving zero.

As cole says, better start looking for an opportunity for a couple more rentals hey, there is a fire sale about to start.

Thanks guys, not only have you built the house, the driveway and established the lawns, but you have also been good enough to furnish it for us as well. Cheers

Rehctub. In Australia it seems the banks are in pretty good shape. Latest I read, the Big 4 have an average of only about 1.5% of their loans classed as "dodgy", which effectively means the "average saver" with an account is in no danger. ie the asset side of the balance sheet is pretty good (the loans) and covers the liability side (deposits owed to depositors). A run on deposits would cause the banks to be (temporarily?) illiquid but not insolvent.

Meanwhile "the cowboys" have much greater levels of bad loans which DOES suggest these "mortage brokers" could be insolvent (ie the asset % which is "bad" means the true asset value is less than the liabilities). However, since they draw most of their funding from non-bank sources...such as mortgage funds, which have stopped redemptions to avert a run, these "cowboys" do not have to repay the loans from these mortgage funds....yet.

Nett result; banks and bank depositors are generally OK. Cowboys and their investors are teetering in slow motion. The banks are pulling in their heads while the (few?) cowboys remaining active are also wising up. On both sides of the loan game there will be busts with imprudent lenders and imprudent borrowers tumbling. Such is the invisable hand of the market. You cannot make a law against stupidity. Cheers.

Wake up everyone! The main reason for the high housing prices - but of course not the only one - was the high and increasing population growth rate fueled by a mining industry that was raking it in due to high metal prices and heavy demand.

The demand for housing thus created was lubricated by high wages on the mines, easy loans and mass (and understandable) speculation. After all it it seemed, and was far easier to make a fortune through highly geared property purchases than by slaving away at the office all week. People did both.
Government policies such as the first home-buyers grants and tax deductions on interest etc on housing investments all played a role but their passion for bringing more and more migrants into the country is why they should be most harshly criticized. This applies to both Liberal and Labor. What's the difference?

Kulu
I would suggest that the majority of the 'disposable' income generated from the mining boom was not spent on the housing market. Sure there are exceptions, esspecially in towns like airlie beach and other coastal townsa in close proximity to mining towns.

I would rather suggest that much of the money was spent on flash cars, boats and dinners. I am only assuming thought!

Rehctub

I can't state it as a fact that the majority of the 'disposable' income generated from the mining boom was spent on the housing market but the mines paid very well and there have been a hell of a lot of migrants arriving in this country over the last number of years who have to live somewhere. Many of these migrants work in the mines themselves or fill vacancies left by others who were attracted to the mines.

It makes me wonder what is going to happen to these migrant workers now that things have turned somewhat pear-shaped. Will they swell the ranks of the unemployed or will they be sent packing now that we don't need them anymore?

The whole idea of feeding the growth cancer with more and more migrants seemed to me at the time the sort of typically short-sighted policy from our governments that I have come to expect.