The economic year ahead , Australian Financial Review , 2 January 2003

My predictions for 2003 with a look back at my record for 2002.

As regards the Australian economy, I have, like many others, been surprised by the length and strength of the bubble in housing prices. Fortunately, having learned from past experience that it is easier to diagnose a bubble than to tell when it will burst, I refrained from making any prediction about the timing of the bubble’s inevitable end.

It now seems clear, however, that the period of rapidly rising prices has come to an end. The optimistic view is that the boom will be followed by a plateau, rather than a collapse. However, as the Japanese experience suggests, a long period of stagnation can be just as painful as a short sharp shock. Prices are well above their equilibrium real values and, at current prices, the housing stock is well in excess of total demand. While it is impossible to predict the course of this adjustment, it is safe to predict that it will be unpleasant, at least for the housing and construction industries.

The big question for Australia is whether the strong performance of the past couple of years is a fortuitous by-product of the real estate bubble or a reflection of underlying economic strength resulting from microeconomic reform. I lean to the former explanation, and therefore to the view that a slowdown in housing and construction is likely to be transmitted to the broader economy.