Bust is inevitable, however when? Onside Property News - Property Rise & Fall...

Bust is inevitable, however when? 

Our economy with only one lever of growth and it feels a lot like the United States before the sub-prime debt problems, which caused the GFC the historically crash.  

"The RBA policy is implicitly borrowing growth from the future to plug a hole in the present". 

But in doing so the Australian economy is becoming dangerously overburdened with household debt."

New Record high: The rise of the Australian household debt

RBA rate cuts are on the cards again however won't work unless the government and the RBA can rebuild confidence – both at consumer and business levels.

But that's not going to stop the RBA from cutting rates again given, since that's the only tool it has apart from an outright sale of Aussie dollars to drive its value down, which the RBA seems unwilling and unlikely to do, sources suggested earlier this week.

While economic growth may still struggle at a 'below trend rate', the RBA's rate cuts are likely to drive up property prices and with them, the level of household debt in Australia. 

Suggested market forecasting is at 6-7% growth in dwelling prices, being leverage based.
The debt to income ratio for households will likely continue to rise. This is from an already record high of 152.8% as of September. Indeed on the majority of measures and metrics Australia's household debt level is already high compared to our own history and other developed nations.

To in perspective, last week credit rating agency S&P warned the government, via the Wall Street Journal, that its AAA rating would be at risk if the level of debt approaches 30% of GDP. 

Australian household debt is currently above 125% of GDP.

By year's end, assuming further RBA cuts, this 'overvaluation' will be around 12.5%.

The worrying issues may be the following;

1. RBA rate cuts won't get the economy moving enough to get back to trend
2. RBA rate cuts will add further upward pressure to drive dwelling prices
3. RBA rate cuts will drive household debt higher than already incredibly high levels
4. RBA policy implies a risk to macroeconomic stability

If and when rates do normalise in the future this "implies some damaging economic consequences if we assume the wealth effect works as prices decline as is being done (by the RBA) as they are rising.

Its a weary future economy with only one outcome of growth and it feels a lot like the United States before the sub-prime debt problems, that caused the GFC.

That is, the RBA policy is implicitly borrowing growth from the future to plug a hole in the present. 
But in doing so the Australian economy is becoming dangerously overburdened with household debt.

RBA rate cuts won't work other than to drive up asset prices

The RBA efforts will increasingly be less effective and simply drive up asset prices rather than lift the economy. 

However, as the official interest rate declines to fresh record lows, we argue that the further easing of monetary policy risks being a triumph more of higher asset prices and housing debt than significantly improved activity. We expect that the upside to residential construction contributing to growth is relatively limited. 

By contrast, the upside to household leverage seems significant. This is in the context of the RBA previously arguing that it is not the level of interest rates that is the impediment to the business sector investing and employing more. Rather it is being restrained by a seemingly crippling lack of confidence.

Previously mentioned that the RBA recognizes the lack of traction from interest rate cuts but while this almost guarantees "that rates will have to go lower still in an effort to stimulate activity", any stimulative effect will be minimal. And in short effecting the Aussie dollar that may take time to pass through and benefits will go into business's bottom lines, not economic activity.

The real problem, as the RBA has highlighted, is the lack of confidence and risk appetite in the business sector. 

And lower rates are unlikely to assist with this.

With the RBA just this month having downgraded its economic outlook and the Government under scrutiny, both for its leadership and economic credentials, the "confidence-enhancing narrative" that the RBA's Governor spoke about last December is lacking.

Change of fiscal policies is due now, the government needs to act quick before the dollar cripples and housing prices boom to the point of an inevitable bust sometime within the next 2 years.. 

Information above is an indicative representation and is not to be used as a sworn property indication for the future. 

Paul Salsano 
Director 
Onside Property Dulwich Hill NSW 2203
paul@onsideproperty.com.au
www.onsideproperty.com.au