With the RBA's help, debt has become king

It’s hardly surprising that the Reserve Bank of Australia (RBA) decided to park the cash rate indefinitely, given the complexities associated with Australia’s fascination of owning real estate.

When one looks closely at the RBA data, our household debt has now climbed to a record $1.870 trillion. Its cause has certainly not been assisted by the avalanche of "autopilot investors" which led the RBA to announce this week that it has concerns about ‘significant’ uncertainty.

Of great concern globally, is that all the central banks presently have their respective cash rates parked at close to zero which has resulted in even greater debt, even though growth keeps trending well below expectations. It is becoming quite clear that those who subscribed to the modern theory that short-term pain would be exceeded by significant long-term gains, have been proved wrong. When growth is trending at below expectation levels, so too are wages, which is why Australia has a ‘significant’ problem. It reminds me of the saying: 'After all, life is really simple, we ourselves create the circumstances that complicate it.'

Once upon a time cash was king – today, debt is king. If you cast your minds back to last year when RBA governor Glenn Stevens addressed the Wall Street Journal he said recession in Australia has a “more or less” 100% probability; only timing is uncertain. It has become clear that a record low cash rate for many has become a 'fool's gold'. Having said that, the money lending market has expanded to unprecedented levels with Coles and Woolworths the latest to apply for entry into the home lending markets.

When one looks a bit deeper into the demographic property markets (over bundling them all together to hide the weak performers) the top end markets have clearly demonstrated a much more cautious outlook. Without a doubt they were the hardest hit during the global financial crisis (GFC) although this time around they are throwing caution to the wind.

I would not be alone by saying the eagerly awaited detailed release of the Murray financial system will make for riveting reading given it is the first inquiry in over 17 years for the property industry – which is absolutely ridiculous. It’s already been announced that the former CBA chief wants to “leave his mark” by setting stringent lending guidelines as against the current format of the 'Big Four' banks boasting who has the greatest market share in Australian property – combined they hold nearly 80% of the overall debt.

When the RBA does decide to raise the cash rate there will be a tsunami of bad debt which explains the latest RBA decision to park the Australian property market (for the time being). Globally the property markets are cactus – Alan Kohler wrote a great piece this week – 'The world must inflate or bust; Australia mustn’t join in'. “The world’s central banks are overly trying to increase inflation because it’s the only realistic solution for the world’s (still) excessive debt, and the Reserve Bank of Australia will soon have to decide whether to join in or bear down on inflation with relatively higher interest rates.”

“A central banker on one panel noted that, in his view, too much is being asked of monetary policy; the main thing that low interest rates and quantitative easing are producing at the moment is more risk taking by financial institutions.

“That’s the problem with too much debt: the only easy solution is more debt, which is no solution at all.”

I have never been a fan of mortgagee in possession sales as they clearly demonstrate a panic mentality which inevitably results in heartbreak together with considerable capital losses. Having worked through the boom of the late 80s and then the “recession we had to have” in the early 1990s, we don’t appear to have learnt much.

I would prefer to see when a home owner is deemed to be in financial difficulty that the property (principal place of residence only) is placed into quarantine for five years. When the property value recovers only then is it sold – with the parties deciding (depending on the circumstances) if it is mutually agreed that it be rented out over that period. If this were to happen maybe then a home loan may be scrutinised much more closely – as against what we are seeing and reading today.

In a perfect world the authorities would make such an announcement sooner rather than when the proverbial hits the fan.

The lending institutions could make the landing a lot softer when and if a recession eventuates.