8 April 2020
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What would property doomsday merchants have Dr Phil do?

On a regular basis I get lectured to by a group who I call the doomsday merchants’ brigade. Let me back off my name calling, however, and simply ask what do those who tip house prices will fall by 40% really want to happen?

The complaints rose as the Reserve Bank’s cutting of interest rates this week made a number of these house price watchers vent their frustration. But I ask again, what do these people want?

I actually asked the Twittersphere this question and a young woman replied “a recession as a start.” I couldn’t help but respond: “Be careful what you wish for..” and instantly a couple of baby boomer tweeters “liked” my response.

I recall the 1990-91 recession vividly and the memory does not simply extend to the economic and hip pocket challenges of those years. It also includes the entire 1980s when home loan interest rates rose constantly and even hit 17%! In the early half of that decade, I was a school teacher while doing my Masters — no wealthy parents were bankrolling us — and I remember selling my old car and started catching the bus to work. Later I had two jobs — one each morning cleaning a pub in Paddington and then cleaning a factory in Rushcutters Bay, which was the home of the Aussie-invented Fairlight Computer Music Instrument, which was bought by the likes of Led Zeppelin and Stevie Wonder!

The only pay-off to my wife and I was the rising value of our home in Paddington, which my father-in-law thought was evidence that Maureen and I were out-of-touch academic types! Fortunately his engineering background helped us turn that place into a wealth-builder for us but it came with scary, cashflow crises times.

And the recession of the 1990s was so dramatic and scary I could never wish this on anyone. It’s what experience teaches you, I guess. But don’t worry, I’m not going to say “you can’t put an old head on young shoulders,” though my brain put this old chestnut in my head to consider!

I resisted as one tweeter made me think about being less learned, semi-patronising and lecturing in my tone this week! That’s hard after you’ve been a commentator, university lecturer and business keynote speaker for over three decades.

But back to my question: what do the 40% house price fall believers/critics want the Government and the RBA to do?

We have an economy that has grown at 1.8% over the 12 months to the end of March. The growth rates for the September, December and March quarters were 0.3%, 0.2% and 0.4%, which aren’t great signs. We won’t see the June quarter until September 4, so something needs to be done now.

Some want the Government to support infrastructure spending but this stuff is never shovel ready — it’s a slow drip, albeit a really good big one when it comes. Tax cuts are on the way and they’ll help, with single income households to receive up to $1,080 a year and there’s $2,160 for dual incomes via doubling the low and middle income tax offset. That will come with the upcoming tax returns and will help our struggling economy.

But cutting interest rates is an obvious move for a central bank so the rightness of this move gets down to a question about who is the smartest — Dr Phil Lowe, the RBA boss or the likes of my old colleague, Steve Keen (and his followers), who are sure Steve is right and smarter.

Steve will point to the graph below that shows Australia’s private household debt to GDP is huge — the second biggest in the world, only behind Switzerland. He says we can’t keep growing this debt to GDP ratio and expect to get away with it. He insists that the countries that have been like us, such as Ireland, Spain and the USA had 40% slumps after going mad on debt. And Japan was even worse, seeing a collapsing of something like 50%!

But is the RBA and its team of economic boffins as “brain dead” as Steve claims they are? (see my interview with him below:)

It’s not much use me passing my judgment because Steve’s supporters will simply shout/tweet me down but I do think the RBA guys have a reasonable supply of grey matter.

I also think the team who doubt the brains of “establishment economists” are often like those who doubt the knowledge of the medical fraternity as they look for common-sense solutions to modern health problems. And sometimes those believing in holistic and organic solutions to some health problems are on the money but when it comes to life and death stuff, I’d opt for someone whose opinion is linked to academic achievement and experience in hospitals, rather than those educated by Dr Google.

But let’s assume Steve and his team are right that lower interest rates and more debt will lead to a problem like a recession. But the question is: What happens if rates aren’t cut?

We could end up with a, you guessed it, recession. Either way, it looks like all roads lead to recession but clearly the Reserve Bank would like to get a small recession as opposed to a huge one and the central bankers might point to their track record of not causing a recession for 28 years!

This chart below shows how lower interest rates not only make house prices relatively cheaper, because they makes debt servicing easier, they effectively make the household debt to GDP ratio less dangerous to an economy. Unbelievable interest rate reductions and extreme actions by governments after the GFC undoubtedly helped to explain why Steve Keen’s 40% house price falls didn’t happen between 2008 and now.

If you don’t understand this graph above, just think a home loan debt is harder to cover if your income isn’t rising but interest rates are. The flipside is that if rates are falling, the debt is less worrying, at least for now!

So this leaves me with the question: What would the RBA critics tell Dr Phil to do?

Nothing? And leave it up to the Federal Government with tax cuts? They could save that or they might say let’s have a purging recession and take the debt back to ground zero — I call it the Pol Pot solution!

Call me old fashioned, a chicken or simply an economist but I think I’m happy to back Dr Phil and the Federal Government with rate cuts, tax cuts and infrastructure spending as an alternative to a Keating-style recession we had to have.

I still have memory of the last one!

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