May 04, 2017
Michael Matusik

Here’s my two bob’s worth ahead of yet another May Federal budget.  Over the past 25 years, Australians have heavily invested in housing.

Strong financial and taxation incentives have been thrown at us to help us on our way.  Banks (and other financial vehicles) have been allowed to treat household mortgages as low risk assets.

See the Basel 1 1988 annotation in our chart below.

In contrast, domestic business investment has been limited by comparison.  Much of our business investment comes from offshore, rather than from domestic sources.

Investment in housing is relatively unproductive when it comes to contributing to our economy, in comparison to investment in business.

The housing industry likes to talk about employment multipliers for every dollar spent on building, but these jobs are largely dependent on punters taking on ever increasing amounts of debt, plus population increase.  Population growth – in its current form – is really shaping up to be a Ponzi scheme.

Furthermore, much of the gains from housing investment are locked into future capital gains.  The latter will create a wealth effect for those who own houses, but make limited contribution to business profits; employee incomes and even government tax bases (as the taxation laws currently stand).

Over-investment in housing and under-investment in productive businesses has created a very high national level of debt.  Our level of debt is one of the highest in the world.

There are increasingly repeated warnings of Australia’s risk of a national debt crisis.  The well credentialed are starting to join this chorus.

This national debt level is mainly so high because of our substantial rise in household debt.  The balance sheets of Australian households with a mortgage are dangerously exposed to any fall in house prices; or the smallest rise in costs or slightest variation in our ability to service the repayments.

Household debt versus disposable income is now at a record high 189%.

Let’s make this mean something – for every $1,000 of income, we owe $1,890!

The chart below shows mortgage debt to GDP – it is a different measure of indebtedness – and I have included it here to outline just how much our level of debt has grown over the past 25 years.

We are now left with large segments of the community with limited (and now real falling) incomes, struggling to buy a home or even rent.  Shelter is very expensive, simply because we have made it so.

The pattern of investment in Australia’s economy needs to change.  I am talking about a major overhaul, not just tinkering about the edges.

Unless a serious effort is made to rebalance investment in Australia, the ‘market’ is likely to impose a ‘solution’ in the form of a collapse in property values.  A housing collapse would be economically disastrous, but would ultimately restore a balance between the value of housing and the general community’s capacity to pay.

And through that shock, we might get the right kind of government action.  Generally as a rule, we humans only act when we are on the precipice.  For mine, we are very close to the edge.

Yet, we seem to be sleepwalking into a terrible crisis.

High debt is like flying with only one engine.  You can bring it home, but you don’t want to run into any further problems.  Even mild turbulence can be ‘touch and go’.  We should have overhauled the plane about a decade ago.  Now, I am almost convinced a crash is unavoidable.

So, enjoy the May budget.  If you watch this type of stuff on the telly, see if you see or hear anything that really changes things.

The $50 billion infrastructure plan is just another con – the next easy way to quickly reshuffle work.  We will replace the ‘mining boom’ and ‘building boom’ with the ‘infrastructure boom’.  Yes, it will re-employ many and get ready for even more baker dozens standing around, looking at the road works during peak hour.

Oh, you cynic!

I once thought that Malcolm T, once elected PM, would make the right stuff happen.  So far, I have been wrong.

Hopefully, I am wrong about this too.

But me thinks not.

PS  Thanks to Shawn Mullins for the Missive title.  Preview here.

“Hi.  I have been in the finance industry for more than 20 years.  I really get a lot from your articles and in the few times I have seen you at Industry events.  Just thought I would say thanks.”  Well, thank you, Andrew H.

PS For mine, when it comes to property investment, capital growth looks increasingly unlikely beyond this cycle.  How much puff is left?  Go here and here to find out.  Looking forward: Rent is king.  The next black is what I call ‘compromised housing’.  Affordable digs.  Residents sharing.  Maximum utilisation.  This is what Property Pick is all about – housing product well ahead of the curve.

Keen to hear your thoughts.

Until next time,


Michael Matusik


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