Confusion on Australian Housing, Loans and Affordability

Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.

Sir Isaac Newton

Sometimes, standing too close to something leaves you lost in the detail.

You fail to see the forest for the trees.

At present, confusion reigns supreme when it comes to our nation’s housing affordability crisis. Do we have a bubble? Is the great Aussie dream just that…a dream?

The Aussie housing market (predominantly Sydney, Melbourne and Canberra) has confounded overseas and local critics for years. Just when you think property prices cannot get any more expensive — on a multiple of household income — it finds another gear…a negative gear (sorry, couldn’t help myself).

Those with an eye on historical valuations shake their head in disbelief at the growing disconnect between price and value.

After the upheaval of 2008/09, the RBA and federal government encouraged households to borrow and spend like drunken sailors to avoid the fate of Northern Hemisphere economies. The intended consequence of this deliberate policy to load households with as much debt as they could carry is our so-called affordability crisis.

In typical and predictable bureaucratic style, after creating the problem, they are now attempting to ‘fix’ it.

There are a myriad of harebrained schemes being tossed about as ‘solutions’ designed to make housing ‘more affordable’.

Medicare, childcare and first-homeowner schemes are all proof of what happens when government meddles in markets.

Distortions. Graft. Corruption. Expectations. Demands.

The so-called ’fix’ for the ‘Aussie battler’ invariably ends up lining the pockets of the select few in the industry the government has ‘chosen’ (been lobbied by the hardest) to bankroll.

Allowing first-time homebuyers to access superannuation is just plain dumb on a couple of levels.

First, house prices will ratchet up to reflect the amount that can be withdrawn. The first-homeowner scheme is evidence of this.

Second, we know from the margin-lending debacle of 2008/09 that any ‘skin’ the investor/homeowner has in the game is the first casualty when the market goes south.

What happens when the property market tanks? The geared-up superannuation deposit is vaporised.

But the dumb ideas don’t stop there. A union official has floated the idea of an inheritance tax (death duty) on estates over $10 million. This not-so-genius plan would see the taxes redistributed — in the form of a housing deposit — to young homebuyers.

There’s talk about limiting the tax benefits associated with negative gearing…dampening the enthusiasm in the investor market. Personally, I’m all for this. When considering whether to borrow to invest, the primary reason should be based on the quality of the investment, not how much tax you’ll save. Tax-driven investment decisions tend to end badly. Negative gearing only encourages Australian households (already the most indebted in the world) to go further into debt. In my opinion, that’s a dumb policy that should be fixed…but one that’s unlikely to be.

The real fix is far more straightforward: Raise interest rates by 2%.

Traditionally, interest rates were pegged to the following formula: CPI + a real return of 1–2%.

Currently, the official cash rate and CPI are both aligned at 1.5%. There’s no real return being offered to savers.

The RBA suppressed interest rates to create the Aussie version of the wealth effect. Make interest rate policy ‘accommodative’ to boost asset values…and the wealth would trickle down. Theory has not turned into reality.

The housing affordability ‘crisis’ is a direct result of the government and RBA pursuing a deliberate policy of enticing/encouraging/luring households into debt to maintain the illusion of a ‘growing’ economy.

Accommodative interest rates created this crisis; therefore, the solution is to make interest rates less accommodative. Bring back the traditional interest-rate formula.

Sure, people are going to be hurt by the inevitable market correction. That’s life in the big world…not every kid is a winner. People will lose homes. Investors will tear up equity. That’s what markets do. They inhale and exhale. Government ‘fixes’ are an attempt to stop the market from natural respiration. These ‘fixes’ are futile attempts to make the market permanently hold its breath. And that’s just plain dumb.

The market is far more efficient at sorting out imbalances. Let it do its job. Stop trying to ‘fix’ it.

Savers have been enduring their own affordability crisis for the past seven years. Do we hear a peep out of the government on how they’re going to solve this crisis? No.

Why not?

Because our system is literally geared towards encouraging debt — not savings.

Increasing interest rates by 2% is a step in the right direction to solving both affordability crises.

Raise rates, then stand back and let the markets go to work.


Simple maths leads to confusion

One reader has taken me to task over my 7 April 2017 Markets & Money article titled ‘Memo to Central Bankers’.

Vern however has not only made the same mistake [as Mat Spasic], he has also made a number of other wrong conclusions…

The Markets & Money article cited a quote from the RBA governor that stated he ‘rejected the idea easy credit was the primary cause of the [property] boom…’

In an attempt to disprove the RBA governor’s rejection, I started with the simple premise of:

In another life (in the late 70s and early 80s), I was a loans officer with a major bank. If my memory serves me correctly, the basic formula for lending was: Loan servicing capacity X interest rate = loan amount.

Apparently, this was a wrong conclusion. To quote the reader:

40 years is a long time and I think he [Vern] should have expected a number of lending practises to have changed. I’m not sure if [this] was ever the case.

The one thing about maths is that it never changes…not over 40 years, 400 years or 4,000 years.

One plus one always equals two.

If you have a loan-servicing capacity of $2,000 per month, and interest rates are at 10%, your borrowing capacity is not nearly as high as it would be if loan rates were at 2%. That’s simple maths. At least I thought it was.

To prove this point, I went to the ASIC mortgage calculator to produce this table:

Monthly Repayment Term of Loan Interest rate Loan amount
$3,000 25 years 4% $568,357
$3,000 25 years 8% $388,694


My comment was:

Same repayment, same term, different interest rate = different loan amount. I knew it! Apologies for that outburst. It’s just that my powers of reasoning are a little fragile these days, so it was reassuring to find out the maths behind the lending process still works the old-fashioned way.

Apparently, I’ve drawn the wrong conclusion, according to the reader:

The old fashion way isn’t the way now and again I’m not sure it ever was!!

After proving what I thought was an open and shut case on the maths behind lending, I stated:

Just so we are clear on this…if interest rates go lower, people can borrow more.

Not so:

Again this [my conclusion] is incorrect today with current low lending interest rates.

But if current low lending rates happened to go lower, surely people could borrow more (at least in theory, if not in practice)?

What I thought was a simple case of proving the maths of lower interest rates leading to higher debt levels apparently was not so simple after all.

So I went back to the charts.

Since January 1990, the cash rate has fallen from 17.5% to 1.5%…that’s a massive difference for both the borrower and saver.

australia interest rate

Source: Trading Economics
[Click to enlarge]

Prior to 1990, Australian household debt hovered around 40% of GDP.

After interest rates peaked in 1990, debt levels took off.


Simple: You can afford to borrow a lot more money when rates are not at 17%.

debt to gdp

Source: Trading Economics
[Click to enlarge]

Source: Trading Economics

People try to overcomplicate things. Keep it simple.

We have an affordability crisis because interest rates, for far too long, have been accommodating borrowers and punishing savers.

The fix is simple…increase interest rates and leave the rest to the market.


Vern Gowdie,
Editor, Markets & Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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