But the unintended consequences were housing bubbles, mainly in Sydney and Melbourne.

We have congratulated ourselves in Australia for avoiding a recession in the wake of the 2008 global financial crisis. But maybe we have just postponed it and created conditions that will make it worse when it hits. The debt mountain is only sustainable while interest rates stay low.

Of course, the bubbles could have been avoided with better Federal Government tax and population policies.

Negative gearing and capital-gains tax concessions fuelled a rush to investor housing, driving up prices and increasing the debt burden for new owner-occupiers too.

Since the 2011 Census, the population has increased by roughly the same amount as Adelaide, Canberra and Hobart’s total population combined.

Meanwhile, incomes have faltered – growing by next to nothing over the past four years. Worse, real income-tax rates for those in the bottom half have gone up, because the tax rates have not moved with inflation. Further, some people on very modest incomes of around $35,000 can face effective marginal tax rates of nearly 100 per cent, when student debt repayments, family benefits and other government help is withdrawn and they move into the second tier tax bracket.

On the government side, there is a Catch-22. We have had more than a decade of do-nothing governments who fear the voters. They fear losing power if they offend some voters. So they do nothing and offend all the voters instead.

Government are supposed to respond to changing circumstances. Present circumstances (as highlighted by the Census) require:

1. Lower immigration.

2. Changes to property taxes.

3. Income tax scales that are fairer to the middle.

While we are at it, we could make a couple of changes to political and corporate culture that would go a long way to making the system fairer.

First, we could end the culture of rent-seeking by special interest groups. We should radically change the rules on disclosure of political donations and have compulsory disclosure of all meetings between politicians, senior bureaucrats, lobbyists and industry groups.

For too long, people like the food industry, pharmacies, the mining industry, the banks, the financial sector, big retail, utilities, property developers and others from the big end of town have been able to secretly chew the ear of government to get the rules written in their favour. Now the top 1 per cent control 70 percent of the wealth.

On the corporate side we should cut high CEO pay and break up big financial institutions, More importantly, directors and top managers of companies should not be allowed to own shares or share options in the company they are managing.

It is an obvious conflict of interest because it is in their power to effect short-term changes in the share price to favour themselves when they want to sell or redeem.

Far from being an incentive to manage their companies better for the good of all shareholders and for good corporate citizenship, these arrangements encourage the opposite.

When market analyst Nassim Taleb was asked at a congressional hearing into the 2008 US recession that wouldn’t lower pay and fewer share options prevent companies from attracting the best talent, he responded ascerbically: “What talent?”

Australia is almost in the US position of not learning from 2008 and having some financial institutions “too big to fail”. But with this increasing indebtedness, governments might not be in a position to do any more bail-outs and central banks cannot cut rates anymore because there is nothing left to cut.

Digital Finance Analytics estimates that a fifth of middle-income households in Australia have “no room to move”. It means that if interest rates go up, they will default.

Australia has been lucky to date in having a very small mortgage default rate, but we should not be complacent. We have not had a combination of high indebtedness, stagnant wages and rising interest interests. Right now only rising interest-rates are preventing the perfect storm.

People imagine that credit card debt and personal unsecured debt pose the greatest threat. Not so. They are trivial. Combined with student debt they come to just 7 per cent of household debt.

Owner occupied households have 56 per cent of the debt. This is not so bad because owner occupiers will do everything possible to meet the payments to stay in their own home.

No, the real ticking time-bomb here is the 37 per cent of household debt that was incurred for investor housing – $740 billion of it.

The trouble with this debt is that, at the first sign of significant trouble (such as an interest rate increase), up goes the For Sale sign as investor cannot meet rising interest payments. Prices plummet as people get desperate to sell. The bubble bursts. Banks call in loans.

The other trouble with investor debt is that much of it is interest-only for a relatively short term – three or five years. Investors just assume banks will roll them over, but they may not if the market value of the house offered as security has fallen. The investor in most cases will have no other source of finance and will default. If the sale of the investment house does not cover the loan, bankruptcy would loom.

It is not only the growing size of the debt, but it changing nature that makes it so dangerous – a danger that lays squarely at the feet of the Federal Government’s deeply flawed tax policy.

The 2016 Census results should ring alarm bells to start slowly tweaking tax and interest-rate policy so that the bubble slowly shrinks without popping.

www.crispinhull.com.au

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