To paraphrase Ernest Hemingway, Australia asks Argentina:

How did you go broke?

Argentina replies to Australia:

Gradually and then suddenly.
But why do you ask?

Australia replies:

Just making sure we are getting close.

So how will Australia do it, go broke that is…?

Government spending and increased regulation pushes inflation up. Inflation forces the RBA to push interest rates up.

Then the government changes tax policy with the result that the marginal buyer is removed.

The combined result, property prices fall, not because the market broken, but because policy worked exactly as designed.

But most property is bought with debt, and because bank capital requirements are a function of risk models, with declining asset values against the loans written, the bank risk departments and APRA get edgy.

Rising arrears raise probability of default. Risk weighted assets go up, and APRA, doing precisely its required job tells the banks to hold more capital against the same loan book.

Lower return on the same lending. Banks do not eat that. They cannot, because their shareholders are the super funds holding your retirement. So they widen their lending margins and raise interest rates on loans independent of an RBA increase.

The out-of-cycle rate rise is the part that actually does the damage. The RBA does not have to move at all. The banks reprice on their own, and the message landing in every household is: it is worse than they are telling you.

Consumption stops. Retail rolls over. Hiring stops. Unemployment ticks up, which feeds more loan arrears, which feeds the models, which feeds the capital requirement. The loop is now self-propelling and requires no further assistance from anyone.

Enter the government, cape already on.

This is the part I am most confident about, because we have the receipts.

Wayne Swan still believes the 2008-09 cash splash saved Australia. It did not; China’s stimulus, an iron ore price going vertical and a banking system that was never permitted to write subprime did most of the lifting. But Swanny believes, deep down in his bones, that he and the Rudd government were the saviours.

Jim Chalmers was his adviser at the time so, lo and behold, he believes it too. Anthony Albanese and a fair slab of the current Cabinet sat around the Rudd Cabinet table watching it happen drew the same lesson, which was the wrong one.

This government is not populated by a group of people who respond to a housing downturn with restraint. That is a group of people with a flattering story about themselves in which more government spending is the thing that works. The only thing that works.

So it arrives: support for construction, support for buyers, support for the states, funded by borrowing or tax or both, which is inflationary, which puts more pressure on the RBA. Fiscal foot on the accelerator, monetary foot on the brake, everybody very pleased with their own footwork.

Then the bit nobody has priced. A large and growing share of the lending here is not on a bank balance sheet at all. It is private credit, and a great deal of it sits inside super: SMSFs reaching for yield, retail funds, industry funds. Most of that book is financing property development.

This lending is not stress tested by APRA, it is marked infrequently, it is sold on a yield number, and it is held by people who have never watched it behave in a downturn.

When margins compress and pre-sales stall, that credit does not reprice gracefully, it simply stops. Facilities are not written, existing ones are not rolled, and developers discover that solvency and liquidity are different words.

Housing construction falls off a cliff at the exact moment the shortage is the central political issue, and the losses land in super accounts that voters check on their phones.

Cue the government comes in wearing its cape again, bigger this time, funded the same way, with the same result.

You can run this loop as often as you like. There is a country that ran it for 70 years. Every intervention was reasonable on its own terms and a response to the last one. Nobody ever chose the outcome.

Not long after, Canberra will be renamed Buenos Aires and Spanish becomes the main language taught in Australian schools.

Gradually. Then suddenly.

First published on Substack. Read the original here…