The Barefoot Investor warns Australian economy is on brink of collapse

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The Barefoot Investor has warned the Australian housing market is in ‘deep trouble’ and on the brink of collapse.

Celebrity financial advisor Scott Pape claimed Australians in 2019 are living through ‘monetary madness’.

He said the central bank cutting rates to an all-time low of 1.25 per cent, easier mortgages and Prime Minister Scott Morrison’s new policy to help people buy their first home are a recipe for disaster.

This is because they will allow more people to afford a mortgage when they would otherwise not be able to, meaning defaults are more likely. 

Mr Pape, writing in the Sunday Herald Sun, imagined a scenario where the Australian economy collapses and his son, now five, grows up and tells him why.    

Predicting what his son would say, he wrote: ‘The housing market was slowly deflating after the mother of all housing booms… but then you started cutting interest rates to almost zero?

‘And at the same time you loosened lending criteria and encouraged young people to buy a home with just a 5 per cent deposit?

‘How did you think it would end?!’

He then added: ‘OK, so I’m putting it on record that I don’t think any of this is a good idea’.

Mr Pape’s warning comes amid fears that Australia is edging closer to recession, suffering from falling house prices, stagnant wages and America’s trade war with China.

And he is not alone as calls grow from economists that Australia is facing a systemic collapse.

Last month, Irish financial advisor Eddie Hobbs said the country is facing a similar housing crisis to the one that decimated Ireland in 2007.

From the 1990s, the Irish housing market boomed due to easy credit and foreign investment. 

But in 2007 the bubble burst and house prices plunged by 62 per cent as owners defaulted.

The global financial crisis saw the Irish economy enter depression in 2009, with unemployment soaring to more than 16 per cent. 

Writing in the Irish Examiner, Mr Hobbs said there are similarities between the Australian housing market now and the Irish one before it burst.

He said recent research by Endeavour Equity Strategy found at least 40 per cent of Australian mortgages are non-prime or sub-prime, meaning they are risky because the homeowner may not be able to afford them.

He also noted that 34 per cent of mortgages are given to buy-to-let investors.

These loans are riskier than ones to owners who live in their homes because investors are more likely to chose to default to avoid losing money if house prices fall.

Of these 34 per cent, 80 per cent are interest-only mortgages, meaning the loan is not being repaid at all. 

These figures are worse than in Ireland in 2007 where 15 per cent of mortgages were held by investors, half of them interest only.

Mr Hobbs concludes: ‘The Australian mortgage book looks to have much higher risk than Ireland before its crisis’. 

He issued his grim warning again on a podcast with Australian economist John Adams and analyst Martin North, who also predict a crisis.

‘The Irish housing boom was built just like the Australian one – on cheap credit being pumped into an asset class out of favour.

‘Eventually bubbles weaken and they pop’. 

He said that Down Under ‘the profile of the mortgage book is much riskier because four in ten loans are not prime and there is a higher proportion of investor loans’.

Mr Hobbs also addressed Australia’s rate cut and policies to help people get bigger loans – and compared them to the Chernobyl nuclear disaster.

He argued that, like Soviet bureaucrats in the the 1986 catastrophe, Australian policymakers are ‘sending people in when they know they are going to get hurt’. 

He said the loosening of loan underwriting by the regulator combined with the rate cut is ‘a serious attempt to get consumers to digest greater amounts of credit’.

‘It is a bubble and the day of reckoning is coming,’ he prophesised.

Mr Hobbs said policymakers and others are unwilling to accept that crisis is coming because they have too much ‘skin in the game’.

‘The closer to the precipice you get, the greater the deafness grows,’ he warned.

Noting that Australia can ease any crisis with monetary policy in a way that Ireland could not because it answered to the EU, he conceded: ‘Australia is different to Ireland in that it can control its own currency’.

But he said this was no silver bullet because allowing the currency to freefall would make it harder to pay off foreign debt and increase bond yields.

‘You can’t magic your way our of a housing crisis,’ he said.

However, several analysts believe that Australia is not facing a recession and the housing market will recover from its recent downturn.

Shane Oliver at AMP Capital told Daily Mail Australia the worst case scenario would be a 20 per cent plunge in prices this year, which would pose a large threat to the economy.

But he said a drop of 10 to 15 per cent is more likely and this would be ‘manageable’.

‘To see something considerably worse than that would require a large increase in unemployment to precipitate defaults and forced selling as we saw in the US before the global financial crisis,’ he said.

Although up slightly from 4.9 per cent in February, Australia’s unemployment rate was only 5.2 per cent in April 2019. 

Mr Oliver concluded: ‘Overall it’s not likely that Australia will suffer a recession’.

Craig James of Commonwealth Bank also rubbished reports of an impending crisis.

‘Banks are strong, home prices are edging higher again, unemployment is low – at record lows in NSW – and the majority of home buyers are well ahead in their mortgage,’ he said.  

Meanwhile, Reserve Bank governor Philip Lowe has denied there are ‘structural imbalances’ in the housing market.

Commenting in March this year, he said: ‘What we do see in the housing market lately is an increasing number of people saying it’s the right time to buy a home.

‘And I think that will eventually stabilise things. Because there aren’t underlying structural imbalances here’. 

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