A Brisbane-based financial planner has slammed Australia’s large amount of mortgage debt as being the precursor to a GFC-style meltdown.
In his submission to the Financial Services Inquiry, Puzzle Financial Advice director Bruce Baker said the current preconditions – historically large housing price and large personal debt bubbles –
are the same as those which led to the “near collapse of the US banking system” in 2008.
“Australia has the biggest house price bubble in its history, a bubble that has been funded by Australia's historically-largest private debt bubble (which is predominantly mortgage debt).”
But Australia is “not sufficiently prepared” for a large house price crash and must do so by changing financial institution regulations before it is too late, he said.
“Hopefully, Australia can learn from the US house price crash experience and GFC, to better prepare Australian banking regulations and Australian banks for our own 2008-style of financial crisis, brought on by our own house price crash.”
Baker pointed to research by US economist Robert Shiller, who predicted the US house price bubble before it burst.
Shiller’s data, if applied to Australia, suggests it is quite likely that the coming Australian house price crash will be bigger than the 30% fall APRA has prepared for, Baker said.
“From an economic perspective, this should be cause for great concern as this is a major risk to the Australian economy and Australia's financial system.”
Australia has large “too-big-to-fail” institutions that are allowed to take too much risk and do not pay for the implicit tax-payer guarantee. Instead, they should be forced to implement the Volcker Rule, he said.
This proposal specifically prohibits a bank from engaging in propriety trading that does not directly benefit its clients, and from owning or investing in a hedge or private equity fund, and also limits the liabilities the largest banks can hold.