Cutting rates and axing tax breaks

Official interest rates need to fall to 1.75 per cent - or about one quarter their current nominal level - in order to restore the ratio of interest payments as a percentage of household spending to a "good times" ratio of eight per cent, down from the current ratio of 15 per cent, according to a polemic "Deeper in debt: Australians' addiction to borrowed money" published yesterday by the Centre for Policy Development.

Not that there's much chance of that.

Written for the left leaning think tank by University of Western Sydney academic Steve Keen, the report endorses calls for "regulating lenders, not just deposit-takers",  a theme endorsed (in a weaker fashion) by this week's report of the House of Representatives Economics Committee.

The tenor of Keen's analysis for the CPD is that Australia's linked inflation in housing prices and household debt levels amounts to "a classic Ponzi scheme" in that "the rise in prices can only continue if new buyers are willing to take on even more debt than the previous cohort did. Yet both prices and debt servicing costs are already well into record territory relative to incomes."

Fuelling this trend, Keen argues, is the behaviour of lenders rather than borrowers, with lenders "predominantly in control of the amount of credit money in the system."

Keen calls for the abolition of tax deductions on mortgage payments on rental housing stock (negative gearing) and to limit those deductions to newly constructed dwellings built for investment purposes.