What circumstances would force the RBA into yet another embarrassing back-flip by slashing interest rates again?
A renewed global financial crisis leading to plunging stock markets and a freezing of international credit markets, which Australian bank funding is more reliant on than any other nation, would see another even more severe global credit contraction, debt deleveraging and asset deflation.
This is crucial because the real driver of house prices in Australia is household debt. Unsustainable credit expansion over recent years has driven up mortgage debt by a factor of five and turned the Australian housing market into what Professor Keen describes as "the world's last surviving Ponzi scheme". Housing finance figures have plummeted over recent months, along with new home sales and falling auction clearance rates, so the Australian housing Ponzi "House of Cards" is now looking extremely precarious.
And having further to cut in our interest rate cycle merely means that the Australian housing market has further to fall as the RBA, just as all central banks always do, follows the market - this time all the way down. And as the RBA chases the market down by cutting interest rates from late 2010 and for several years to come (contrary to what virtually every economists in Australia forecast) then Australia would be on the same path as the US, UK, Europe & many other nations whose housing markets are also deleveraging.
