A key paper by the RBA’s Luci Ellis (Property Market Cycles as Paths to Financial Distress, Ellis Kulish and Wallace 2012) offers large insights into why our central bank is relaxed about Australia’s post-peak property market, and why they see little prospect of financial instability.

Let us be clear about what this does and doesn’t mean.

Dr Ellis’s main task is to oversee the solvency of Australia’s financial sector, not consider the mortgage pain borrowers may endure or the wealth transfer high land prices impose. You, dear citizen, are an externality.

The paper asserts the “distribution of debt is far more important in creating financial distress than its aggregate value.” However, both measures are demonstrably at extreme levels – many borrowers are supporting very heavy debt loads, betting asset price inflation will overtake their inability to fund principal and interest on the cash flow from the investment (imputed rent in the case of owner occupied housing). This is Hyman Minsky’s classic definition of ‘Ponzi Finance’.

She observes expectations property will hold or increase its value may induce both borrowers and lenders to treat the collateral as the primary guarantee of repayment, rather than as a second line of defence should the borrower’s cash flow prove insufficient to service the loan.

Financiers have changed their lending formulas to disregard borrower cash flow and rely solely on the latter measure. While this boosts the creation of large, long-lived bank assets (loans), it doesn’t help people buy a house – it risks ensnaring them in debt beyond both earnings and work-life. Ethical people would call that moral turpitude.

The paper cites a Massachusetts study (Foote 2008) of the early 1990’s downturn where 10 per cent of borrowers went into negative equity in Q41991 and ‘healed’ naturally and quickly in the later land price boom. A mere handful defaulted. Only problem is, that downturn was a mere blip compared to the land price crunch of 2008-12 where 16.8 per cent of borrowers in Massachusetts – one of the least affected states – were still in negative equity and a further 3.5 per cent to near-negative equity a full five years later.

Dr Ellis may preserve the banks through the land price slump to live to lend another day, but her good work is no help for the vast majority of Australians who simply want a home to call their own and not be some cats-paw in financier rent-seeking.

I am always staggered by the apathy of economists about the costs and burdens imposed upon modest people, as though this is their natural lot and there is nothing to be done.

I see young adults rejecting home-ownership because absent future price appreciation, debt-slavery is futile. Without them, others cannot trade up or out.

This happened in Japan, to their great cost. So the RBA may, in the pursuit of chimeral ‘stability’, preside instead over a moribund and introspective country slowly and painfully paying down all that debt.