There is no knowing which, if any, of his election promises Donald Trump will actually carry out.

But Australian homeowners should be worried if Congress allows him to unleash his massive infrastructure program and cut corporate taxes.

There can only be one result from so many trillions of dollars of unfunded spending: higher US government debt and higher interest rates. This is bad news for Australia.

Australians don't save enough to fund our mortgage debt and as a result our banks have to borrow money offshore to lend to home buyers. As much as the Reserve Bank of Australia might adjust the interest rate, it is only one factor determining the rates home borrowers actually pay.


Just as important are long-term global bond rates. These have already risen since Trump's election in anticipation of his spend-up and as a result of the US economic recovery. They have the potential to rise a lot more if Trump spends and cuts taxes as recklessly as he is promising to do.

Higher mortgage rates couldn't come at a worse time for Australians. According to the Reserve Bank, we are more indebted than ever.

RBA governor Philip Lowe recently warned many households are suffering from a sobering combination of high debt and slow wage growth.

He noted the recent years of ultra-low interest rates have encouraged households to ramp up the national debt-to-income ratio to a record.

"It is possible that continuing rises in indebtedness, partly as a result of low interest rates, increase the fragility of household balance sheets," he said in a speech to the Australia-Canada Economic Leadership Forum late last month.

Lowe sees this as a risk to the economy, because if households decide they are too indebted they will to cut back on consumption, dragging on growth.

The issue is whether Trump is the trigger for this to happen.

In a recent report, the Organisation for Economic Co-operation and Development (OECD) highlighted the risk of a house price collapse triggering a broader recession. It puts the chance of a recession in Australia at about one in five.


The problem is that historically-low interest rates have led to "ramping up risk-taking by investors and driving house prices and mortgage lending to historical highs", the Paris-based economic agency said in its 2017 Economic Survey of Australia.

House prices and household debt has reached unprecedented highs and house prices could crash.

"The market may not ease gently but develop into a rout on prices," the OECD said.

The housing market is so competitive that Sydneysiders and Melbournians pay as much as they can possibly afford to get into the property market. With typical home mortgage rates around 5 per cent, that is quite a lot, leaving large swathes of Australia vulnerable to higher interest rates.

The fact that Australians will buy a house to the maximum level of what they can afford makes helping first homebuyers into market much more difficult, because the end result is that they just use any extra money they can get their hands on to pay more for their house.

This includes homebuyer assistance. Various state and territory governments have at various times provided first homebuyers grants of as much as A$26,000 ($28,337).
The rationale behind these grants was to help first homebuyers with costs such as solicitors' fees, removals and getting phone and electricity connected, but now they are simply inflationary, adding on to the purchase price. For instance, if the grant is A$10,000, house hunters add this to what they can afford. However, everyone else does the same thing and so house prices rise by the same amount as a result.

The only winner is the person who sold the house, who is A$10,000 richer thanks to the government (unless of course they want to buy another house with the proceeds, in which case that A$10,000 is passed on to another home seller).

There is only one way to bring house prices back to a sustainable level and that is to increase the supply of housing. Crucially, this must be in places where people want to live.

Building 60 kilometres from the centre of the city on Sydney's urban fringe, with little infrastructure or services and a long commute to get to work is not a viable option.

Many Australians will have to give up on the great Australian dream of a house on a quarter acre block.

In fact, most already have. Instead, we will need to move to more dense urban living in apartments and townhouses.

That sort of shift is many years away.

Until it happens we are all captive to the vagaries of international interest rates and the US economy in particular.