AI's Double Life

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Hello, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter, Columnist and Podcaster for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review.

And we are The Money Café. Hello, everyone. G'day, James.

Hey, Alan, how are you?

Very good. Now, I had the unusual experience of being on Channel Nine News on Sunday night because of these scams, the AI scams, which became a story on Sunday and then Monday because of ASIC putting out a release about it, saying that they're cracking down - well, they're warning everyone about it and listing the top 10 subjects of AI scams and I was on it.

Do you feel honoured or...?

It's interesting, isn't it? It's mixed feelings because these AI scammers are obviously picking people who are trusted in order to further their aims and obviously that means that I am trusted, which is nice, but it's terrible. Obviously, this has been going on for ages, possibly 12 months and I've been trying to get these things taken down. As I explained on several interviews yesterday about it, some people have written to me saying that they've lost money, they've been taken in by the scams and actually paid money. It's terrible, I feel awful for them.

What's been the response when you've tried to have things taken down?

Meta is obviously the one I think that's mostly appearing on Facebook and Instagram and they are hard to get hold of, they take a while and then eventually they take it down and then it comes back up again. It's really a whack-a-mole sort of thing, they keep coming up and you whack it and they come up again. Also, it's on YouTube, I think, these things, they're pretty good, I must say...

Yeah, the jump in quality, Alan, I would say over the last 12 months, from what I've seen, that's what worries me. We went from sort of mocked-up still photos of that famous one of you and Matt Comyn fighting or something, to now real sort of high-quality deepfakes.

I'm seeing high-quality deepfakes clearly made by AI of all sorts of subjects, as you are probably as well and they're getting better and better and in a few years' time, they're going to be completely indistinguishable from real videos. I think we're heading in for real problems.

You can just imagine what the next few elections are going to be like around the world with all this sort of stuff going on, can't you?

I just think it's an emergency and governments need to get involved fast. ASIC putting out a thing warning consumers to be careful, it's not enough, it seems to me, just not enough...

This is the classically hands-off approach though of social media, Meta particularly seems - the idea that they would moderate anything in any way is just so - they won't go anywhere near that because of the ramifications. If you start sort of monitoring one thing, you've got to monitor everything. That seems to be their point of view.

Their whole business model is based on not getting involved in monitoring anything and not editing anything, they just put it out there and they are platforms for others to use, that's their whole business model, rather than publishers themselves. If Channel Nine or Channel Two, that I work for, put out something that was obviously false and misleading, they'd get into trouble with ACMA.

Yeah and rightfully so.

And rightfully so.

It's fascinating, Alan, a few weeks ago, the Future Fund put out a paper on AI, basically trying to say, "This is how we're thinking about AI, we don't have the answers, it's very difficult even for us to pick winners, but this is our approach..." Speaking to Raphael Arndt, the CEO, I asked him, "What's the thing that everyone's not thinking about here when it comes to AI?" And his sort of view is that regulation is the thing and that if these platforms get too successful, governments will be forced to regulate and we don't quite know what that looks like and how it will go. Your point about an emergency is well made. I just wonder what government's got the tools and the guts to have a crack at that sort of regulation. It's an interesting question.

There's no sign of it yet and I'm not sure they do. We've now created something called the AI Safety Institute, Tim Ayres is the minister, Andrew Charlton is the assistant minister, it's run by a woman named Kate Conroy, she's a global expert on AI safety. It's just a research body, really. It's true, governments everywhere are way behind here and it won't be long before we get humanoid robots which are described as physical AI, the embodied form of AI, which is probably correct. I keep seeing these videos of female humanoid robots that are supposedly going to cure loneliness.

Really? Is that where we're heading? There are a lot of videos going on of humanoid female robots, beautiful and they behave exactly like a woman, apparently, some of them with freckles. I think they're manufactured AI videos, I don't think they're real, you know what I mean? I don't think we're there yet, but it seems to me clearly what the companies are trying to achieve because they can see that there's a lot of money to be made from it.

China's passed a law that says, "Encouraging emotional independence by AI needs to be controlled," and they're trying to get a handle on AI companies getting people to emotionally rely on them through these AI bots that are available that aren't humanoid robots, they're kind of on your phone. There's no sign of anyone else having a go at this. Everyone says, "Oh, this is just another technological revolution like all the others in the past and it'll be fine..." I don't think this is like anything we've seen before, really. I just think this is entirely new territory, technology-wise.

For sure and the ultimate goal is replacing humans. That alone sort of makes it very different. Now, whether you think it'll get there and I know there's lots of different views on that... It's interesting, Alan, we're in reporting season so every company mentions AI in their presentation in some way, shape or form.

Do they? What do they say about it?

I think the evidence of deployment is fairly patchy at the moment. Companies, I think they've thrown a lot of AI fairy dust at the wall, some of it is sticking, some of it's not. Everybody's quite aware of the costs. I think in most cases, people are breaking even on AI. We haven't seen any evidence of huge cost savings or huge profit pools that have been uncovered using AI. I don't see any great evidence that companies are getting close to the big stack of job cuts that I thought would be coming this year. I think we're going slower in that deployment phase than I thought we were. In the US reporting season, the sense has been the same, Goldman Sachs has got a stat that 11 per cent of companies have actually shown during the June reporting season any detailed information on what they're actually doing with AI.

We're getting towards four years on from ChatGPT and sure, the agentic AI revolution's more like a year old, but I thought we might have been seeing a little bit more concrete evidence and I imagine, OpenAI and Anthropic would be hoping that we're seeing a bit more concrete evidence of deployment. I think it's still coming and maybe it's one of those things, these things take a little bit longer to get here and then they move very quickly. We're at an interesting sort of point at the moment.

They're cutting their prices, I think, partly because of the cheap models coming from China.

For sure and every company is now hyper-aware of the costs, clearly the costs have gone up and as you say, Anthropic and OpenAI now having to bring their costs down because of these cheap Chinese models. Do the Chinese models get regulated eventually based on security concerns? Possibly. I think there's so much to play out and yet, the spending, the debt associated with the spending, that all just keeps going one way. We've now got Google down in Australia, Alphabet raising, it looks like they'll do a $5 billion bond deal in Australian dollar bonds in the next little while, as Alphabet continues this sort of campaign of raising debt in basically every currency in the world this year.

Speaking of reporting season, how's it going?

It's okay. Companies aren't getting much help from their economic backdrop in Australia and I think we are at the start of the sort of economic impact of the housing slowdown. Craig Woolford from MST Marquee had a great point this week that, if you think about housing is usually good for discretionary retail, think of a company like JB Hi-Fi or Harvey Norman or Nick Scali, what they need is not just the housing market to be strong, but housing churn, so buying and selling of housing to be strong. In the March quarter, housing churn was running at about 13 per cent.

In the June quarter, it was still at 4.5 per cent, so actually churn is holding up. The impact on retail - this is Woolford's argument - the impact on retail of the slowing housing market hasn't even really started yet. We're likely to see that in September, but I think everybody's thinking about that, JB Hi-Fi had their results on Monday and July sales were much weaker than the market expected. The stock dived 14 per cent at one stage on Monday and JB Hi-Fi is one of the best retailers in the country, you can imagine how others might be struggling. There are two things on JB Hi-Fi...

Just on JB Hi-Fi, they reported that their sales for July were down 1.4 per cent and you pointed out that analysts are expecting the six months we're in now to be a growth of 2 per cent, which means a big turnaround is coming or the analysts are going to be disappointed, which I guess is why the share price fell a bit, it had to be downgraded. But you did also point out, I think, that July doesn't see many sales, so you'd expect them to be down in July.

Yeah, wait and see. I think the danger though is the sales momentum if you look back over a two-year period, is slowing and it's slowing fairly quickly. It's really halved on a two-year view from say, June to July. So that's what analysts are worried about now. Everyone's only buying when there's big promotions on. The other interesting thing, we've got the housing wealth effect in JB's result. The other interesting thing is the AI boom. Because these data centres are sucking up all the computer memory, that is pushing up the price of laptops because they need to buy memory chips. JB was saying yesterday, it's actually hard to buy an entry-level laptop at the moment because memory is so expensive. So, it's a really interesting sort of snapshot into the two big forces in the economy, AI and housing.

I'm talking to Warren Hogan this morning, I think in an hour or so and he's the economist for Judo Bank, he used to be Chief Economist of ANZ. I had a chat to him yesterday ahead of the interview and I think he's going to say that in order for the Reserve Bank's consumer spending forecasts for this half-year to be realised, consumer spending basically has to stop from here to be kind of zero, or near enough to zero for the rest of the year in order for the Reserve Bank's forecast to be achieved. That doesn't sound great. He's predicting another rate hike, at least one more rate hike in order for that to happen.

Well, it's quite possible. Alan, we should mention our co-host Stephen Mayne's star turn in the AFR on the weekend.

I know, I think it was really interesting and terrific, really, that the Financial Review, your employer, decided to do a profile of him.

Yeah and by Grace Lagan, one of our gun young reporters here, I think it runs to about 3,000 words. It's a fascinating sort of look into Stephen's life, I'd really urge listeners who know and love Stephen to have a read, it's interesting on his health battles, his personal life, his career, why he does what he does. I thought it was a great piece, Alan, really insightful into Stephen's approach to the world.

It was a good piece and we should probably just talk about his health battles because a lot of people don't have a Financial Review subscription. Stephen is one of apparently about 100 people in the whole world who exist on a 48-hour cycle, instead of 24 hours as the rest of us do, we sleep every night. Stephen, every second day, has a terrible day; and every second day, he's terrific, he's really energetic. He just has this cycle of every second day being down or depressed or something and not being able to - so we have to make sure that our Money Café recordings are on his good days, which they are.

Yes, I think he's tried lots of different things to figure out if that cycle can be rewired or broken, I'll let him talk to it more. I must admit, having read a little bit more about it in the AFR this week, you sort of think how debilitating it would be, not only knowing this is coming, but not being able to do much about it.

It's meant that he can't get a proper job, it's really kind of held him back, it's terrible. I've known about this for a long time and got quite close to Stephen, I mean I like him a lot and I really kind of admire the way he holds up in the face of this terrible debilitating - I suppose it's an illness, I guess.

Yeah, absolutely, it's quite inspirational in a way, actually.

It is. Well, we should probably go to questions, we've got a lot of terrific questions this week.

Let's do it.

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And just remember, everyone, this is general advice only and not personal advice. If you need personal advice, please see a financial adviser. Philip says, "Alan, please keep fighting the good fight of data and facts against sensationalised reporting like The Australian. My question is, how many Australians actually suffer from falling house prices? My thoughts are only a small minority, 10 per cent of people..." he says, querying... "These are the forced sellers, investors, downsizers. Most people are unaffected. Non-sellers buying or selling into the same market at a reasonable chunk definitely benefit, these are the upsizers, first home buyers and renters, et cetera..."

Yeah, it's an interesting idea. I don't know if you saw last week, Alan, but Commonwealth Bank had their results, they were pretty good, but everyone's worried about the housing market and Matt Comyn put it into perspective and there were some good bits of perspective, I thought. For the average Australian household, their house is 57 per cent of their assets, so price falls do matter, Philip. I take your point about how many people actually suffer, but everybody suffers when they think their major, major asset, more than half of their household asset base is declining, so I think there is some wealth effect there that we need to be wary of.

But Comyn also had the important bit of context, house prices are up 75 per cent in six years and so far, we've seen falls of 2.5 per cent, around that. Even if we get falls of 20 per cent, we're only back to 2023 levels. His big point is that the problem that we are all suddenly not thinking enough about is the supply one. Productivity in housing construction is awful and has been going backwards for 30 years, that's the problem we need to start to solve and falling house prices might actually make it harder because it doesn't incentivise supply to be brought on. I think there is important context, but Philip does have a point.

The point I suppose is worth pointing out, he's talking about actually suffering as opposed to emotionally suffering, which is the kind of wealth effect. I think the wealth effect is true... There were a lot of questions - I think there were questions in parliament yesterday, there was - Clare O'Neil was asked probably several times, "How many people in your electorate are in negative equity now?" And she didn't answer the question, presumably because she wouldn't have a clue, but a lot of people, particularly those who bought houses on the 5 per cent deposit scheme are probably already in negative equity in Melbourne and certainly Sydney because house prices there are down 5.5 per cent. That's already, on average, more than the 5 per cent deposit. The thing is, negative equity is only a problem if you sell.

That's right. I think the RBA said recently that only 1 per cent of the population is in negative equity or 1 per cent of households. The problem's minor at the moment, let's see where it goes. David's got a long question about productivity around how the labour market fits into the broader productivity discussion given that we're suffering from low productivity and the speed limit of the economy's quite low at the moment. Shouldn't we be talking about other labour forces like labour mobility, has it slowed down due to work from home, by government employment or other structural changes? Industrial relations policy, is this limiting labour mobility? Labour mix, are we moving from higher-paid manufacturing, mining and white-collar jobs to lower-paid services jobs? The NDIS, is there a portion of the economy employed by the NDIS, keeping the unemployment rate lower than history? Do you have a view on why the labour market isn't moving at a pace to support increased productivity?

He's saying that labour mobility improves productivity, is he?

Yeah.

And is that right?

Broadly, yes.

Okay.

If it's easier for you to move cities and swap jobs, then that should make it easier for the labour to get to the bits of the economy that need it most and that should lift productivity.

Fair enough. I think the main surprise with the labour market is unemployment has stayed so low and the labour market's pretty strong. I don't think there's a problem there and labour mobility, presumably it is declining, I haven't looked at it lately, have you? It is down?

The way it's measured, yes, I think broadly down, it appears to have slowed down to some extent.

Probably people are a bit concerned about AI and they don't want to hang onto what they've got.

There is an interesting view that there's a bit of a frozen labour market. In the US, we've seen this sort of no hire, no fire labour market at the moment and has that got something to do with AI that companies aren't shedding jobs, but they're not adding jobs either as they get bigger. There are some interesting things there. Industrial relations policy has definitely changed under Labor. We're seeing strikes in the Pilbara that we haven't seen in 30 years. You listen to some companies and they'll say that they feel they've got a lot less flexibility than they did have.

That is an issue, are we going to see change in that? Not sure. The work from home issue, I've got no idea. There's just so many feelpinions on work from home, there's very limited research, even at a company level about what it does, let alone an economy-wide level. I don't know, I think we probably need to study it, it's such a recent phenomenon, we probably need to study it in 20 years' time to see what's happening.

I think it's the rise of service jobs as opposed to manufacturing jobs and mining jobs that has reduced productivity to some extent. Service jobs are inherently less productive and also, the rise of NDIS and the huge number of people that are now being employed by that, I think that is kind of reducing aggregate productivity, for sure.

Indeed.

Andreas says, "While I understand the current supply issue for crude oil, I struggle to understand why $90 to $100 per barrel is currently considered catastrophic, resulting in high petrol and diesel prices. Before the GFC, oil peaked at $147 per barrel and I don't recall petrol prices being off the chart back then. Yes, we had the GFC right after but it was not the oil price that crashed the economy, what has changed? Has someone increased their profit margin massively since then?" Yes, indeed, Andreas, refineries have increased their profit margin enormously, that is true.

Yes and we used to have more of them in Australia back in 2008, we don't anymore.

That's right, but the refinery margins have gone through the roof, otherwise known as the crack spread between the oil price that they buy and the fuel price that they sell. To be honest, I don't understand why they've been able to do that. Obviously, they're taking advantage of the current sort of turmoil in the oil market and the closure of the Strait of Hormuz, but I don't fully understand how come they've been allowed to do it.

I wonder if it's a supply and demand thing. There's just less refining capacity in the world than there was.

That's right, because a lot of refineries in the Persian Gulf have been knocked out by drones and stuff.

But also, you think of Australia, we used to have more refineries, now we don't. That's probably a story that's been mirrored across the world. I wonder if we're short refining capacity? I confess I don't entirely know the answer to that. Andreas does make a good point in a way, but I'd also have to say, we've had 90-buck and 100-buck a barrel oil for quite some time now, it hasn't proved catastrophic, so there's a lot more adaptability in the oil/energy complex around the world than we thought. It's an interesting one, there's lots of experts that keep telling you, the longer the Strait of Hormuz remains closed, the more trouble we're in. It sort of hasn't quite got there yet.

I think it's partly because the world has been running down inventories, particularly China and at some point that runs out. Once a week, ANZ publishes these graphs of oil inventories running down and they have this dotted line for when they get to be empty and the answer is, in about a month's time, according to ANZ's forecast.

I feel like we've been saying we're a month away from disaster for a few months though. Alright, Ian in Chiang Mai says, "How are markets and governments likely to react to the reasonably possible scenario where Trump declares some kind of 'BS emergency' and doesn't hold the midterm elections? He and his goon squads have done the groundwork and couldn't care about the Constitution and yet, there seems to be remarkably little discussion of what it could mean." We'll take that as a bit of a comment, Alan, but do you think there's any possibility there?

Well, it's clearly a possibility. He keeps talking about running again in 2028 and the Republicans do not want to lose the House of Representatives which is clearly on the cards in the midterms, given the way the polls look. I think the markets can't believe it would happen.

I think markets and governments would react very poorly to that. You can already see the 30-year bond yield is at its highest point, as of Tuesday morning when we're talking, it's at its highest point since 2004. US borrowing costs are pushing higher. If that was to happen, US borrowing costs would go completely through the roof. I think the midterm elections are really interesting though, Alan. Michael Hartnett from Bank of America was making this point recently, it could turn out that these are a bit of a referendum on AI and if the Republicans hold the Senate, then the AI party continues; if the Democrats were to win the Senate, then maybe we do see the Democrats trying to put some handbrakes on AI and that pushes stocks down? I think it's still a major event for markets, what Ian's describing is more of a tail risk though I think.

Yes. Elliott says, "I saw Saul Eslake talking about using the super guarantee rate as an inflation lever instead of just interest rates, raising it to cool spending, cutting it to stimulate. What are the pros and cons of the RBA or the government using compulsory super this way to manage inflation? Discuss!"

Well, I think we've got a couple of questions on this one. I think we've had this before on The Money Café. It's theoretically possible, but it just invites another set of questions. Who decides what the superannuation guarantee rate should be? Who decides when it comes off or on? Is that in the hands of the RBA? Is that in the hands of the Treasury? Because every change to the superannuation guarantee would sort of change the actuarial calculus for the government when you think about long-term savings and budgetary positioning. I think it's very complex, Alan. I get the theory, I just think it might invite more complications than it possibly solves.

We're only talking theory because it's never going to happen, because as you say, it's too hard and too complicated. Possibly a cleaner way to do it as opposed to interest rates would be to raise and cut the GST, because that affects everybody and puts prices up and puts them down and the trouble is, that won't happen either because it's also terribly complicated and would drive retailers mad, I guess.

Totally. And again, who makes the decision? How political would that get?

That's right. Interest rates used to be political until the Reserve Bank was made entirely independent in 1996. It would have to be an independent body. Speaking of independent bodies, I reckon infrastructure should be independent and should not be announced by governments and politicians, anyway that's another subject...

You digress... [Monto] says, "I've been working on a large government-funded project and I'm appalled at how contract renegotiations and budget blowouts seem to have become standard practice, deliberate in some cases. Why is the political focus on increasing taxes, rather than on getting these ambitious projects under control?"

Why indeed?

We're both in Victoria, Alan. To be fair, the work done by the reporter at The Age and The Sydney Morning Herald, Nick McKenzie, on the way that the Victorian government's infrastructure program has been managed and the corruption that seeped into it, criminal activity. I think that has just helped change the Premier in this state. I think there is some political focus on that, but I agree, it's just become too common that someone in the government whistles up a scheme on the back of a napkin and literally, some of these are ideas, they're not to Alan's previous point about infrastructure.

They're often not costed, there's no expert rationale for them, they are often just sort of dreamt up, Suburban Rail Loop being a prime example in Victoria, NBN arguably an example around the country. Then they become these signature schemes without a whole lot of ballast behind them and that's where I think you get these cost overruns, which absolutely this is our money. I agree with [Monto] and I don't quite get why there isn't enough work done on this.

Your colleague, Michael Read, Deputy Economics Editor of The Financial Review, had an interesting piece - when was it? Yesterday? - resulting from an FOI request to the Reserve Bank. He got hold of a research report that they put out a while ago, in fact, but it was expressing alarm about the rise in state government debt, semi-government bond issuing - all state government debt is called semi-government bonds. They had a graph of the rise in semi-government debt that the state governments have been issuing and it was interesting and I put that on the news last night, thanks to Michael Read.

It's a persistent issue, except in Western Australia, of course.

That's right, exactly. Jeff says, "Always enjoy your discussions, mostly agree. All are thought-provoking. Last week, you explained to Simon that deflation was not good because of all of the normal reasons. Regularly, you have explained that we need to reduce our impact on the planet, which I agree with, through such things as plant-based meats and electrification.

Surely, if people did not see the need to buy more because it may get cheaper and deflation set in because people were not consuming more and more, this would be a wonderful way to reduce our impact on the planet's resources and not done with regulation or force, probably self-sustaining. People could safely save, not the game that the super sellers of the world want though. Also, how are state governments going to cover up the stamp duty hole?" That's another issue...

Yeah.

What do you reckon, deflation to save the planet?

Again, I get the theory. The problem with deflation is, we are a high-income country that everybody seems to enjoy their high income, nobody would like to give that away and that is part of the deflationary bargain. You would have to accept that the economy is going to slow with deflation and maybe that would add to Jeff's point, that that would be good for the planet too, a slowing economy. But there are other ramifications from that that not everyone would like. I think that's the - deflation suggests the economy is slowing and that's what you've got to cop.

I think the main reason everyone wants some inflation rather than deflation, is because deflation would cause the value of debt to rise.

Yes, including state government debt.

Including state government debt. There's so much debt in the world now, everything's got financialised, there's so much debt that deflation would probably just cripple the world because the value of all that debt would increase. I think the reason that central banks want to achieve 2 per cent inflation is because it will just gradually reduce the value of the debt.

Yeah. I'm going to duck down, Alan, I think we've got time for a couple more, I'm going to go Emma, who says, "Just a quick comment on your thoughts about the Census. One of the big risks of an exercise like this is you miss key disadvantaged demographics, e.g. the homeless and the mentally ill. For these cohorts, online is often not accessible. We really need the Census to be as accessible and inclusive as possible. This means keeping it short with multiple modalities available." A bit more of a comment. Alan, how did you enjoy your Census experience?

I thought they didn't ask anywhere near enough questions, I think it was just a wasted opportunity. I couldn't believe how quickly I got through it. I think they should be asking much more.

I do get Emma's point about accessibility and keeping it short, but I'm a bit with you and I think she's right about disadvantaged demographics, who arguably get the most out of the Census, we need to make sure they're included, I think that's a really good point. I just wonder, if there was enough in even the current form of the Census, which I agree with you, was quite short, to get the sort of information we need to shape policy around those disadvantaged demographics? I don't know, didn't feel like it was all that deep a set of questions to me, but I'm clearly out of my depth here in terms of expertise.

Last question from Stu, "Alan, you recently made a comment that the Australian housing market could not have a material correction and downturn without a major economy-wide recession. When we look at Canada, New Zealand, Hong Kong and perhaps even China, haven't they demonstrated it is possible to navigate that? Why are we different?" Yes, look, I think that's a fair point, Stu. I suppose I was kind of mostly referring to America, which caused a global recession and the GFC in 2008, with the 30 to 35 per cent decline in house prices in the US, but I think it's possibly because they have this kind of what they call jingle mail, so people just walked out of their houses when they went into negative equity and they fell and they just posted the keys back to the bank, saying, "Your house now."

I think that led to a lot of defaults in the US, which in turn produced a credit crunch, because banks went broke or they had to cut back their lending and that was what caused the recession. Whereas, in Canada, New Zealand, Hong Kong and China definitely, they've had a huge decline in house prices in China and the economy is still growing, so they haven't had a recession as a result of that and I think that's probably the reason. People don't have to sell, that's fine, the price has gone down but they just stay in the house.

Yeah, those examples are good and New Zealand's been - the conditions in New Zealand are pretty recessionary, they're probably stagflationary at the minute. China, yes, obviously economic growth continues to power along, it's mostly driven by exports, the domestic economy is very weak and there have been periods of deflation as well, it hasn't been great for them. I think your point still stands, maybe we do avoid a recession even with a large house price correction, but it's not going to be a pleasant 18 months in the Australian economy, I wouldn't have thought, Alan, one way or the other. Either rates don't go up and that means the economy is going to slow, or rates have to go up perhaps once more and the RBA is going to have to really work hard to put the brakes on.

I think I was talking about the prospect or the possibility of getting housing affordability back to what it used to be, which is median house prices being four times the average income instead of eight to nine times, which is what it is now. It used to be, 25 years ago, the house price to income ratio was four. In order to get back to four, we'd need to halve house prices, if we were going to do it overnight or in a hurry. I did think and I probably still think, if house prices fell 50 per cent, which I don't think they will do, but if they did that would cause a major problem in the economy, if not a big depression. That's what I was talking about, 50 per cent fall in house prices... 10 to 20 per cent? I don't know what would happen.

I think the experience of those other countries probably would mean that there might be a recession but it wouldn't be that bad probably, because people wouldn't have to sell... The main reason there's potentially a recession caused by house prices falling, is if there's a credit squeeze and banks start going broke or they cut back their lending. Would they do that in the event of a 10 or 20 per cent fall in house prices? I don't know.

It would certainly be interesting because we haven't been in anything like those conditions for a long time.

That's right, exactly.

It'd be a real experience for lots of Australians. Maybe we wouldn't get a technical recession, it'd feel pretty recessionary.

I think it would, that's right. Thanks, everyone, for listening to today's episode of The Money Café, I'll be back next week with Stephen Mayne, send in your questions to themoneycafe@intelligentinvestor.com.au. Until then, I'm Alan Kohler at Intelligent Investor and the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review.

See you soon.

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Got a question for next week? Please send it to themoneycafe@intelligentinvestor.com.au.