The economic pundits are increasingly putting their money on a two-year spell of worsening economic news before we turn the corner and profits are again predictable and reliable.

The most recent blow was a dual announcement by NAB and ANZ that they will write off billions of dollars on investments they previously thought were OK.

Only a short time ago they were patting themselves on the back for having escaped the worst of the reckless lending practices they observed in the US. Last week they had to 'fess up that toxic sludge embedded in their investment portfolios had surfaced and that the AAA rating on those investments was worthless.

If smart bank analysts can't identify duds before it's too late, who knows where these toxins will pop up next?

The irony is that although the banks may have done their best to avoid reckless lending practices, they got stung anyway, because smart alecs on huge salaries and even bigger bonuses elsewhere cleverly packaged bad loans and sold them as "clean", highly rated investments to other banks, including those in Australia.

The All Ordinaries Index has just registered its worst financial-year performance in 26 years. The market's worst performer was Centro Properties, down 97 per cent on its high.

According to Mark Wist, a director of Property Investment Research, Australian households that thought they were in for a softer landing than their US counterparts are in for a shock.

That is because Australian households have a higher debt-to-income ratio (177 per cent) than their American counterparts (138 per cent) and the average household debt service burden here is at its highest level to date. In Property Investment Research's latest monthly bulletin, Wist lists a confluence of circumstances that indicate Australian households are in for a period of stagflation - high inflation and low growth - that we have not seen for a generation.

These factors include irrepressible fuel price increases that feed into the cost of just about everything, robbing consumers of spending power while they pour ever-increasing sums of money into their fuel tanks.

Add to this cyclical high interest rates (which impair consumer confidence), a housing affordability crisis combined with a housing shortage, severely constrained business operating conditions, deteriorating demand, slowing retail sales growth, the absence of liquidity in the credit markets and a big turnaround in housing equity withdrawal.

This vicious circle of softer domestic demand leads to weaker business sentiment, in turn leading to reduced investment, weaker employment and softer domestic demand.

"This is exacerbated by a higher interest-rate regime, making residential property less affordable and therefore affecting prices of new dwellings fuelled by consumer resistance," the Property Investment Research bulletin says.

This combination could result in more mortgage defaults and damage to bank loan books, particularly if property prices fall.

As a worst-case scenario, Australia could develop its own mortgage problem if debt servicing becomes problematic, Wist says.

It is not all bleak, though. The upside, he says, is that the shakeout, particularly in commercial property markets, will result in greater transparency and commit to the dustbin the convoluted, heavily debt-infused and interdependent structures that have passed for real estate investment trusts.

Cashed-up buyers will be able to pick up bargains and regulators will have the opportunity to sharpen disclosure practices.

The main winner, Wist says, will be the investor who can maintain a position through the present turbulence and stay the course.

"This investor is also likely to see the demise of the convoluted capital stacks concocted in a time when investment conditions permitted creative licence and a corresponding return to a cleaner, more simple and transparent structure," he says.