Australia Runs out of Luck, Now Needs a Miracle

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By Lindsay David, Australia, author of Print: The Central Bankers Bubble, founder of LF Economics:

Australia, you have officially run out of luck.

While leveraged property investors in Sydney and Melbourne are desperately hunting for a senseless “net-yield” that makes the yield on a German 2-year bund look rewarding, the Australian mining sector is screaming towards what may be one of the greatest and colossal economic breakdowns in modern Western history.

As iron ore illustrates, this is not a downturn; this is a spectacular crash in the spot price of a commodity. And the sad news is, there is no new demand scenarios (unless China builds more apartments than its population) to suggest that more supply is needed to fulfil the demand of the global economy.

Australia made two bets.

The first bet was that China would willingly consume every ounce of iron ore Australian miners could dig from the ground and pay a premium.

Unfortunately, Australia has built an (incredibly sophisticated and streamlined) iron ore production operation so big that the world may never be able to consume all that it can supply. Our treasury, RBA, Miners and politicians assumed that China would forever grow. But they failed to calculate over the long-term that if China continues to consume all the iron ore dug from Australia’s underground, the world’s most populous nation would literally need to build a national subway network, literally an airport every 22 kilometres apart from each other and literally more dwellings than people.

I truly wonder, how many decent Australian’s lost their job challenging their employer, whether it be in the mining industry, or at government level for doing the maths and saying something is simply not adding up.

And from the looks of it, as I strongly argued in my recent book “Print: The Central Bankers Bubble,” as a signal to the end of the Chinese property boom, if their stock markets were to surge, it meant that property investors are pulling out of the ‘no-yield’ real estate market and pumping their funds into Chinese stocks. My gauge on this seems to be spot on.

The second bet this nation made was to leverage Australian households through the roof and create an economic model that shares the same risk profile as a Ponzi scheme in order to assure that house prices only rise creating never-ending capital gain to those who took the most abnormal sums of risk to invest in a zero-sum game.

House prices have already ‘crashed’…yes ‘crashed’, across a plethora of our mining towns. These real estate markets were ‘property bubbles’, yes ‘property bubbles’ that have already ‘burst’. So for anyone to suggest there are no housing bubbles in Australia is nonsense.

Outside of Sydney and Melbourne, property prices have ‘stalled’. Not because these markets are taking (as the real estate pundits would say) a short breather, it’s because you probably have first time homebuyers in Adelaide thinking to themselves, ‘why the heck should I leverage my life away to live in this expensive shit-hole?’

I don’t care whether we are talking about Adelaide, Hobart, Alice Springs, Sydney or Melbourne. These property markets are as ridiculously expensive as they are today because they were fuelled by excessive sums of available credit which created an artificial sum of buyers in an Irish-style bubble myopia frenzy. And unless there is a ‘miracle’… it’s by all mathematical accounts, downhill from here.

I stand by my prediction that I made in my book ‘Australia: Boom to Bust’ that the spot price of iron ore will touch $20 with three of the five largest iron ore producers in Australia going bust; that property prices across Australia will fall back to their long-term median house price to income ratios; and that at least one of the big four banks will either go bust, be bailed out, or nationalized before the end of 2017. And based on the recent data points, I’d say this prediction is looking pretty good! But this prediction will be a truly heartbreaking result for a good nation, where good people will unfortunately lose everything they have spent their lives working for. By Lindsay David, author of Print: The Central Bankers Bubble

Just when Australia’s resource boom has collapsed, and manufacturing too – though at least the housing bubble is still going strong in some places – attention turns to the banks. Read…  No Major Country Is More Exposed to Banks than Australia

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  8 comments for “Australia Runs out of Luck, Now Needs a Miracle

  1. B Wood
    Apr 16, 2015 at 3:46 am

    ‘first time homebuyers in Adelaide thinking to themselves, ‘why the heck should I leverage my life away to live in this expensive shit-hole?’

    Oi!, Adelaide is a beautiful city! I am in Perth, houses are still being advertised and sold stickers going up, people are still confident. I have read Lindsay Davids books, and enjoyed them, life is not as bleak in Australia as portrayed, I know a safety guy on the roads, holds the stop/go sign, made $1800 for 48hours work. They can’t get people to do the work as it involves standing for long periods and boredom, so people start, do a couple of weeks and leave for some other job..

  2. Ray
    Apr 16, 2015 at 2:03 pm

    No worries. She’ll be right mate. “Ha ha, That’s not a bubble, that’s a bubble. Just kids having fun.” – Mick Dundee

  3. interesting
    Apr 16, 2015 at 6:01 pm

    “life is not as bleak in Australia as portrayed”

    all in due time!!

  4. NotSoSure
    Apr 16, 2015 at 7:12 pm

    I’ve heard it from good authority that aliens (yes you didn’t read that wrong) will come soon and buy iron ores and all kinds of derivatives in exchange for infinitely renewable energy sources, anti death technologies for Silicon Valley people, etc

    You heard it first on Wolf Street!!!

  5. Julian the Apostate
    Apr 17, 2015 at 1:38 am

    Wow. Has the Foundation learned to time-travel? Mineral poor and all that, with nuke tech the size of a walnut. Where is Harry Selden when one really needs a psycho-historian?

  6. Lee
    Apr 18, 2015 at 8:04 am

    A few points:

    1. Interest rates are still high in Australia. Since the GFC commercial banks have increased their margin on loans by about 1.5%. They did this by increasing rates by a greater amount when the RBA increased the discount rate, increasing rates when the RBA left rates unchanged, and not lowering them as much when the RBA decreased them. That is one reason why bank shares in Australia have performed so well compared to mining shares: they are screwing their variable mortgage rate customers.

    Consumers have yet to see ALL of the benefits of the RBA’s interest rate cuts.

    2. Housing loans are recourse loans in Australia and the banks will go after everything you own should you default on a loan. Unlike in the USA you can not ‘walk away and mail the keys to the bank”.

    3. Housing is in a bubble in certain parts of Sydney and Melbourne and in other places RE prices are steady or falling. Is the RBA going to try and kill the entire economy because of this as it did with the domestic economy during the so called ‘mining boom’? The factors that are increasing housing prices are basically beyond the RBA’s control.

    4. Interest rates are of little concern to people who plunk down a couple of million dollars CASH for a property.

    A small block of land of about 800 square meters (that’s 1/5 of an acre) 30 minutes from the Melbourne CBD by train recently sold for A$1,030,000………………….Ridiculous, yes, but it doesn’t matter as the majority of properties in the Melbourne area are not going up by 15 to 30% a year!!!

    I’d be happy to see even 5%.

    5. Australia’s population is increasing just as in the USA, however, whereas the people sneaking into the USA are illegal, low skilled, and poor, many of those coming to Australia are generally skilled and more importantly many have the funds to buy those million dollar properties. (However, many of those let in by the left wing nutter Labor government under their idiotic polcies are the ones that are causing many of the social problems we now face here.)

    6. Melbourne’s population increased by around 95,000 people last year and is expected to increase from 4.4 million to around 5 million people by 2020.

    Yep, you read that correctly: 5 million people.

    Demand for housing based on population growth will underpin property values more than any change in iron ore prices.

    I’d be more worried about the effect of a decrease in immigration on housing prices than most any other factor.

    • Apr 18, 2015 at 9:32 am

      Lee, about your point #2 – “Housing loans are recourse loans in Australia and the banks will go after everything you own should you default on a loan. Unlike in the USA you can not ‘walk away and mail the keys to the bank.”

      1. Generally, a bank can pursue already totally squeezed borrowers that walk away from their mortgages all it wants to, but it won’t get anymore juice out of them.

      2. I hear this a lot: that banks in Australia, Canada, etc. will be better off than banks were in the US during the housing bust because loans in the US were non-recourse and people could just walk away from their mortgages.

      That is a popular misconception. There are about a dozen states in the US, including California where I live, that are non-recourse. The rest of the 50 states are recourse. In those states during the housing bust, banks had the right to go after borrowers. But when people ran out of money to make their mortgage payment, they generally didn’t have enough money to make it worthwhile for a bank to go after them (my point #1).

      And that is what played out in the US. It didn’t matter, recourse or non-recourse state: the housing bust took down the banks. Expect a similar scenario if there is a housing bust in Australia, Canada, etc.

      Also, investors create corporations (usually LLC) that own the properties, each property in its own LLC. Hence, in a recourse state, the LLC is responsible for the mortgage. But the LLC won’t have anything but the property in it. And the bank won’t be able to get anything else. Investors in Australia, Canada, etc. are doing the same thing. Investors in the US walked away from properties that were under water and kept the ones they wanted to keep. There is nothing a bank could do about it other than foreclose on the property, take the loss, and go on.

      Same thing is going to happen in Australia.

      Your point #5: “whereas the people sneaking into the USA are illegal, low skilled, and poor,…”

      Sure there are some people who fall into this category, but there is a stream of legal immigrants and non-immigrants (H1-b visa holders for example) coming to the US who are highly skilled or wealthy, or both. The US is the number one target country in the world for Chinese and Indian immigrants with money to buy expensive homes. Same for wealthy immigrants from LatAm. A lot of Canadians own second homes in the US. The list goes on.

      • Lee
        Apr 18, 2015 at 7:22 pm

        Wolf,

        Yes, some interesting points.

        I’ve been here 20 years and every year people point out how the housing market here is going to crash. It has had its ups and downs just like every asset, but I doubt if it will crash.

        Those housing asset bubbles in certain areas of Melbourne and Sydney are not being fueled by bank loans. They are being undertaken by cash purchases by new immigrants.

        Many of them are Chinese.

        So called ‘first home buyers’ – those with limited finances are being driven out of the market and are really not a concern. IIRC those types are at a record low in terms of the number of properties being bought recently.

        The net immigrantion to Australia is about 250,000 or so each year. That works out to a little less than 1% of our population. And overall much of that immigration is highly educated, skilled, rich, permanent, and legal and not illegal, poor, and uneducated as in the USA. To scale to the USA’s equivalent population that would mean a net legal immigration of over 2.3 million people.

        That immigration has had and will continue to have a huge impact on the demand side of the economy: more houses, cars, and food is needed.

        Here in Victoria we saw little if any positive impact from the so called mining boom. We only had the negatives: increasing interest rates, increase in wage costs, a decimated domestic market and a high Australian dollar.

        The net population increase here is way more important and has much more impact than any other factor.

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