A housing market set for the mother of all corrections.
“I think it’s important that people don’t hyperventilate about these type of things.” With these words, Australian Prime Minister Tony Abbott tried to soothe the world’s rattled nerves today about the ongoing crash in China. Australia is heavily exposed to China, the biggest consumer of its commodity exports.
“It is not unusual to see stock market corrections,” he said about the relentlessly brutal three-month crash that has taken the Shanghai Composite down 43% so far.
“It is not unusual to see bubbles burst in particular markets and for there to be some flow-on effect in other stock markets, but the fundamentals are sound,” he said, speaking of the Chinese fundamentals, and by extension, of the Australian fundamentals that depend so much on Chinese fundamentals.
And he said this though factory activity in China shrank at the fastest rate since the Financial Crisis, other indicators are heading south, cars sales are suddenly plunging, and the People’s Bank of China started devaluating the yuan to mitigate the problem, thus further hurting Australian exports to China.
So here’s Lindsay David, founder of LF Economics in Australia, weighing in on the “sound” fundamentals in Australia.
By Lindsay David, Australia Boom to Bust Blog:
It’s truly surprising since LF Economics released its chart pack on the Australian housing and debt markets the great interest that hedge funds and financial institutions in the US, Europe and Asia have in our product and work. The same however, cant be said for Australia. But that’s no big deal. Based on the analytics of this blog, Aussie institutions and government prefer or try to scrape the free data on this blog. I’m sure the same happens on the Macrobusiness website.
It felt just like yesterday when I released Australia: Boom to Bust. As I argue in the book, the Australian economy is incredibly dependent on what I call the “Three Pillars of the Australian Economy”: mining, banking, and real estate sectors. And as I argue, at least three of the five largest iron ore producers will go bust. And “at least” one of the big four banks will either go bust, be nationalized, or bailed out before the end of 2017.
The mining sector is already in dire straits. In order for miners such as Fortescue to survive, they must continue to increase output to keep their extraction costs low; and the spot price of iron ore must not fall any further. This is not sustainable. Unfortunately, only a small handful of us over the last year or two were warning about this scenario taking place. And today it is.
Now to the banking sector. More specifically the Big Four banks – ANZ, Commonwealth (CBA), National Australia Bank (NAB), and Westpac (WBC) . Yes those banks that are apparently strong and safe even though their stocks continue to slide off a cliff.
It is only now that the broader public is starting to question the fundamentals of these banks. And the media is now honing more attention to their balance sheets, capital ratios and their ability to withstand an economic shock. Aside from a small handful of us, I strongly believe that if we look back to say January 2014, hardly any Australians in their own right would have thought that the stability of our mining sector and banking system would be under such scrutiny today. And day by day a darker picture is rightly portrayed.
So, if our miners are stuffed, and our bankers are more than likely, and desperately trying to explain to the international wholesale lending community that there is no housing bubble in Australia, what happens when emphasis moves from the miners, to the banks… to the housing market?
A society caught off-guard
Whilst the overwhelming majority of our real estate analysts work for and are employed by entities with too much skin in the housing market game, which restricts their ability to make a fair analysis, they have essentially become more like property cheerleaders than anything else, fly-squatting any view that suggests Australia is experiencing a credit-fuelled housing bubble. Clear examples can be found here, here, here, here and the real estate guru with a silver necklace here,
What none of these media commentators (alongside almost every other commentator) ever mention is the unsustainable growth in household debt in this nation. $1.6 Trillion economy and $1.9 Trillion in household liabilities and growing. Have any of these real estate pundits ever given a clear indication what our national household debt load will look like a year from now? Two years? Here is a hint. It’s comfortably over $2 Trillion.
Under the current mathematical metrics, House prices in any market that has the same debt levels as Australia’s can crash, and have crashed. If our housing market looks and smells like a bubble while every stakeholder denies it’s a bubble, it’s a bubble. And society will unfortunately be the biggest loser caught with its pants down when the housing market has the mother of all corrections.
The debate on the risk of the mining sector taking a hit was too late. We are only now starting to get traction with the debate on the safety of our banking system. But the debate that is happening today about the housing market conditions is simply a whisker. But a whisker is a lot compared to early 2014. And expect the voices in sum to continue to grow. And remember with housing bubbles, when they burst there is no such thing as a soft landing. By Lindsay David, author of Australia: Boom to Bust and Print: The Central Bankers Bubble. David recently founded LF Economics and holds an MBA from IMD Business School.
And the banks? They’re not only too big to fail. For Australia, they’re too big to save. Read… How Australia’s Big 4 Banks Can Sink the Entire Economy