Australia’s Sacred Cow Threatens Banking System

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

I have consistently held the staunch view that Australia never had a housing shortage. At LF Economics, our recent research suggests Australia has more than enough housing to go around. This is clearly documented in the “Comprehensive Housing Supply Analysis.”  My personal views are well documented in my books Australia: Boom to Bust, and in my new book Print… alongside a host of articles in my blog.

However, 99% of Australia’s housing analysts (paid cheerleaders) were, until Michael Janda’s recent report on housing supply, claiming a dire housing shortage. A housing shortage so bad that by all mathematical accounts, football and cricket fields across Australia should be tent cities. But they are not, and there is no housing shortage. But all of the sudden, since Michael Janda’s article, and out of the woodwork, analyst from some of the most respected names in finance and economics have magically begun to also question Australia’s housing supply issue.

Even worse… some other Economists who just a few short months ago were calling a dire housing shortage all of the sudden are claiming there now could be a slight oversupply of housing on the way which will bring house prices down a smidgen. Based on what I’ve read, there was the claim of a shortage of a few hundred-thousand dwellings. Housing construction is ramped up by some 50,000 new dwellings, and a handful of the paid cheerleaders are only now talking of a potential oversupply?? What national idiocracy!

Artificial Demand

If the highly paid cheerleaders of the Australian housing market had taken a genuinely objective approach, they would have seen the clear link over roughly the last two decades between house prices, demand, and the banking system relaxing their lending practices to potential homebuyers.

Household debt has risen from 50% to more than 150% of household income over the last two decades. How can you argue that our banking system is lending 3x more to homebuyers without creating artificial demand in hands-down one of the most expensive countries in the world to buy a house? Would house prices be as high as they are if household the debt-to-income ratio in Australia were still only 50%?

In plain English, the Australian banking system has over time allowed more Australians access to high levels of risky debt that was once unattainable. This is clearly reflected in the balance sheets of practically every Australian bank.

When debt becomes much easier to attain, more potential homebuyers are created. This is what creates more buyers for property in a market that is mathematically deemed chronically unaffordable yet with available supply. By the banking system artificially creating more demand through generous lending, you will most likely see strong demand relative to the available supply. That’s exactly what happened in Ireland. That’s exactly what happened in America. And it’s exactly what happened in Japan.

I am bewildered as a mere observer that there is no major financial Australian entity questioning the leveraged artificial demand that exists within the Australian property market. But then again, these are the very entities that created the artificial demand in the first place.

Negative Gearing

Leveraged artificial demand plays out on the investor-side too – in negative gearing, Australia’s sacred cow. This occurs when an investor borrows money to buy rental property, but the rental income won’t cover the interest expenses. The promise of negative gearing is a capital gain when the property is sold.

More than a million dwellings in Australia negatively geared investments. For banks, these mortgages are highly exposed (toxic) assets in an economic downturn. What happens to the Australian economy if the capital-gain train runs out of steam and property prices start to fall significantly? The endgame result for negative gearing is an economic disaster.

The biggest problem would be the impact on Australia’s highly leveraged banking system. Banks do not hold enough capital to cover their losses in the event of a significant downturn in the housing market. Negatively geared property investors are the greatest risk to the banking system. Their investments are loss-making schemes in pursuit of capital gains. If there are no capital gains to be made… a real world problem arises.

The highly leveraged nature of the Australian housing market will inevitably put pressure on the banking system when house prices head south or banks are restricted (regardless of reason) on their lending capacity.

Then put yourself in the shoes of a negatively geared property investor in pursuit of capital gain, who recently purchased a property in Sydney or Melbourne, and then property prices fall by 10%-20%. In terms of sum value, that equates to a lot of money and capital losses. Would you still hold on to your investment if it’s losing you both income and capital? Or do you try to sell? Now multiply the answer by one million. Next step: Now imagine house prices fall, and suddenly you have an extra several hundred thousand investment properties on the market at the same time!

Given the Australian speculative debt frenzy, it would be wise for the Australian Prudential Regulation Authority (APRA) to take immediate action on restricting the banking system from making any loans on properties where beyond the shadow of a doubt the rental income will not cover the costs of servicing the loan. If the rent can’t pay the mortgage… no loan.

Either regulators make a concerted effort to put a stop to this leveraged frenzy, or the market will do the dirty work for them. Either way, Australia’s sacred cow will die. By Lindsay David, Australia Boom to Bust Blog, author of Print: The Central Bankers Bubble

Now they’re saying, “Nobody predicted the crash” of iron ore. Ha! Read… Australia’s Bad Bet on China

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  5 comments for “Australia’s Sacred Cow Threatens Banking System

  1. Ray says:

    Baby it’s too late now. The way to prevent a bubble is not to blow in the first place, but the incentives in a fiat money system is such that it reminds me of those bubble machines at a seventies disco. The bubble is going to burst. Now it’s only a question of who will get the blame. My bet is an excess of freedom will get blamed.

  2. Larry says:

    The bubble will definitely burst. The next best thing the regulators can do (aside from not blowing bubbles in the first place) is to LET THE BUBBLE BURST. Let those who made foolish bets pay for doing so. Don’t use taxpayers’ dollars to make speculators whole.

  3. Julian the Apostate says:

    No one is going to stop this, silly man, they WANT this. They won’t stop until reality bitch slaps them upside the head. Then they’ll bail in every dollar in sight. It’s déjà vu all over again.

  4. Lee says:

    “And it’s exactly what happened in Japan.”

    No it is not and it shows the same ignornace and mis-understanding of a unique market that few foreigners really understand.

    In regards to Australia the area of over supply has always been in two select areas: apartments and units and holiday houses.

  5. Lee says:

    In some of my previous comments I have indicated that the housing market boom in Australia and in particular is being driven by immigration.

    Immigrants put price pressure on housing stock and drive up prices.

    Today in THE AGE newspaper there is an interesting map showing where immigrants are living in the Melbourne area.

    Not surpsingly the areas that show the highest concentrations of immigrants from China are also the areas that have been seeing increasing property prices.

    For example the Glen Waverley and Mount Waverley areas in the east.


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