First the Miners, now the Banks, then Property? Going to be a Hard Landing for… Australia

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

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  19 comments for “First the Miners, now the Banks, then Property? Going to be a Hard Landing for… Australia

  1. David in Texas says:

    Australia has no deposit insurance, so if one of the big Australian banks starts to wobble, the government will have to intervene or face the mother of all bank runs.

    On the plus side for Aussie real estate, one could argue that as conditions in China deteriorate, a fair number of Chinese are going to change their focus from concern about losing a percentage of their assets to getting what they can (including themselves) out of China, before the window for doing so closes. A lot of this money has already found its way to property in Sydney and Melbourne. More will surely follow. It probably won’t be enough to keep the bubble from popping, but may cushion the blow in certain parts of town – although the mining communities and nondescript suburbs will get killed.

  2. Mr. Reality says:

    And like many Aussies my fellow Canadians are absolutely clueless as to what commodity demand destruction can do. Heavy to debt and houses…….Sounds like Oz.

    Mr. R.

  3. hidflect says:

    China’s stock market crash threw all the markets into a wobbly for a few days till everyone realized they don’t depend on China for hardly anything on the demand side, except Australia…

    • Wolf Richter says:

      Plus Germany and Japan. Australia ships commodities. Germany and Japan ship all kinds of manufactured products, machinery, and the like. The corporate whining has already started in Germany.

      But in terms of the size of the economy v exports to China, I think you’re right: Australia is a lot more exposed.

    • MC says:

      There’s a big problem: profits.
      The Chinese market is a goldmine for companies such as BMW, Hitachi, Siemens and FANUC as far as profits go. Getting over 20% of overall profits from the Celestial Kingdom is now the norm, with some companies going over 30%.
      These record profits are (were?) the end result of a combination of artificially high demand, high margins on the Chinese market and an unusually strong yuan/renmimbi against the euro and the yen.

      Just the yuan devaluation is bound to chew into those profits, and as Wolf said the big German exporters are already making a racket about it. In their opinion the euro is still too strong relative to pretty much any currency except perhaps the Bhutanese Ngultrum. So much for those who believe Germany to be a bastion of monetary integrity.
      Japanese companies would make the same racket if they weren’t sure Haruhiko “Madman” Kuroda will continue thrashing the yen anyway.

      There’s also the question of sales growth. Companies such as BMW and Toshiba have built their plans for the next decade around expectations of China growing at the same pace she did in the 2010-2013 timespan. They expect the Celestian Kingdom’s voracious appetite for semiconductors and luxury sedans not to just continue, but to continue growing at double digit pace.
      Those plans have started falling apart last year, when the Chinese manufacturing base “unexpectedly” started losing steam and prospects for the future began looking not too bright.

      When manufacturing colossi such as Siemens and Hitachi get their growth figures wrong, all Hell breaks lose. I feel the insane, never ending “promotions” Hitachi is having here in Europe on industrial machinery and tools are somewhat tied to China. Never before has the Japanese manufacturer (from which I’ve bought tooling for years with complete satisfaction, and I’ll buy again from) behaved this way, not even in 2009.

  4. Mark says:

    Rarely good text on Australian state of economy and real estate.
    Reminds me much of Canadian situation.

  5. itsallgood says:

    Nahhh, Australia is different and she’ll be right mate. Only the rest of the world makes mistakes ;-)

    • Brett says:

      itsallgood…exactly, its not called the lucky country for nothing, going forward lets hope we don’t pick up any more unfortunate tags.

    • Jack says:

      itsallgood, your “mates” still drivin’ on the wrong side of the road down there?

  6. Les Francis says:

    Of you think that the only Chinese ghost cities are in China you would be mistaken.
    There are tens of thousands of vacant apartments in the Australian major cities either unoccupied by owners or not tenanted by renters. – Apartment banks. Majority owned off shore.
    Many of these apartments are not fitted out – just shells.
    Tens of thousands more apartments are being built, planed or nearing completion..

    Here’s another ridiculous fact. Australia’s population is around 25 million – living on a continent. Building highrise city apartments and low rise suburban ones is a sop to the U.N. Agenda 21.
    Prices for these apartments are ridiculous.

    The young Australians are now resigned to never being able to afford to buy a property and will be consigned to a lifetime of renting – unless there is a serious adjustment to pricing.

    The housing shills are always fast to comment when the subject is raised about foreign (by inference Chinese) buyers affecting the prices of the real estate bubble. No big effect is the shills cry.
    However if the market is suddenly panicked by foreign owners quickly putting their “banked property” on sale – the shills have a different story.

    • matt says:

      bring on the crash..I want to buy but not in this bubble thanks

      • night-train says:

        Matt, hope getting a good price after the crash works out for you. That was my plan too when the housing market here crashed. Unfortunately the FED and the private equity boys had a different plan. So here I sit, where I sat while morons bid up prices, lied to get loans, planned to flip their way into real estate empires and biting any other bait dangled in front of them. Hopefully, the next time, the powers that be will have to let the market find its own level.

  7. Lee says:

    Time again to bring out the ‘market is going to crash’ story.

    With the real estate industry having weekly auctions on Saturdays I guess we’ll how the recent carnage in the world markets affect the upcoming auctions on the 29th.

    These doomsters just don’t get it.

    First:

    Increasing demand as a result of population growth will keep demand for property (meaning houses) growing. The biggest threat to house prices in Australia is reduced population growth or reduced immigration.

    Second:

    Except in a few select markets that demand is not being met. Yes, the Melbourne CBD has/will have too many units/condos/apartments, but this will have no impact on housing 30 miles from the CBD.

    Third:

    Many of the houses (repeat HOUSES) are being bought with something called cash and much of that cash is coming from overseas. These purchases will have no impact on banks’ balance sheets unless the proceeds are put into accounts there.

    Fourth:

    Interest rates by historical standards are low, but the banks have increased their margins since the GFC. In fact the margin on variable rate mortgages is some 1.5% HIGHER than at the depths of the GFC. People here are still paying way too much in interest to the banks. And again this ability to ‘screw’ the customer is the reason for the huge increase in bank profitability and in turn the huge increase in bank share prices.

    Fifth:

    Yes, there are areas where prices have become ridiculous. For example in the Glen Waverley and Mt Waverley areas where there has been a huge influx of Chinese buyers. Those areas make up only a small portion of the entire Australian RE market.

    If I had the money to plunk down A$3 million for a house I certainly wouldn’t buy there.

  8. d says:

    ANZAC Basher’s are all having a good time again.

    Ignoring a major fundamental.

    The ANZAC housing market also has a general under-supply issue. So any correction will be a Maximum 20% (Which would be historical huge) which will not bring most loans into distress.

    Much more likely is that the corrective forces will be absorbed by the market resulting in a stagnant/sideways market for some time, as has historically happened in these situations. Distressed selling from the 08 crisis was over by 09 and no real pain was felt by the banks, few loans resulted in shortfall sales due to the initial deposit ratios in the ANZAC States..

    Unfortunately neither a 20% correction, or a stagnant market, will return affordability, to the market for the average wage earner.

    The $ AU has devalued nearly 30 % effectively so even at these depressed commodity prices, Australian Mining is still profitable, in Australia, particularly GOLD. For which demand seems to be slightly increasing, for some reason.

    The Miners will do what they have done before, cut overtime, Stockpile mined ore, and not replace non critical churning staff, the State will assist them do that, as it always does.

    Remember the ANZAC Nations are your “Canary”, If they develop”Employment Issue’s” due to current chinese upheavals, your larger “Employment Issue’s”, are not far away.

  9. Lee says:

    Guess we’ll have to put off the crash at least for another week:

    “Young families and other home buyers beat off property investors at many auctions on Saturday as stock levels and confidence in housing ramped up.

    More than 1000 Melbourne properties were auctioned on Saturday, testing the market’s depth at a time when borrowing conditions are becoming more onerous for investors.

    But the market scored a big pass mark, with the Domain Group posting a 79 per cent clearance rate from 847 metropolitan auctions. There were 178 unreported results.”

    SEE:

    http://www.domain.com.au/news/home-buyers-regain-the-upper-hand-with-investors-under-pressure-20150829-gjaqiq/

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