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The credit bubble in Australia has never really popped; The obvious catalyst for the popping of the great Aussie bubble is China
Topic Started: 16 Apr 2012, 05:23 PM (4,447 Views)
mugshot
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This article is from January but it makes interesting reading, especially our banking system's massive exposure to housing assets.

There's a good comparison of the Australian bubble today compared to Ireland and UK pre-crash.

http://www.bondvigilantes.com/2012/01/17/the-hot-money-has-flown-south-to-australia-for-the-winter-but-will-it-fly-back-in-the-summer/

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The hot money has flown south to Australia for the winter, but will it fly back in the summer?

Posted on January 17, 2012 by Anthony Doyle

On Friday we had a Dumb and Dumber moment in the office when a colleague for a few seconds thought that Australia had lost its AAA rating. The error was quickly realised (it was Austria that was downgraded) and Australia kept its AAA rating across the board that it has had with Moody’s and S&P since 2002 and 2003 respectively (although Fitch only upgraded Australia’s foreign currency rating to AAA in November 2011).

There were however some disturbing figures that came out of Australia on Friday – foreign investors bought a record AUD$23.9bn (=US$23.9bn) of Australian government bonds in Q3 2011, resulting in foreign ownership soaring to 80.4%, which is also a record. Judging by the price action on Aussie bonds and the Aussie Dollar in Q4, foreign ownership is likely to have jumped further in Q4. For us, this is worrying as heavy foreign ownership of government bonds can be very dangerous, particularly when this is combined with a country running a current account deficit (i.e. the country is reliant on capital inflows from abroad). Ireland and Portugal, which saw similar levels of foreign ownership before the crisis hit, are great (or poor?) examples of how this combination can leave a country’s exchange rate and solvency very exposed if the country hits a crisis.

Of course, Australia does have some big advantages over the Ireland of 2006. Australia has the ability to print its own currency and set its own interest rates (just ask the Irish how much they would like this power right now). Secondly, despite the massive expansion in credit and house prices that Australia has experienced over the last two decades, Ireland’s was comparatively greater. The run up in Australian house prices since 1990 is reflective of a massive increase in household debt (fuelled by the Aussie banks) and is not the product of more fundamental factors such as population changes or rental income equivalents. Additionally, there is likely to have been a change in demand, as years of rising prices that have made the Australian housing market one of the most expensive markets in the world on price-to-income and price-to-rent ratios (as The Economist pointed out last November) have probably changed household formation dynamics.

Australia’s current account deficit is currently only 1.5% of GDP which is far from alarming. However, on a cumulative basis, Australia has averaged a deficit of 4.8% since the beginning of 2003 which should have investors’ alarm bells ringing. The credit bubble in Australia (credit bubbles usually accompany large credit account deficits) has never really popped (we wrote about Aussie housing market here). The end of a bubble is always difficult to predict and identifying the trigger for such an unwind is similarly fraught with difficulty. Given that markets are extremely sensitive to the potential for asset price bubbles bursting and with the effects of such events still in mind, the Australian housing data are key to AUD maintaining its lofty levels. Something else that is worrisome is that the Australian banking sector dwarfs the size of Australia’s economy at 3.5 times nominal GDP (Ireland’s banking sector was 4.4 times GDP in 2008). The key challenge facing the Australian banking sector is its exposure to the housing market, with about two thirds of assets on the banks books consisting of housing loans.

The following chart shows the AUD/USD currency rate versus foreign ownership of Australian government bonds going back to 1989. It appears that there is a positive correlation which makes a lot of sense – obviously if foreigners are buying government bonds in large size then the currency should strengthen. In fact, we think this is precisely why the British Pound has been surprisingly strong over the last six to nine months as the UK government is one of the few AAA sovereigns still standing and has been the beneficiary of a huge safe haven bid. Of course, if this safe haven status gets called into question, which could easily happen in both Australia and the UK, then capital outflows would leave their respective currencies extremely vulnerable. On this front the UK’s current account deficit of 4% of GDP recorded in Q3 2011 wasn’t exactly encouraging – since 1955, it has only been worse in Q2 1974 (which preceded sterling’s 1975-76 collapse and IMF bailout) and from Q4 1988 to Q2 1990 (which was a symptom of the UK’s housing bubble and preceded the pound’s sharp fall after it was booted out of ERM in 1992)

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The obvious catalyst for the popping of the great Aussie bubble is China, as that’s essentially all that matters if you’re taking a view on Australia’s economy. Almost 70% of Western Australian and Queensland mining exports go to China. If China has a hard landing then Australia is in serious trouble, and even if it has a soft landing then Australia may be in trouble anyway. If China wobbles or the Australian housing market starts to correct, the RBA would be forced to cut interest rates as it did late last year, reducing the Aussie Dollar’s appeal as a higher yielding currency. The Aussie Dollar is only just over 3% below its strongest ever on a trade weighted basis, and we think that leaves it looking very vulnerable. With the market pricing in a reduction in the RBA cash rate of 1% to 3.25% by August, will the hot money fly away from Australia in the summer?
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mugshot
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From the same blog.

http://www.bondvigilantes.com/2010/03/02/bubbles-down-under/

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Bubbles down under

Posted on March 2, 2010 by Matthew Russell

Having just returned from a couple of weeks in Australia for a friend’s wedding (all the best to the happy couple) I thought it might be worthwhile writing a note on what looks to me to be a bubble in the Australian property market.

On my first night out in Sydney I was fortunate enough to get chatting to a couple of the locals who were out celebrating, one of them having just completed the purchase of her second property. The other, who already has two, thought it totally normal that two girls in their mid 20s – one an interior designer, the other a shop assistant – should be able to do this.

A couple of mornings later, I was reminded of this conversation whilst reading an article that I felt I had seen many times before. The journalist was bemoaning the state of the market – house prices ballooning, first time buyers unable to get on the ladder, demand outstripping supply…..sound familiar?

After the wedding I headed up the coast to a small beach town for a change of scenery. The train journey was made interesting (if a little irritating) by an old lady at the other end of the carriage who must have forgotten to turn her hearing aid on that morning. She spent a good half hour telling a friend and the rest of us in the carriage about her grandson who was playing the property market. Apparently he has accepted an offer on his house and then pulled out in the hope of achieving a higher price twice already, and is considering doing the same again.

Once in my beach town (and gratefully out of earshot) I counted no less than seven estate agents/mortgage brokers in the parade of about 50 shops along the beach front. If I wasn’t already thinking “bubble?” I was now. So on a rare cloudy afternoon I popped into a few banks curious of what mortgages were on offer. Mostly I just picked up the standard leaflets but in the branch of one of Australia’s big 4 banks a very helpful member of staff offered me a seat so we could talk about my “options”. Once the disappointment of not being able to sign me up had passed, she told me how busy they had been and how the majority of people signing on for new deals were opting for variable rate mortgages.

With at least a 20% deposit on a property worth A$250,000 or more, the lowest variable rate one can achieve is 5.79% and 6.49% fixed for a year at this particular bank. Encouragingly there were no deals I could find that were offering an LTV of greater than 95%. However there was a decent amount of literature on re-financing existing deals and suggestions on how this cash could be used. Rather scarily one of these was to invest in the capital markets – and yes, you can trade on margin.

My helpful mortgage advisor also mentioned that a lot of re-financing took place last year when rates were at their lowest for some time. With every passing minute spent talking to her the bubble in my mind’s eye was growing larger.

Mortgage repayments increased by an average of 25% in Sydney in the 4th quarter of 2009, and if the experiences of this mortgage advisor are representative of Australia as a whole, last night’s rate rise from the RBA (of 0.25% to 4%) together with the further anticipated hikes that may be necessary to tame inflation could lead to tough times for mortgage holders further down the road.
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Shadow
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Of course, Australia does have some big advantages over the Ireland of 2006. Australia has the ability to print its own currency and set its own interest rates (just ask the Irish how much they would like this power right now). Secondly, despite the massive expansion in credit and house prices that Australia has experienced over the last two decades, Ireland’s was comparatively greater.
Not according to 'Raveswei Theory'. :re:

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The obvious catalyst for the popping of the great Aussie bubble is China, as that’s essentially all that matters if you’re taking a view on Australia’s economy. Almost 70% of Western Australian and Queensland mining exports go to China. If China has a hard landing then Australia is in serious trouble, and even if it has a soft landing then Australia may be in trouble anyway.
And what if China does not have any sort of 'landing'? The truth is, China is still growing very strongly.

Edited by Shadow, 18 Apr 2012, 05:20 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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raveswei
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Shadow
18 Apr 2012, 05:20 PM
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Of course, Australia does have some big advantages over the Ireland of 2006. Australia has the ability to print its own currency and set its own interest rates (just ask the Irish how much they would like this power right now). Secondly, despite the massive expansion in credit and house prices that Australia has experienced over the last two decades, Ireland’s was comparatively greater.
Not according to 'Raveswei Theory'.

According to my theory these are not big advantages.

US had all these "big advantages" and what happened? was it much different than in Ireland?
http://popping-bubble.blogspot.com/

Thinking of an Australian property speculator (PI):
Inaction = missing opportunities.
Missing opportunities = losing.
Too much thinking = inaction.
Thinking = missing opportunities.
Therefore thinking = losing.

disgraceful little man Frank Castle owes a house to Salvation Army

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There were however some disturbing figures that came out of Australia on Friday – foreign investors bought a record AUD$23.9bn (=US$23.9bn) of Australian government bonds in Q3 2011, resulting in foreign ownership soaring to 80.4%, which is also a record. Judging by the price action on Aussie bonds and the Aussie Dollar in Q4, foreign ownership is likely to have jumped further in Q4. For us, this is worrying as heavy foreign ownership of government bonds can be very dangerous

Dangerous for who? Foreigners own more AUD government debt because foreigners desire to save in AUD. If they wish to own AUD bonds in exchange for real goods and services, that is a net benefit to Australia. Is the author suggesting we are reliabnt of foreign capital to fund government?
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Something else that is worrisome is that the Australian banking sector dwarfs the size of Australia’s economy at 3.5 times nominal GDP

Ummm, what? I would like to see that calculation.
According the RBA bank statistics (B2), total bank assets = $2.8T in Feb 2012, versus nominal GDP (Dec Quarter) $1.4T. So by that measure, that’s about 2x.
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Of course, if this safe haven status gets called into question, which could easily happen in both Australia and the UK, then capital outflows would leave their respective currencies extremely vulnerable

Bear porn. No Capital can leave Australia – that’s the benefit of a floating exchange rate mechanism. Yes, the currency may fall, but that would be stimulatory for production and employment.
Quote:
 
The obvious catalyst for the popping of the great Aussie bubble is China, as that’s essentially all that matters if you’re taking a view on Australia’s economy. Almost 70% of Western Australian and Queensland mining exports go to China. If China has a hard landing then Australia is in serious trouble, and even if it has a soft landing then Australia may be in trouble anyway.

A falling AUD has historically been very favorable for Aussie real estate. This is because local property prices fall in foreign currency terms, and lower interest rates transfer income from savers to new and existing mortgage holders.

In fact, the last two time the AUD fell by +20% over short time frame (2001 & 2008) is was followed by a surge in property prices.

(S – I) + (T - G) + (M - X) = 0
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Catweasel
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b_b
18 Apr 2012, 05:54 PM


In fact, the last two time the AUD fell by +20% over short time frame (2001 & 2008) is was followed by a surge in property prices.
Catweasel say ???? Last time a AUD fall a dramatic was a a GFC. Just because a house price increase after, not necessarily a correlate to a AUD. That not the very clever. A house price increase because of a master's intervene and free money for a mouse.
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raveswei
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b_b
18 Apr 2012, 05:54 PM
Dangerous for who? Foreigners own more AUD government debt because foreigners desire to save in AUD. If they wish to own AUD bonds in exchange for real goods and services, that is a net benefit to Australia. Is the author suggesting we are reliabnt of foreign capital to fund government?


Ummm, what? I would like to see that calculation.
According the RBA bank statistics (B2), total bank assets = $2.8T in Feb 2012, versus nominal GDP (Dec Quarter) $1.4T. So by that measure, that’s about 2x.


Bear porn. No Capital can leave Australia – that’s the benefit of a floating exchange rate mechanism. Yes, the currency may fall, but that would be stimulatory for production and employment.


A falling AUD has historically been very favorable for Aussie real estate. This is because local property prices fall in foreign currency terms, and lower interest rates transfer income from savers to new and existing mortgage holders.

In fact, the last two time the AUD fell by +20% over short time frame (2001 & 2008) is was followed by a surge in property prices.

You must be very proud on your “dry scholarly” knowledge of economics. Unfortunately it doesn’t work the way you think. There are so many recent examples of things not working as you learned at school.

BTW. House price fall accelerated after AUD fall in 2008. Australian house prices resumed growth only after AUD started quick growth after the fall.
Edited by raveswei, 18 Apr 2012, 06:14 PM.
http://popping-bubble.blogspot.com/

Thinking of an Australian property speculator (PI):
Inaction = missing opportunities.
Missing opportunities = losing.
Too much thinking = inaction.
Thinking = missing opportunities.
Therefore thinking = losing.

disgraceful little man Frank Castle owes a house to Salvation Army

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b_b
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raveswei
18 Apr 2012, 06:13 PM
You must be very proud on your “dry scholarly” knowledge of economics. Unfortunately it doesn’t work the way you think. There are so many recent examples of things not working as you learned at school.
What did I learn at school, and what examples do you have which shows "it doesn’t work the way I think"?
(S – I) + (T - G) + (M - X) = 0
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b_b
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Catweasel
18 Apr 2012, 06:12 PM
b_b
18 Apr 2012, 05:54 PM


In fact, the last two time the AUD fell by +20% over short time frame (2001 & 2008) is was followed by a surge in property prices.
Catweasel say ???? Last time a AUD fall a dramatic was a a GFC. Just because a house price increase after, not necessarily a correlate to a AUD. That not the very clever. A house price increase because of a master's intervene and free money for a mouse.
True - but it has happened acouple of time in the past. So, anyone who argues a soft / hard landing in China = Aussie property collapse needs to address this point.

Of course, no-one ever does. Probably a bit inconvenient.
(S – I) + (T - G) + (M - X) = 0
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b_b
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Quote:
 
BTW. House price fall accelerated after AUD fall in 2008. Australian house prices resumed growth only after AUD started quick growth after the fall.

Aussie prices resumed growth in the year following the fall in the AUD - just like 2001.
(S – I) + (T - G) + (M - X) = 0
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