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Australia Is The Biggest Bubble In Recent History, It's Heading For The Mother Of All Hard Landings
Topic Started: 4 May 2012, 11:30 AM (5,323 Views)
Pig Iron
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Bogan scum

we are nothing like the US and japan though. it's like your living in some other Australia which doesn't have pretty much full employment and power house resource industry.
all the bears miss the simple truth that Australians can pay their bills, and no property crash will happen while that continues. the correction we are seeing is people being less sure of how far they can extend themselves on high end property.
I am the love child of Tony Abbott and Pauline Hanson
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TED BULLPIT
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timmy
5 May 2012, 08:57 PM
we are nothing like the US and japan though. it's like your living in some other Australia which doesn't have pretty much full employment and power house resource industry.
all the bears miss the simple truth that Australians can pay their bills, and no property crash will happen while that continues. the correction we are seeing is people being less sure of how far they can extend themselves on high end property.
Timmy o'tool :wak:
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genX
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It won't happen the way it did in the US.

It won't happen the way it did in Japan.

It won't happen the way it did in Ireland or Iceland or Greece or Spain.

If we have a property 'crash', then it will occur in a completely different way, and that's what makes it OK.

Currently household debt is 105% of GDP[1], down from a high of ~141. That is quite a lot of deleveraging, but will it be enough?

Due to deleveraging, Australian banks are seeing their new lending growth stall and their margins on existing mortgage book get squeezed as carry volatility leads to higher funding costs. They either raise their rates, or cut costs some other way.

At current property prices, many new buyers are priced out of the market, and with credit tighter, they have reduced access to capital. If prices don't deflate, they will stagnate as owners hunker down and continue to pay off their principal.

So far, not catastrophic, as long as owners can weather the storm, we will most likely have a mild recession for 12 to 36 months, new lending will stagnate or decline, and there will be downward pressure on salaries and wages.

BUT, in order for owners to survive and keep paying their mortgage, they will need income, and so the question on whether we will see a crash or not comes down to employment. Right now, we are at a knife's edge. Our prospects for ongoing full employment now lies with our continued ability to dig stuff out of the ground, grow stuff on top of it, and sell it.

Manufacturing has collapsed from 25% of GDP to just over 9%, education exports and tourism are under strain, and financial services has grown to ~11% of GDP. Yes, the largest industry in notional dollar terms is the one that stands to lose the most if lending growth stagnates or stops.

In employment terms, retail now employs ~11% of all employees. So if discretionary spending contracts, it will effect the industry with the greatest number of employees.

And it's THOSE numbers that represent the risks to both the economy and the property market. If unemployment rises to 7 or 8%,we will see similar mortgage stress that other western countries experienced. Because when you are leveraged 105%, there is no buffer. You cannot take a hit to your income and stay afloat when you are leveraged that much. If household debt was 60% of GDP or 50% of GDP, then that is a huge buffer against income or cash flow shocks.

Trade accordingly.

[1] I should add that I personally have zero debt, so someone else has borrowed my share. That person is fucked.
Edited by genX, 6 May 2012, 12:25 AM.
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miw
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genX
6 May 2012, 12:19 AM
It won't happen the way it did in the US.

It won't happen the way it did in Japan.

It won't happen the way it did in Ireland or Iceland or Greece or Spain.

If we have a property 'crash', then it will occur in a completely different way, and that's what makes it OK.

Currently household debt is 105% of GDP[1], down from a high of ~141. That is quite a lot of deleveraging, but will it be enough?

Due to deleveraging, Australian banks are seeing their new lending growth stall and their margins on existing mortgage book get squeezed as carry volatility leads to higher funding costs. They either raise their rates, or cut costs some other way.

At current property prices, many new buyers are priced out of the market, and with credit tighter, they have reduced access to capital. If prices don't deflate, they will stagnate as owners hunker down and continue to pay off their principal.

So far, not catastrophic, as long as owners can weather the storm, we will most likely have a mild recession for 12 to 36 months, new lending will stagnate or decline, and there will be downward pressure on salaries and wages.

BUT, in order for owners to survive and keep paying their mortgage, they will need income, and so the question on whether we will see a crash or not comes down to employment. Right now, we are at a knife's edge. Our prospects for ongoing full employment now lies with our continued ability to dig stuff out of the ground, grow stuff on top of it, and sell it.

Manufacturing has collapsed from 25% of GDP to just over 9%, education exports and tourism are under strain, and financial services has grown to ~11% of GDP. Yes, the largest industry in notional dollar terms is the one that stands to lose the most if lending growth stagnates or stops.

In employment terms, retail now employs ~11% of all employees. So if discretionary spending contracts, it will effect the industry with the greatest number of employees.

And it's THOSE numbers that represent the risks to both the economy and the property market. If unemployment rises to 7 or 8%,we will see similar mortgage stress that other western countries experienced. Because when you are leveraged 105%, there is no buffer. You cannot take a hit to your income and stay afloat when you are leveraged that much. If household debt was 60% of GDP or 50% of GDP, then that is a huge buffer against income or cash flow shocks.

Trade accordingly.

[1] I should add that I personally have zero debt, so someone else has borrowed my share. That person is fucked.

Nice summary of the risks. It's because of the downturn in retail and the service sector that the Reserve Bank dropped interest rates IMHO, not because anyone is too concerned about property prices per se. We'll know if the gummint is concerned when we see if Swan adds some crack like a FHB bonus in the budget, though. Personally I'm hoping he doesn't. On Balance, anyhow. Absent major unemployment, property not going up for a year or two or dropping 10-15% just doesn't do much harm. People will grumble, but they will hold on. Depressed construction will cause issues, but that is more correlated to base demand than the speed of house flipping.

It will be interesting to see if the govt and reserve bank are able to manage the leverage down some more without causing a recession. One thing they have in their favour is that it is now much harder to cause a recession in-country than it used to be because the start of the supply chain is mostly no longer in-country.
Edited by miw, 6 May 2012, 02:45 AM.
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genX
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Quote:
 
We'll know if the gummint is concerned when we see if Swan adds some crack like a FHB bonus in the budget, though.

Mmmmmm ... that sweet sweet FHB crack. My taxes, hard at work. :bye:
Quote:
 
Absent major unemployment, property not going up for a year or two or dropping 10-15% just doesn't do much harm. People will grumble, but they will hold on.

There will probably be a change of government as well. Then we get to find out how both parties are one, and it's the treasury and owners of capital that set fiscal policy. :lol
Quote:
 
It will be interesting to see if the govt and reserve bank are able to manage the leverage down some more without causing a recession. One thing they have in their favour is that it is now much harder to cause a recession in-country than it used to be because the start of the supply chain is mostly no longer in-country.

True, however the demand driver is also no longer in-country. In fact, it's in the same country as the start of the supply chain!

(We send expensive commodities to China, and they send back cheap manufactured goods. It's a great deal. Through improved terms of trade we export inflation, but how long will the Chinese keep importing our inflation for?)
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stinkbug
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TED BULLPIT
5 May 2012, 09:46 PM
Timmy o'tool :wak:
Ted Bullshit. :lol
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Australia Heading for ‘Mother of All Hard Landings’

Published: Friday, 4 May 2012 | 1:03 AM ET
By: Ansuya Harjani
Assistant Producer, CNBC Asia

Australia is headed for the “mother of all hard landings,” according to Société Générale strategist Albert Edwards, who says the country’s “credit bubble” could burst if China’s economy suffers a sharp slowdown.

“(In Australia) We see a credit bubble built on a commodity bull market based on a much bigger Chinese credit bubble,” Edwards said in a report. “Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious.”

Edwards reiterated his case for a hard landing for the mainland economy, pointing to the official Purchasing Mangers Index (PMI) of 53.3 last month, which he says is “the worst” April reading in years.

“We are likely to see the PMI trend lower from here and the case for further Australian dollar weakness is clear,” he said.

The health of Australia’s economy, which is largely driven by its resources sector, is closely tied to that of its largest export market China – the world’s biggest consumer of commodities such as iron ore, copper and aluminum.

The Reserve Bank of Australia on Friday separately lowered its growth forecast for 2012 to 3 percent from 3.5 percent. It also lowered its outlook for export growth, warning that a sharp escalation in Europe's crisis could have significant implications on Asian demand, which in turn would weigh on commodities prices.

Australia Has an ‘Obvious’ Credit Bubble

According to Edwards, the lack of volatility in the Australian economic cycle and the absence of any recession since 1991 has led Australians to have an “excessive” appetite for debt in the belief the “future will reflect the past”.

“But for us, suppressed volatility is merely storing up an even bigger crash further down the road,” he wrote in report published Thursday.

Paul Gambles, Managing Partner at independent financial consultancy MBMG, agrees that there is a large credit bubble in Australia’s banking sector, and a hard landing in China is going to be the catalyst that “pricks” the bubble.

Companies in the resources sector, which borrow large amounts to fund their projects, will struggle to repay their debt if commodity prices fall, he said.

“Commodities tend to be capital intensive and based on a long term business model. There has been a huge amount of additional investment in commodities sector since 2008 on the assumption that higher commodity prices would be sustainable,” Gambles said.

“Any reduction in commodity prices is going to devastate these companies…it doesn’t take a big change in commodity price or demand to destroy the viability of new projects,” he added.

He also points to the massive level of household debt in the country, which has been around 150 percent of disposable income since 2006, according to the Reserve Bank of Australia.

“Australia has a very leveraged consumer sector whose wealth is dependent on the performance of the housing sector, which I think is also in a bubble,” he said, adding that the real estate market is highly overvalued, by approximately 45-70 percent.

“Consumer debt, and debt from the resources sector is way beyond anything the Australian government is going to be able to manage if there is a recession or downturn,” Gambles said.

Short the Aussie

Like Edwards, Gambles says that the case for a weaker Australian dollar [AUD= 1.0176 --- UNCH ] is clear, warning that the currency will fall below parity against the greenback to 70 cents over the longer-term.

“We think that the Australian dollar along with perhaps the Aussie banks and Aussie property are maybe the greatest shorting opportunity that we're going to see for a long time to come,” Gambles said.

While he doesn’t think the sharp fall in the Aussie is imminent because of the healthy margin it offers carry traders, further deterioration in the outlook for the economy could “terrify” investors and lead them to exit the trade.

“The 70s is not a floor for the Australian dollar. When the Aussie spirals it can be a very volatile currency,” he said. The last time the currency fell below the 70 U.S. cent level was in October 2008 during the global financial crisis.

Read more: http://www.cnbc.com/id/47290031
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newjez
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Guys - the UK relied heavilly on resale mortgages before the GFC. You would get a massive discount for a year or two, and then remortgage when the term ran out. This stopped not due to a reduction in valuations, but because the banks added massive fees to the remortgage. This had a similar result of people being stuck on high interest rates, but it didn't result in a US style crash. I think the increased stress in the US, (caused by very poor checking of home buyers finaces before they borrowed) must have helped. There was some of this in the UK, like self cetrifying mortgages - but these tended to go to the self employed, who artificially reduced their income to avoid tax, rather than over inflated it to get a loan.

I can only assume that it was the increased stress, plus the massive over building in the US, Ireland and Spain that caused the crash in these countries. Places like Oz and the UK where there haven't had the massive over building have only dropped 10% or so. Whether this dip will continue is yet to be seen.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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miw
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newjez
6 May 2012, 03:52 PM
Guys - the UK relied heavilly on resale mortgages before the GFC. You would get a massive discount for a year or two, and then remortgage when the term ran out. This stopped not due to a reduction in valuations, but because the banks added massive fees to the remortgage. This had a similar result of people being stuck on high interest rates, but it didn't result in a US style crash. I think the increased stress in the US, (caused by very poor checking of home buyers finaces before they borrowed) must have helped. There was some of this in the UK, like self cetrifying mortgages - but these tended to go to the self employed, who artificially reduced their income to avoid tax, rather than over inflated it to get a loan.

I can only assume that it was the increased stress, plus the massive over building in the US, Ireland and Spain that caused the crash in these countries. Places like Oz and the UK where there haven't had the massive over building have only dropped 10% or so. Whether this dip will continue is yet to be seen.
The UK also had a property slump of up to 30-35% in places at the beginning of the 1990s. Nothing like a reminder that property is not a one-way-bet in recent memory to add a little caution to the mix. Caution is great for avoiding crashes.

The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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Pig Iron
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Bogan scum

genX
6 May 2012, 12:19 AM


[1] I should add that I personally have zero debt, so someone else has borrowed my share. That person is fucked.
You see I have a huge problem with this kind of logic genx. You still need a roof over your head, so whats your plan? I see only a few ways this can play out.
1. if it's a big crash and this person is as fucked as you say the bank will repo the house and kick you out
2. if it doesn't crash you keep throwing money in their pocket and house prices don't move
3. if it's a small/slow crash you will sit in your rental thinking prices will drop more in 12 months like all bears, continuing to waste money on rent. in all likely hood you don't pick the bottom and prices go up in a few years


I'm not advocating buy buy now or anything of that nature, but the idea that it's a financial win to rent all your life is a bad one. the only instances where renting is better than owning when purchasing WITHIN YOUR MEANS, is if you have an unreliable income. renting is just you making someone else rich, they wouldn't be doing it if it wasn't the case.
I am the love child of Tony Abbott and Pauline Hanson
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