The LF Economics Submission in relation to the Budget Savings Omnibus Bill 2016 can be downloaded here.
A nation caught off-guard.
I have always warned of the day that Australian banks would face when it came to the dangerous assumption that no matter what happens, the tap of international wholesale debt would always be running at full power. However following this months RBA decision to cut rates, the beans have officially been spilt, and Australians are a little confused at the moment.
First and foremost, this was the first time I can remember witnessing an interest rate cut where the prime response was for banks to raise term deposit rates to the incredible magnitude of 50-85bs (roughly 150bps above the reserve rate). It must also be noted that there is enough scrutiny to warrant an explanation from the RBA on whether it informed these banks prior to the rate decision of a pending rate cut. Because it normally takes a major institution (let alone four of them) weeks to make the necessary preparations to raise term deposit rates at such a scale when the reserve rate is about to be cut.
Why did the banks raise the interest rates on term deposits when the RBA cut rates?
Unfortunately there are several possible reasons as to why. None of those possible reasons can give Australians any comfort. Possible reasons include
- The international wholesale lending community have no interest to lend money to Australian ADI’s at such a low rate, so banks have to source money elsewhere
- There is a funding problem in general
- There already is a funding problem with one of the major banks, hence raising the interest rate by 55-85bps for term deposits will attract more depositors to their banks (keeping money in the banking system) whilst banks tap cheap funding through the RBA bailout CLF (if they haven’t already).
- Banks are starting to sustain or preparing for heavy losses from the WA, NT and QLD housing markets, hence are not able to pay back creditors without additional resources which would limit their liquid cash on hand and the ability to lend to homebuyers in other states in Australia the way they are.
- For one reason or another about to be given heavy fines for mortgage fraud from a regulator other than ASIC or APRA, or that a Royal Commission is on its way which will crush the banks.
- The banks don’t have the fiscal resources to lend to all the soon-to-be new apartment owners. Hence are batting down the hatched because if they cant lend like they are today in Sydney and Melbourne… the whole economy tanks.
- Credit rating downgrades (rating agencies are a bit late to this party)
I warned about this… Sad to possibly see my biggest concerns possibly coming to fruition. Whatever the RBA does from now is irrelevant. Our focus now turns to how much money can banks raise to fund their ponzi financing schemes– by who– at what rate– and how much it will cost the Big Four to lend between one another. Last but not least, focus will also be on how much are these banks going to write down from the housing market.
Interesting times ahead.
Government has gone into overdrive protecting the hidden truths of the Australian housing and finance sectors with clear indications that the 2015 House of Representatives Home Ownership Inquiry will not have a filed report for the Australian public and the 2016 Senate inquiry into Penalties for White Collar Crime looks like it may not go ahead as scheduled.
Furthermore, LF Economics has made assertive attempts under the Freedom of Information Act to attain certain documentation from government to better assist us in our research in understanding why highly paid (non-elected) government executives managing the fiscal affairs of this country refuse to enforce various laws in relation to mortgage fraud and loose lending standards by our banking system. All our requests under the Freedom of Information Act have been rejected, hence it is difficult for LF Economics to dive deeper and conduct further forensic examinations of the relationship between financial institutions, financial regulators and Canberra.
There is no doubt government, ASIC, RBA and APRA are hiding something from the Australian people. I think its fair Australian’s should have the right to investigate what it is they are hiding.
Sydney’s uber high cost of doing business relative to market opportunity, alongside its failure to persuade large foreign multinationals to use Sydney as its premiere business hub for the Asia Pacific regions suggests the NSW and Australian governments need to go back to the drawing board to figure out how to transform Sydney’s (and other Australian cities) attractiveness as not only a regional, but a global hub.
To be frank, Singapore and Hong Kong are crushing Sydney’s chances of becoming a real regional player. They too are expensive locales to do business, but talking to senior decision makers of large and complex global businesses, it is clear Sydney does not seem to be a preferred destination versus Singapore or Hong Kong. Citing high costs of doing business, distance from other major hubs and cultural challenges alongside an uncompetitive tax system and limited access to market versus rival hubs, it is clear that its now time for key government decision makers to figure out resourceful solutions to improve Australia’s talent base alongside figuring out a solution to make Australia a more tax friendly place to attract global talent.
At the end of the day it comes down to the availability of high caliber talent, productivity, profitability and tax. Imagine a large multinational trying to persuade their prime human capital to relocate to Sydney and pay +45% income tax? Or imagine a new local tech startup seeking to attract expertise that does not exist in Australia as the RBA pushes for a weaker currency?
If Sydney is truly a global city, it should not have these serious problems period. The sooner there is a dramatic shift in the education system that pumps out talent like no tomorrow the sooner Australia can compete on the basis of human capital. Lets not forget, California and New York are high taxing locales, but they are able to attract the best the world has to offer when it comes to talent. This approach in itself would significantly increase Australia’s competitive landscape versus Sydney’s more successful rivals in Asia
There is no evidence of a nation going bankrupt because it spent too much on education (investing for the future). And the more educated our workforce is to fulfil the future roles the globe will demand, the greater the chance global businesses will choose Sydney or another major Australian city as its regional base. Until then, it could be a very hard grind. Especially for startups who we depend on reinventing our houses and holes economy.
Recent stats suggest the Northern Territory economy has entered a serious period of economic duress.Relative to the size of the greater Australian economy, the NT economy only makes up around 1% of total national GDP. However, it’s surprising that this economic disaster does not get a mention in the mainstream media.
With the election just a few days away, would be interesting to get an understanding from both side of politics on how they will address economic instability. Because based on action, the current approach by both parties is to ignore it. Hence, you know nothing about it.
As the election campaign drags on and desperation slowly sets it, the gloves are slowly coming off with the LNP and Labor advocating they are the better economic manager than each other. Both parties present a slight shift in policy and objectively have a case to criticise their foe’s policy.
I tend to take a neutral approach and don’t pick sides, especially in an election based on minimal reform; there are undeniable signals from both camps on their paltry approach to taxation and debt. In the backdrop to this election, it is important to note the costs of transferring significant sums of leveraged wealth to other Australians can be more costly to an individual versus any likely taxes ever paid down the line.
At his press conference yesterday, Treasurer Scott Morrison retaliated against Labor’s apparent and pending invasion of the hip pocket of Australia with a cheap cardboard sheet seemingly pulled out of Colin Powell’s 1990 collection of Gulf War charts, citing Labor’s war on taxes (in large capitals) with HIGHER TAXES ON:
– SMALL BUSINESS
If we take General Scomo’s military campaign against Labor’s proposals seriously, then the Coalition is claiming Australians will be worse off under a Labor government. It was suggested there will be no job creation because small businesses will not be able to afford new staff, less investment due to rising capital gains taxes, greater income taxes and rising electricity bills. Perhaps these things could occur.
If we take General Scomo’s military campaign in the War against Labor’s higher taxes with objectivity, however, Scomo is not upfront on his underlying message that is transmitted: protectionism. Protectionism of the old and grey – and the younger generation is General Scomo’s enemy in the War on taxes.
Labor’s alleged war on growth is seeking to level out the playing field in investment, primarily in relation to housing affordability, reducing speculators’ ability to outbid first home buyers. The latter group will undoubtedly struggle like no other generation in the post-WW2 period to create their own ‘real net wealth’ given the dire changes in the economy.
The Liberal party is warning of ominous consequences to the economy if dwelling prices fall, making it difficult for the older generation and speculators to capture unearned and unrealised wealth from rising land prices. This is what the General Scomo military campaign is attempting to protect.
When a young first-home buying Aussie does outbid their speculator tax-deducting foe, it is done so at an extraordinary cost to them. Every dollar that a young Australian has saved for a deposit alongside the gargantuan loan they must service benefits an older Australian for their retirement – an intergenerational wealth transfer.
Think of it as a bank-sponsored generational tax where a young Australian is investing everything they have in an older Australian’s retirement through leverage. This is unlike other nations such as Germany or the US where the older generation invests capital in the new; just look at their entrepreneurial startup scene compared to ours.
Australia’s approach is vastly different, by having the younger generation invest via debt to acquire older Australians’ property that will yield no new jobs for the nation but to secure another’s retirement at the lowest possible tax rate for the old.
The older generations are fond of reminding the young that they faced very high mortgage interest rates back in the day. But they also had the benefit of both lower deposit and price to income ratios, one adult earner and high wage growth which reduced their relative debt burdens.
Today’s younger generations are beset with two hardships: record-low wage growth amidst an income recession now 17 quarters long and sky-high housing prices. Without high levels of wage inflation to reduce massive debt burdens, it will become increasingly difficulty to muster up enough to invest in a new business or tech startup. The older generations don’t seem to invest in the young like the young invest in the old.
From an objective point of view, it’s worth cautioning that when combined, taxes and generational wealth transfers come in different shapes and sizes. For General Scomo to win the war on taxes, he has to repeatedly slay the young to protect the older cohorts’ wealth by continually raising the barrier for entry to allow the next generation of young Australians to succeed. This economic model has been tried and tested numerous times – and has failed every time.
Click the highlighted text to download the LF ECONOMICS SENATE SUBMISSION into the Australian Senate Economics Committee ‘Penalties for White Collar Crime’ inquiry
ASIC has the backbone of a chicken wing when it comes to enforcing the rule of law; this is widely recognised in Australia and resulted in a Parliamentary inquiry. If any politician believes that ASIC is a ‘tough cop on the beat’ they should seriously reconsider their opinion on this issue.
Under the pomp and ceremony of the government’s decision to levy the banks to fund ASIC’s prolonged $400 million+ annual fishing vacation is its pursuit of catching tadpoles in the open seas while leaving sharks and barracuda’s to freely roam. Unfortunately for the regulator, there is a new term Australians will become accustomed to.
If you haven’t heard of the term control fraud before, you do now. It refers to fraud committed by the controllers of a corporation: executives and managers, typically a bank. It’s a crime that ASIC has decided neither to investigate nor prosecute, leaving borrowers on their own with no pennies to spare and nowhere to turn to.
So here’s how a control fraud would work. Let’s say you’re an asset rich and income poor (ARIP) husband and wife in their 70s surviving off an income of less than $23,000 a year and own your $400,000 (today’s value) home outright. You want to obtain a $400,000 loan from the bank for an investment property that will run at an annual net loss. You walk into the bank branch for an appointment and are presented with 3-page pre-filled loan application form (LAF) stating only the basics details.
During the application process, you honestly state your income and assets and are then issued with a 30-year interest-only loan you have absolutely no chance of servicing beyond a three to five year horizon. In other words, there is a strong chance that a few years later the only way you can get out of your loan is to sell your investment property at a higher net price than what you paid for it to extinguish your mortgage or go bankrupt.
Firstly, this type of loan is predatory as it is far larger than what can be serviced by income and rent. There are laws and regulations in place preventing banks from engaging in this illegal activity which ASIC (including APRA) seemingly refuse to enforce, let alone impose penalties on such behavior.
Secondly, and more importantly (from a criminal aspect) there are many cases where bankrupted borrowers realise they were not given a copy of their LAF at time of approval. They then phone the lender and demand their copy. The banks’ version differs significantly from the original application.
On these LAFs, there is clear evidence of lenders tampering with their copy to show that a particular borrower was more credit-worthy then they actually were. In a nutshell, there is evidence of lenders inflating incomes and assets of borrowers to get mortgages approved. In many cases, signatures and initials of borrowers were forged; this is fraud.
So when the old ARIP couple goes to ASIC after they ascertain the bank’s copy of the LAF (which now states they apparently earn $180,000 a year rather than $23,000) to report fraudulent activity and rightly asking for justice to be served, ASIC has an all too familiar response. Now broke, ASIC will inform you in a polite manner: “hire a lawyer as it is not ASIC’s problem”. In reality, this conduct is why ASIC was established, to protect Australians against white collar crime and enforce the law when it is broken.
If you think this is a one-off instance, then how has Denise Brailey, Australia’s leading financial services consumer activist, managed to organise with more than two thousand victims of this mortgage control fraud along with their LAFs to prove they are victims of fraud? Yet, all of these accusations have been completely ignored by ASIC and other authorities when the evidence points to widespread control fraud.
So why would a lender fudge their copy of a LAF to issue predatory jumbo loans? The answer is simple: it maximises revenues, share prices, profits, market share and executive remuneration. Furthermore, it keeps funding costs low via AAA ratings the ratings agencies provide. By using the fraudulent LAFs, the residential mortgage backed securities (RMBS) can be made to look secure. In reality, however, there is evidence to suggest these AAA rated RMBS contain lots of toxic subprime mortgages.
We have seen this story before in the US. The only way to run up mortgage debt as historically and globally high as Australia’s is for lenders to commit control fraud. According to Brailey, this has been going on since the late 1990s. ASIC could’ve intervened to stop these practices a long time ago but have decided instead to side with the fraudsters.
A Royal Commission into lenders would uncover a cesspit of control fraud, which is why vested interests adamantly oppose it. Typically it takes a bursting asset bubble for the fraud to be publicly revealed, but Australian banks are so fraudulent the criminality is seeping out everywhere. These control frauds have received wide publicity in the mass media, though the one to watch is the mortgage control fraud which is likely to be the nuclear bomb to our overleveraged and undercapitalized banking system.
In the meantime, if you are currently seeking a loan, do not walk out without your full eleven-page copy of your LAF from the bank or broker, and do not sign anything without first obtaining legal and financial advice. And never sign blank forms!
An interesting video here from the FT on the structural challenges China faces on the back of an incredible migration from the farms to the cities. Definitely worth watching.
I almost fell off my chair this morning when I read this Property Observer Op-ed piece by Steve Jovcevski on the reasons why the Australian property bubble isnt going to burst.
There is an extroardinary difference between what Australians are told and the reality when it comes to the housing market.
My responses to Steve’s 10 points from the Property Observer article below his quotes.
1. AUSTRALIA HAS HIGH CREDIT QUALITY
Australia and the US are two completely different markets. Australia has higher quality home loans thanks to stricter lending criteria and requirements, which means borrowers who are approved for loans can generally afford to service them. In contrast, banks in the US at the time of the GFC were lending to people who hadn’t provided paperwork and couldn’t service the loan – a recipe for disaster.
The Reality: I sincerely hope Steve Jovceski reads the LF Economics Submission into the Senate Penalties for White Collar Crime when the government releases it for public debate in the next week or so. Steve, like every other real estate cheerleader will surely be gobsmacked by the similarities in illegal practices between the Australian banking system today and the American banking system of yester-year when it comes to mortgage lending.
2. NOT AS MANY FORECLOSURES
Borrowers in the US weren’t required to stump up a deposit to get a mortgage. To make matters worse, banks had no recourse so a borrower could walk away from a property without being sued. In contrast, Australians can no longer borrow 100% of the property value, and lenders can seek financial retribution if a borrower defaults. Australian borrowers are therefore less likely to default on their home loan, resulting in fewer foreclosures.
Let me make this very clear. Most states in the USA (including Florida and Nevada) are recourse lending states. Why Australians continue to lie to themselves and the public that Americans can just return the keys to the bank if they cant pay their loan is beyond me.
If financial retribution means Australians borrowers are less likely to default on their mortgages, why the heck did the Irish housing market crash. Heck, in Dubai, you don’t pay your mortgage you could go to jail!! Furthermore:
-American borrowers were never allowed to borrow the same sums of debt relative to income.
– Many Australians borrow 100% all of the time by using ponzi financing. FHB’s get 100% financing by using their parents home as a guarantee.
-When a housing market hits the dirt in Australia, it really hits the dirt. We just need to look at the mining towns that have already taken a hit in recent time.
3. YOU NEED TO COMPARE APPLES WITH APPLES
A major problem with Tepper’s examples is that he was talking about the US as a whole and not comparing apples with apples. We need to compare prominent cities with other prominent cities, like Sydney with New York, which didn’t have much of a collapse during the GFC. No one would compare Logan in Queensland with Manhattan, would they? It just doesn’t make sense.
How on earth can you even compare Sydney to New York City? As someone who has lived in both cities, I can say unequivocally that compared to NYC, Sydney is a little quiet. To put it simply, Sydney is no NYC. The GDP of NYC is larger than all of Australia’s for pete’s sake. NYC is truly one of the worlds global hubs. You don’t see such global activity here in Australia period.
If you are going to do an apples to apples comparison Australians need to start looking at Florida or Texas as their cities have the closest economic, lifestyle and city elements. LA and San Francisco are too large and global economic powerhouses to make any comparison to Australian cities as there is no city that can economically rival those two mega hubs. This map of the greater San Francisco metropolitan area explains it all.
4. FINANCIAL BODIES ARE CLOSELY MONITORING THE MARKET
Down under, the Australian Prudential Regulation Authority is keeping a close eye on the market and responding swiftly. For example, last year when APRA found there were too many investors driving up the Australian property market, it brought in new regulations that required lenders to reduce their investor loan books. The banks responded quickly and as a result we haven’t seen a major drop in the property market.
The Reality: APRA and ASIC have the backbone of a chicken wing. Read the LF Economics Submission into Penalties for White Collar Crime when the APH release it shortly.
5. WE HAVE A STRONG EMPLOYMENT MARKET
For a 40-50% property collapse to occur, there need to be massive job losses and foreclosures – but we are seeing the opposite in Australia, as unemployment has dropped to around 6%.
The Reality: You mean unemployment has risen to 6%. When reality kicks in that Australia has overbuilt, all those construction jobs will unfortunately go. The domino effect is concerning when this takes place. Thats precisely what happened in Ireland.
6. THERE’S A LIMITED AMOUNT OF LAND AVAILABLE
The US is covered coast to coast with property, whereas in Australia we are restricted to areas around the coast where there is water and amenities, so we have a limited amount of properties available. We also have record migration at the moment, which will underpin prices for land.
The Reality: Australia only has 24 million people and more than enough dwellings to house the entire nation including the homeless. Migration is falling and most immigrants who come to Australia only have the means to rent and they aren’t paying a premium to rent suggesting no shortage of dwellings. The overwhelming majority of migrants do not have the financial means to purchase a property which theoretically should be driving rents through the roof. But there is enough dwelling stock to accommodate.
7. CONTINUED PROPERTY DEMAND FROM FOREIGN INVESTORS
The Australian market is also being propped up by continued investment by overseas buyers from countries like China.
The Reality: There is no evidence to suggest foreign buyers are putting price pressure across the whole Australian property market. Foreign buyers are not driving the the price of housing in Dapto. Aussies are doing that. There is only evidence of foreign buyers making an impact in a small handful of (roughly 30 or 40)suburbs across our major cities. Unlike the US where foreigners can buy whatever property they want, there are restrictions in place in Australia to what properties can or cannot be purchased.
8. THE MARKET IS SIMILAR TO 2003
If you compare the percentage of disposable income today to what it was in 2003, it is somewhat similar. Back then, the RBA increased the official cash rate and prices slowed down. However, prices still moved along with inflation – they didn’t drop. So we’ve seen this happen before and we are just as leveraged now as we were then.
It’s a whole different ballgame buddy.
9. THE RBA HAS ROOM TO MOVE
The good news is today the Reserve Bank of Australia still has 2% to play with, so if the market did start to collapse the RBA could push the official cash rate to 0%, which would help homeowners get through the tough period financially.
The Reality: If interest rates were to go to zero, how would Australia be able to access wholesale debt from the international market which the mortgage market is dependant on? If a major Australian bank asked the international wholesale lending community for debt in a ZIRP environment, trust me, wholesalers will be asking the banks to pay a heck of a lot more than 0% interest. Hence the housing market would crash with the ponzi financing system breaking down.
10. WE HAVE NEGATIVE GEARING
The US didn’t have negative gearing when the GFC occurred – and still doesn’t today. But tax benefits Down Under drive behaviour as many investors are willing to lose a portion of their wages for the benefit of capital gains and bringing down their taxable income. Even if negative gearing concessions were to be slashed, property prices are unlikely to drop by 50%.
The Reality: American owner occupiers have the same tax benefit to deduct from from their income. rather than investors