First the Miners, now the Banks, and then comes…Property?

It’s going to be a hard landing.

By Lindsay David

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 govt 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 dependant on what I call the ‘Three Pillars of the Australian Economy’. They being the mining, banking and real estate sectors. And as I argue, at least three of the five larges iron ore producers will go bust. And ‘at least’ one of the big four banks will either go bust, be nationalised or bailed out before the end of 2017.

Now the mining sector is 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 not to fall any further. This is not sustainable. And 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. Yes those banks that are apparently strong and safe even though their stock value continues 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. Now personally, aside from a small handful of us, I strongly believe that if we look back to say January 2014, hardly any Australian’s 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 who have 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 on what our national household debt load will look like in a year from now? Two years? Here is a hint. Its comfortably over $2 Trillion.

Under the current mathematical metrics, House prices in any market that has the same debt levels as Australia’s can and have crashed. If our housing market looks like a bubble, smells like a bubble, quacks like a bubble and you have every stakeholder denying the bubble,, its 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 starting to really get friction on the debate on the safety of our banking system. Unfortunately the whisker of debate that is happening today and over the last twelve months 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 continue to grow. And remember with housing bubbles, when they burst there is no such thing as a soft landing.

Lindsay David is the 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

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