Category Archives: Banks

Banks and Debt: Society fools itself with Supply vs Demand theory

The price society pays for listening to the bankers that feed the debt.

Lindsay David – Author Print: The Central Bankers Bubble

When it comes to house prices, 99.9% of Australian’s believe that because demand outstrips supply is the prime reason as to why house prices in Australia are as high as they are. Unfortunately, the greatest flaw in this theory is that the assumption is that when it comes to the housing market that banks and debt do not exist.  In other words, just because there are a  large sum of buyers seeking to buy a house relative to the available (sufficient) supply that the price can climb infinitively. Lets look at two hypothetical property markets as an example.

City A City B
Median Household income $70,000 $70,000
Median House Price $210,000 $700,000

Now here is where Australian society has made a dangerously flawed assumption. The Australian herd assumes that just because a city such as the hypothetical City B has a significantly higher house price that there is less housing stock available in the marketplace relative to demand than City A. And based on this assumption that supply is incredibly limited that homebuyers are able to magically come up with the necessary funds (based on the absolute assumption that desperation to secure a roof over their head is higher in City B v City A) available to purchase a median house at 10x the median income without debt. What the overwhelming majority of the Australian public… (including the economists at the big banks and RBA) dont understand ‘or will not acknowledge’ is that it is almost near impossible for housing in both City A and City B to be as expensive as it is even if there was screaming demand relative to the available supply without banks and debt. But when banks in one city are prepared to lend more than banks in another city relative to incomes, you will generally find house prices are higher in the city where the banks lend more.

City A City B
Median Household income $70,000 $70,000
Median House Price $210,000 $700,000
Deposit 30% 20%
Total Deposit $63,000 $140,000

Now as per the above, if the banks in City A are only willing to lend households 210% of their income to purchase a home, that would mean there is a good chance (give or take a few % points) that the median household would only be able to acquire a maximum of $147,000 of debt (on top of their deposit) to purchase a house. Theoretically, even if there was an actual dire shortage of houses available in the marketplace, you would find that more often that not the only way to drive house prices higher would be if the median homebuyer was able to come up with a larger deposit. Lets assume that the median homebuyer in City A were to come up with an $70,000 deposit versus a $63,000 deposit. It would mean that the homebuyer would be able to pay $7,000 above the median house price.

But in City B there is a distinctive difference (spread) between the median income generated by the median household and the median house price when compared to City A. All things being equal between the two cities where there are just as many homebuyers in each city desperate enough to get into the housing market. If the banks in City A are only willing to lend a median income homebuyer $147,000, but in City B banks are willing to lend a median to homebuyers $560,000, which city do you expect to have higher house prices if both property markets share the exact same level of demand?

So the next time you hear a chief economist from one of the major Australian financial institutions mention the importance of supply and demand– remember, they (and the banks they work for and lend significant sums of debt to homebuyers year after year) assume that the banking system has no involvement whatsoever in the housing market and has not made an impact on the price of a house through flooding the housing market with debt.

Artificial leveraged demand created by the Australian banking system in what is a nation where housing is completely unaffordable is what drives prices in Australia sky high. Funny how no major financial institution, research agency or government entity such as Treasury or the RBA will never address the demand side of the Australian housing market. Just the good old, ‘we have a housing shortage’ and the population is desperate….creating artificial desperation. 

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

Westpac fuels the Bogan Tiger economy with wish wash

Westpac oversupplies the housing market with debt, creating artificial demand: then calls it a housing shortage.

Lindsay David – Author Print: The Central Bankers Bubble

Westpac just released its Federal Budget 2015 report and let me tell you, when it comes to the housing market they are as confident as Joe Hockey and The Kouk that the housing market is not in a bubble. Ive always been fascinated by commonly used the terms or phrases by used by our banking and real estate pundits that include the words “Sydney” and “catchup” in the same sentence. Or “Sydney well behind”, or even “Sydney still the best market”. particularly from the very institutions that would inevitably go bust (or bailed out, or nationalised) if house prices tank (regardless of reason) in Sydney and Melbourne.

Westpac 'Sydney Catchup'

Source: Westpac

And they will always use charts to make house prices or growth not look so crash hot for Sydney whilst forgetting that house prices have already taken off from a very high altitude.Sydney Best in the Market

Source: Westpac

And on top of this shift their justification of high house prices to the good old housing shortage myth.Westpac Housing Shortage

Source: Westpac

As per the LF Economics Comprehensive Housing Supply Analysis, NSW does not have a shortage of housing. Nor are there tent cities within our cities because Australia does not build enough housing. Plenty is built year in and year out.

NSW Housing Supply

Relative to scale Australia has completely out-built the overwhelming majority of property booms including the California boom. California too once had an apparent shortage of housing. Then there was a magic oversupply when access to housing credit dried up. It’s funny how this always seems to be the case historically.

My question to the highly leveraged banks is ‘where is the Sydney property market playing catch up to?’. Where is there an example of a city of Sydney’s dynamic, both economically and physically where house prices have reached such roaring heights and not crashed?  And “what abnormal sums of debt is your bank lending to multiple property investors to make property prices higher than the previous year?’ Because all we have is the most classic of credit fuelled property bubbles which has created artificial demand in what is a completely unaffordable and over-leveraged housing market. There can’t be a shortage of housing if there is an oversupply of debt whilst home builders are consistently building enough new dwellings to house the population. If available credit for homebuyers dries up Australian’s will quickly realise there was never a housing shortage to begin with. And the banks look a but silly when they ask for multi-billion dollar bailouts at taxpayers expense.

Raising capital requirements whilst lending more money to homebuyers and property investors year in and year out will be a difficult mathematical achievement for the banking system. If household credit expansion deteriorates in Australia that is the endgame for both the Australian housing market and the banking system. Next stop would be burning through the RBA’s CLF facility which would then be followed by a nationalisation of our banks.

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

Capital Gain with Dividend Pain

Retirees in the US will struggle to live within their means.

Lindsay David – Author ‘Print: The Central Bankers Bubble

As I argue in my new book Print: The Central Bankers Bubble,  American retirees will struggle to live within their own means whilst interest rates remain at record lows and stocks deliver small dividends. So much so that at this point in time, the average American retired couple will have little chance of earning a meaningful cash dividend from the investments they make that would offer an income equal to, or more than what the U.S government considers to be the poverty line.

The knock-on effect is that more retirees will burn through their lifesavings much faster than anticipated – potentially leaving millions of American retirees dependant on social security benefits over the long-term that otherwise would have been able to live within their own means if the interest rate was higher and stocks were more affordable.  

As an example, the table below illustrates how much a retired couple would have to invest in the following stocks today to earn an annual cash dividend that would earn the equivalent of a poverty-line income.

Some food for thought for Janet Yellen and her associates at the Fed. Does it seem rational that retirees would have to invest as much money as the table below suggests to earn an income on-par with the poverty line?


Poverty Line Investments





The Great Australian Ponzi scheme showing signs of stress

Like a ponzi scheme, when the Australian banking system inevitably struggles to increase the debt load of households, it will create Australia’s ‘house-of-cards’ moment. It is becoming evidently clear that the banking system is pumping massive sums of debt for so little growth relative to fifteen years ago. As they say, you can’t taper a ponzi scheme.

Take note to the falling QOQ growth numbers highlighted in red.

Lindsay David – Author ‘Australia: Boom to Bust’

source: ABS

Household Liabilities($Billions) Increase QOQ ($Billions) QOQ Growth YOY Growth Annual Growth ($Billions)
Jun-1996 $286,70
Sep-1996 $291,80 $5,10 1,78%
Dec-1996 $299,80 $8,00 2,7%
Mar-1997 $305,80 $6,00 2,0%
Jun-1997 $316,20 $10,40 3,4%
Sep-1997 $323,00 $6,80 2,2%
Dec-1997 $336,40 $13,40 4,1% 12% $36,60
Mar-1998 $346,10 $9,70 2,9%
Jun-1998 $356,90 $10,80 3,1%
Sep-1998 $364,80 $7,90 2,2%
Dec-1998 $377,10 $12,30 3,4% 12% $40,70
Mar-1999 $386,00 $8,90 2,4%
Jun-1999 $401,40 $15,40 4,0%
Sep-1999 $411,80 $10,40 2,6%
Dec-1999 $426,50 $14,70 3,6% 13% $49,40
Mar-2000 $439,30 $12,80 3,0%
Jun-2000 $460,40 $21,10 4,8%
Sep-2000 $466,70 $6,30 1,4%
Dec-2000 $477,90 $11,20 2,4% 12% $51,40
Mar-2001 $489,30 $11,40 2,4%
Jun-2001 $505,10 $15,80 3,2%
Sep-2001 $520,40 $15,30 3,0%
Dec-2001 $539,30 $18,90 3,6% 13% $61,40
Mar-2002 $564,20 $24,90 4,6%
Jun-2002 $586,20 $22,00 3,9%
Sep-2002 $608,20 $22,00 3,8%
Dec-2002 $624,50 $16,30 2,7% 16% $85,20
Mar-2003 $639,80 $15,30 2,4%
Jun-2003 $672,40 $32,60 5,1%
Sep-2003 $701,00 $28,60 4,3%
Dec-2003 $731,30 $30,30 4,3% 17% $106,80
Mar-2004 $761,10 $29,80 4,1%
Jun-2004 $790,30 $29,20 3,8%
Sep-2004 $814,40 $24,10 3,0%
Dec-2004 $840,30 $25,90 3,2% 15% $109,00
Mar-2005 $863,30 $23,00 2,7%
Jun-2005 $895,10 $31,80 3,7%
Sep-2005 $920,00 $24,90 2,8%
Dec-2005 $948,70 $28,70 3,1% 13% $108,40
Mar-2006 $969,10 $20,40 2,2%
Jun-2006 $1 009,20 $40,10 4,1%
Sep-2006 $1 038,60 $29,40 2,9%
Dec-2006 $1 065,70 $27,10 2,6% 12% $117,00
Mar-2007 $1 087,80 $22,10 2,1%
Jun-2007 $1 139,40 $51,60 4,7%
Sep-2007 $1 159,60 $20,20 1,8%
Dec-2007 $1 192,00 $32,40 2,8% 12% $126,30
Mar-2008 $1 214,80 $22,80 1,9%
Jun-2008 $1 248,70 $33,90 2,8%
Sep-2008 $1 265,10 $16,40 1,3%
Dec-2008 $1 276,10 $11,00 0,9% 7% $84,10
Mar-2009 $1 292,70 $16,60 1,3%
Jun-2009 $1 322,30 $29,60 2,3%
Sep-2009 $1 348,90 $26,60 2,0%
Dec-2009 $1 376,90 $28,00 2,1% 8% $100,80
Mar-2010 $1 402,70 $25,80 1,9%
Jun-2010 $1 432,10 $29,40 2,1%
Sep-2010 $1 450,40 $18,30 1,3%
Dec-2010 $1 477,00 $26,60 1,8% 7% $100,10
Mar-2011 $1 503,90 $26,90 1,8%
Jun-2011 $1 532,30 $28,40 1,9%
Sep-2011 $1 549,80 $17,50 1,1%
Dec-2011 $1 567,90 $18,10 1,2% 6% $90,90
Mar-2012 $1 587,20 $19,30 1,2%
Jun-2012 $1 609,40 $22,20 1,4%
Sep-2012 $1 624,20 $14,80 0,9%
Dec-2012 $1 642,50 $18,30 1,1% 5% $74,60
Mar-2013 $1 665,10 $22,60 1,4%
Jun-2013 $1 692,30 $27,20 1,6%
Sep-2013 $1 713,30 $21,00 1,2%
Dec-2013 $1 741,80 $28,50 1,7% 6% $99,30
Mar-2014 $1 768,80 $27,00 1,6%
Jun-2014 $1 809,30 $40,50 2,3%
Sep-2014 $1 833,20 $23,90 1,3%
Average $21,18 2,58% 10,96% $84,82

The moment Australia will be left red-faced.

‘Only when the tide goes out do you discover who’s been swimming naked.’ Warren Buffet

Lindsay David – Author ‘Australia: Boom to Bust’

Let me ask you a question;

If three individuals; an Australian, an Irishman and a Japanese jumped out of an airplane at 20,000 feet without a parachute, would the Australian survive because he is different? The reality is that the Australian has just as much of a chance (0%) of surviving the 20,000 foot fall as does the Japanese individual and the Irishman. How do we know this? Because history, data and the laws of physics tells us that if you jump out of a plane at 20,000 feet without a parachute that you will not survive. It’s as simple as that.

Now when it comes to economics, the laws of economics tell us the same about adopting a business model that has a 100% track record of ultimate failure . And unfortunately we live in a world where politicians, economists and central bankers have simply failed to learn from the mistakes of others. In the 1980’s, Japan adopted an economic model that by all mathematical accounts attempted to defy the common laws of economics. The economic model was dependant on its banking system lending more to real estate buyers year after year to fuel house price growth. The citizens of Japan thought a new world arrived and because property prices would only rise, they would go to the bank and leverage themselves to the hill to invest in a property market solely in pursuit of capital gain. Then one day, the Japanese were hit with an awful truth.

Japan had the mother of all credit fuelled property bubbles. And then what transpired was the greatest economic collapse in the modern developed world. This left a proud population red-faced. Because when caught up in the myopia of a credit fuelled property bubble, it distorts the real-world risks taken when the Average Joe acquires abnormal sums of debt.  Japan’s economy has never recovered from the collapse of its credit fuelled property bubble.  It was clear that when the Japanese economy jumped out of an airplane at 20,000 feet, it had no parachute. And it did not survive.

On the back of a clear example (Japan) of what happens when a country gets caught up in the myopia of a credit fuelled property bubble, you would think it would have been the best guidance for governments and central bankers around the world to use as a benchmark case and to avoid Japan’s credit-fuelled strategy at all costs. But since Japan did not survive the 20,000 foot fall without a parachute, other countries adopted the same strategy that propelled the Japan’s ecomomy only to fall out of an airplane at 20,000 feet without a parachute. Ireland was a clear example.

On the back of witnessing several credit-fuelled property bubbles over the last quarter of a century, Australia has adopted the exact same economic model that has a 100% track record of failure as the end result.

The mere fact that household debt has outpaced inflation by more than 1000% since 1996 is enough evidence in itself to suggest Australia is experiencing a credit-fuelled real estate bubble of epic proportions. But due to the lack of debate, the majority of Australians have no clue whatsoever to the real-world risks they are taking when acquiring an excessive loan to buy a house in the 233rd most densely populated country in the world.

By all mathematical accounts the end result will be the Australian economy jumping out of a plane at 20,000 feet without a parachute. When it does, this will leave a very large proportion of the Australian population red-faced. Or as Warren Buffet says ‘Its ‘Only when the tide goes out do you discover who’s been swimming naked’. And at this point in time it is impossible to tell who is swimming naked.

And as I argue in my new book ‘Print the Central Bankers Bubble, the Fool’s Paradise known as a Australia, will feel the full force of pain when the credit-fuelled property bubble bursts.

To purchase a copy of the book Australia: Boom to Bust click here.


Australian Household Liabilities 1996-2014

Data that the RBA, Politicians and Banks won’t tell you… or want you to know.

Lindsay David – Author ‘Australia: Boom to Bust’

The data speaks for itself. Australian households are today choking in debt. But they weren’t in 1996. Since then, the liabilities that Australian households hold has outpaced inflation at a rate of more than 1000%.

Total Household Liabilities Australia

Australia’s interest repayments

Household Debt v Government Debt.

Lindsay David – Author ‘Australia: Boom to Bust’

For too long Australian politicians have been debating about government debt levels in Australia. But completely avoid discussing the true debt problem in Australia…Household Debt.

Want to know how much households repay in interest compared to the Federal Government? The numbers below speak for themselves.

Australia Household v Government Debt

Copying Japan? RBA set to kill Australia’s only economic lifeline

In the name of price speculation, is Glenn Stevens adopting Japan’s retiree model?

In a world where countries are attempting to grapple the challenges of an ageing population, Australia is no different. As more Aussies end their working career and start a new life as a retiree, the Reserve Bank of Australia is considering reducing the interest rate even further than its all-time low of 2.5%.

Whilst RBA is bending over backwards to manage and protect one of the most toxic credit-fuelled property bubbles in Western history, the responsible retirees who were responsible with their savings and live off the interest from the bank are losing capital year after year to survive. They are simply not earning enough interest to cover the bills.  With a very low interest rate environment, like in Europe and Japan, more retirees will be forced to burn through their life-savings much faster than they would have anticipated. This in turn means that more Australian retirees will end up on the government pension. The end result? A large proportion of retirees will become a liability to the balance sheet of the Australian government rather than an asset. Hence, a budget surplus in Australia may be a thing of the past.

As I will clearly illustrate in my new book ‘Print: The Central Bankers Bubble,’ the RBA has allowed the Australian economy to adopt the same economic model as Japan’s credit fuelled economic model in the 1980’s. The big difference is the Australian credit bubble has yet to burst, but Australian retirees are already struggling to survive off their savings.

I believe the RBA has already broken the retirement system in Australia. This means unavoidable budget deficits for more than the next decade as the Australian government covers the living costs for more retirees that could have comfortably been living within their own means if interest rates were higher.

I believe that the RBA will be forced to raise interest rates in the future. But this does not mean the RBA will not drop rates first. But dropping interest rates at this point in time will do nothing to help the economic business model of the Australian economy. If retirees have less to live off, they will spend less. If they spend less, jobs go. If jobs go, mortgage repayments are not met. If mortgage repayments are not met, Australia’s high-risk Japan-style IZNOP business model will breakdown. But if interest rates rise it will cause a collapse of the housing market. In other words, low interest rates today have put the Australian economy in a no-win situation. Thanks RBA!




Australian Banks: Cash v Total Resident Assets

Many financial institutions in Australia have very little liquid assets on hand relative to the risk taken.

Compiled by Lindsay David – Author ‘Australia: Boom to Bust’

Source: Apra

The Oversea-Chinese Banking Corporation Australia Limited takes the prize with just $1 of cash or liquid assets for every $1,036 of resident assets on its balance sheet.

Cash v Total Resident Assets Ratio
Agricultural Bank of China Limited 3
AMP Bank Limited 24
Arab Bank Australia Limited 48
Australia and New Zealand Banking Group Limited 29
Banco Santander, S.A. 2
Bank of America, National Association 7
Bank of Baroda 3
Bank of China (Australia) Limited 49
Bank of China Limited 6
Bank of Communications Co., Ltd. 5
Bank of Queensland Limited 122
Bank of Sydney Ltd 22
Barclays Bank Plc 9
Bendigo and Adelaide Bank Limited 64
BNP Paribas 6
BNP Paribas Securities Services 4
BOQ Specialist Bank Limited 47
China Construction Bank Corporation 7
Citibank, N.A. 13
Citigroup Pty Limited 11
Commonwealth Bank of Australia 59
Community CPS Australia Limited 17
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. 16
Credit Suisse AG 7
Defence Bank Limited 52
Deutsche Bank Aktiengesellschaft 4
First Commercial Bank 7
Heritage Bank Limited 66
HSBC Bank Australia Limited 6
Hua Nan Commercial Bank, Ltd. 85
Hume Bank Limited 7
Industrial and Commercial Bank of China Limited 145
ING Bank (Australia) Limited 42
ING Bank N.V. 39
JPMorgan Chase Bank, National Association 3
Korea Exchange Bank Co., Ltd 828
Macquarie Bank Limited 13
MECU Limited 26
Mega International Commercial Bank Co., Ltd. 77
Members Equity Bank Limited 104
Mizuho Bank, Ltd. 9
MyState Bank Limited 60
National Australia Bank Limited 37
Oversea-Chinese Banking Corporation Limited 1 036
Police & Nurses Limited 24
Police Bank Ltd 11
Police Financial Services Limited 53
Portigon AG 8
QT Mutual Bank Limited 32
Rabobank Australia Limited 57
Royal Bank of Canada 12
Rural Bank Limited 51
Standard Chartered Bank 2
State Bank of India 7
State Street Bank and Trust Company 97
Sumitomo Mitsui Banking Corporation 15
Suncorp-Metway Limited 64
Taiwan Business Bank 65
Taiwan Cooperative Bank, Ltd 32
Teachers Mutual Bank Limited 48
The Bank of New York Mellon 1
The Bank of Tokyo-Mitsubishi UFJ, Ltd 115
The Hongkong and Shanghai Banking Corporation Limited 4
The Northern Trust Company 1
The Royal Bank of Scotland N.V. 163
The Royal Bank of Scotland PLC 106
United Overseas Bank Limited 185
Victoria Teachers Limited 48
Westpac Banking Corporation 51
Woori Bank 5

The Australian IZNOP model at risk of breaking down.

The FSI Inquiry indirectly attacks high risk taking.

Lindsay David – Author ‘Australia: Boom to Bust’

As one of the very few commentators to have raised serious concern for the Australian banking system it was refreshing to see David Murray’s Financial Services Inquiry indirectly identify the high-risk-lending business in Australia and the measly capital the banking system holds. Keep in mind, there are major banks in Australia that have a higher risk profile than Lehman Brothers. And the bulk of that risk is geared towards the housing market.

Will Joe Hockey and Tony Abbot have the strength to implement the recommendations set-forth by the inquiry or will they cave in to pressure from the bankers? Because if all recommendations are implemented, there is enough firepower to burst the largest asset bubble in Australian history. And in my opinion will inevitably lead to a handful of banks either getting bailed out or nationalised.

The reason property prices are so high in Australia is because of risky lending. This is what has created so much artificial demand for a real estate market that would not have existed otherwise. And for property prices to either grow or remain flat the real estate market is 100% dependent on every aspect of the lending market functioning and growing. This includes banks lending a greater sum and leverage to homebuyers than the previous year. If the banking system is unable to lend more, or buyers do not want to take more risk than the previous homebuyers, the bubble bursts and the whole business model of the Australian banking system breaks down. The recommendations set-forth by the FSI inquiry, if implemented, would be enough to send the property market into a tailspin. This will ultimately lead to a recession. And I am a firm believer that its better to have a policy led recession than a market lead recession.

To purchase a copy of the book Australia: Boom to Bust click here.