Warning to borrowers–ASIC protecting the control fraudsters.

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!

The Lies Aussies got fooled into believing

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.

The Reality: 

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.

The Reality:

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.

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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.

The Reality: 

It’s a whole different ballgame buddy.

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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

 

 

 

How Australia’s rental market stacks up vs the USA

Using data from Zillow and Domain here is how Australian cities stack up versus American cities when it comes to the cost of renting an abode on a monthly basis in $US. The top 150 cities were used in the sample… Have fun scrolling down to find Sydney, Melbourne, Brisbane, Perth and Canberra to see where they rank. Unfortunately Adelaide missed the cut.

City Monthly Rent Rankings ($USD)

1 San Francisco $4,406

2 Sunnyvale $3,903

3 San Jose $3,288

4 Irvine $3,106

5 Fremont $3,103

6 Huntington Beach $2,966

7 Glendale $2,960

8 Oakland $2,777

9 Arlington $2,738

10 Los Angeles $2,671

11 Yonkers $2,656

12 Washington $2,550

13 Boston $2,516

14 Hayward $2,513

15 Anaheim $2,483

16 Garden Grove $2,452

17 Santa Clarita $2,449

18 Fairfax $2,444

19 Alexandria $2,436

20 Seattle $2,405

21 Santa Rosa $2,401

22 San Diego $2,382

23 Naperville $2,375

24 Santa Ana $2,370

25 Long Beach $2,360

26 New York $2,320

27 Chula Vista $2,298

28 Oxnard $2,296

29 Boca Raton $2,251

30 El Cajon $2,242

31 Oceanside $2,231

32 Silver Spring $2,208

33 Jersey City $2,195

34 Rancho Cucamonga $2,149

35 Miami $2,110

36 Corona $2,107

37 Scottsdale $2,059

38 Salinas $1,964

39 Denver $1,950

40 Plano $1,947

41 Pomona $1,932

42 Lakewood $1,929

43 Overland Park $1,913

44 Pembroke Pines $1,902

45 Fort Lauderdale $1,863

46 Austin $1,814

47 Ontario $1,796

48 Woodbridge $1,793

49 Fontana $1,787

50 Bridgeport $1,783

51 Portland $1,771

52 Boynton Beach $1,760

53 Fort Collins $1,750

54 Hollywood $1,732

55 Charleston $1,729

56 Elk Grove $1,729

57 Aurora $1,718

58 Hialeah $1,717

59 Riverside $1,712

60 Chicago $1,661

61 Sydney $1,642

62 Chesapeake $1,591

63 Moreno Valley $1,591

64 Palmdale $1,587

65 Marietta $1,580

66 Bradenton $1,560

67 Fort Myers $1,560

68 Virginia Beach $1,560

69 Paterson $1,558

70 Fredericksburg $1,548

71 Aurora $1,542

72 Minneapolis $1,502

73 Vancouver $1,500

74 Lancaster $1,497

75 Gilbert $1,494

76 Cape Coral $1,490

77 Madison $1,486

78 Nashville $1,484

79 New Orleans $1,474

80 Worcester $1,474

81 Reno $1,471

82 Providence $1,458

83 Newark $1,455

84 Corpus Christi $1,420

85 Irving $1,416

86 Atlanta $1,414

87 Chandler $1,414

88 Houston $1,414

89 Lafayette $1,414

90 Sacramento $1,408

91 Canberra $1,394

92 Arlington $1,393

93 Salt Lake City $1,384

94 Grand Prairie $1,379

95 Tacoma $1,375

96 Bakersfield $1,372

97 Springfield $1,370

98 Henderson $1,369

99 Saint Paul $1,367

100 Tempe $1,359

101 Port Saint Lucie $1,358

102 Salem $1,354

103 Raleigh $1,351

104 Colorado Springs $1,349

105 San Bernardino $1,343

106 Garland $1,340

107 Murfreesboro $1,327

108 Fort Worth $1,324

109 Baltimore $1,321

110 Lawrenceville $1,316

111 Peoria $1,314

112 Perth $1,301

113 Pasadena $1,299

114 Dallas $1,294

115 Baton Rouge $1,293

116 Tampa $1,290

117 Stockton $1,289

118 Durham $1,264

119 Lincoln $1,262

120 Saint Petersburg $1,262

121 Omaha $1,261

122 Norfolk $1,260

123 Newport News $1,255

124 Visalia $1,249

125 Charlotte $1,247

126 Modesto $1,246

127 Orlando $1,244

128 Brisbane $1,239

129 Mesa $1,233

130 San Antonio $1,226

131 Greenville $1,225

132 Fresno $1,220

133 Tallahassee $1,215

134 Melbourne $1,208

135 Lubbock $1,208

136 Gainesville $1,204

137 Las Vegas $1,202

138 Phoenix $1,198

139 Albuquerque $1,197

140 Glendale $1,195

141 Philadelphia $1,183

142 Laredo $1,178

143 Richmond $1,176

144 North Las Vegas $1,161

145 Boise $1,159

146 Amarillo $1,157

147 Lexington $1,154

148 Jacksonville $1,149

149 Columbus $1,145

150 Chattanooga $1,129

 

No need to raise GST for a budget emergency that does not currently exist.

Lindsay David – Author Print: The Central Bankers Bubble

Though Australian government debt remains quite low (38% of GDP), The Australian government is trying to find ways to boost revenue to cover the ever increasing costs spent.

I do not personally believe we have a federal ‘budget emergency’ today ($37billion deficit is manageable for the time being), if the government of today firmly believes a budget emergency exists, there are a few handy interim solutions at their disposal before considering an across the board rise in the GST.

In the name of promoting an ideas boom (and cause-effect doesn’t exist), here are some possible interim solutions to solving the budget emergency we don’t have– and a little bit more.

  1. Increase the fuel excise.

Australia consumes ballpark 1.1 million barrels (168 million liters) of oil per day. A very large proportion of this oil consumed is subject to the fuel excise.

Now the cost of fuel has collapsed at both at the wholesale and retail level and backed due to a global oversupply of oil. So whilst the cost of fuel is low, there is room to add an interim increase to the fuel excise.

Minus the ballpark sum (20% of supply) of oil that is utilized excise free or at a deep excise discount, each cent increase in fuel excise would increase government revenue by roughly $1.2 million per day.

Jack up a temporary fuel excise by 30c over a 12 months period so we are all paying what we used to pay for fuel, government would earn an extra $13 billion in revenue.

This temporary fuel tax would also breathe a significant sigh of relief for the RBA which is concerned about low inflation and the multi-billion dollar impact to Australian GDP that low oil brings.

If an interim 30c added fuel excise was implemented over the next twelve months, the budget deficit would fall from $37billion to $25billion

  1. A temporary Bank super tax

Believe me when I say this tax would be temporary because there is a good chance the Big Four banks will not be making the same profits they are used to making coming into 2017. But in the meantime, if the big four banks earn the $30billion combined they did in 2015, surely there is room there to tax these financial institutions before the housing market goes bust.

Lets say government was able to extract ballpark an extra 33% of the profits of these ‘too big to fail and too big to save without nationalizing’ banks, government would clock up an extra $10 billion in revenue. Surely that’s the least these banks could be taxed considering taxpayers are the ones who guarantee these banks.

Budget deficit now

Original $37 billion forecast deficit minus interim fuel excise and bank super tax brings the total deficit down to $15 billion.

3. A temporary land tax on negatively geared properties

There are more than 1.2 million properties in Australia that are essentially an annual tax write-off costing government $billions. To cover the loss of government revenue a $2500 per year land tax per negatively geared property would generate an extra $3billion in revenue for the Australian government.

The other benefit to this temporary land tax on negatively geared properties is it would most definitely persuade more Aussie investors to invest in innovation which is exactly what the Australian government wants right?

Now we have gone from a $37 billion deficit to a $12 billion (0.8% of gdp) deficit without forcing the Aussie battler who cant afford a car to increase his or her living expense.

Surely there are other resourceful ways for government to increase revenue without slugging consumers an extra 5% across the board whilst solving a few key national problems our society contends with.

  • A 300% baby formula export tax
  • A 5% ‘budget emergency’ pay deduction for top serving public servants & 20% for central bankers until the income growth rate exceeds inflation.
  • Government purchasing HSV Limousines to transport our politicians (like they used to) versus the BMW 7 series they now acquire
  • Close down APRA (They haven’t done much since 1998)
  • Annual $15 fee per household to help cover the costs of running the ABC
  • A 30c tax on each alcoholic beverage served at a restaurant, pub, bar or nightclub.
  • A $5 contribution fee for every doctor visit or emergency room visit for any household earning over $40k per year

These temporary solutions are definitely worth government considering whilst our politicians slug it out in the federal chamber about a GST we don’t need to raise and a budget emergency we don’t even have.. And if you believe the jobs data that comes out of the Australian Bureau of Statistics (ABS) suggesting hundreds of thousands of jobs were created throughout 2015 (and the net cost v revenue gain to government from this), there is no reason government cannot produce a balanced budget. But then again, the ABS is producing a lot of ABS data.. when you leave out the ‘A’ in the ABS.

Median house price to income ratio much higher than Demographia suggests.

Lindsay David – Author Print: The Central Bankers Bubble

I found it interesting going through Demographia’s annual housing affordability survey. Which I must say is always well worth the read and does provide great insight on house price to income ratio’s in cities and towns across primarily the English speaking world.

And once again it showed how insanely ridiculous house prices in Australia are– not only in the sum paid for a house, but also relative to what we earn.

One thing that struck me year after year was how the median house price across each country is measured. Demographia suggests that Australia’s median (market) house price is 5.6x household income. Yet over at LF Economics we have calculated the house price to income ratio to be 8.4x (& 6.6x for units).

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Then I realised that the methodology for Demographia to measure the median house price to income ratio nationally was to use the median house price to income ratio without weighting each city relative to the sample size. So if there were hypothetically three cities in a national sample, the house price to income ratio in the middle city (median market) would be the national house price to income ratio (which is the number the media jumps on) regardless of population variables.

As an example,  City A which has a population of 10 million and a median house price to income ratio of 12x. City B (population just 1,000)  has a house price to income ratio of  2.1x, and City C (population just 2,000) with a house price to income ratio of 1.1x. Under Demographia’s methodology, the national median house price to income ratio would be just 2.1x. But in reality the median house price to income ratio, when the three cities are weighted against their population would be just a fraction under 12x.

I wonder how many other research houses (private and public) use a similar methodology to Demographia giving equal weighting between Sydney and Bathurst..

Nevertheless,Demographia’s annual housing affordability survey  is definitely an insightful read and always recommend anyone with an interest in housing affordability to check it out…

Will the Australian economy eat dirt in 2016?

My Final Thoughts for 2015.

Lindsay David – Author Print: The Central Bankers Bubble

Regardless of what side of the economic fence you sit on, there is no doubt Australia faces some serious economic challenges coming into 2016. From the Auto industry, to the predictable crash of the spot price of iron ore, to the most overvalued housing market in the world, there are some serious kinks in Australia’s economic chain.

From my point of view we will begin to see a significant shift in media attention towards the first pillar of the Australian economy (The financial services sector). And when I mean shift, I mean a deeper dive into the risk profile of our highly leveraged banking system and its dependant relationship with the housing market and vice versa…not to mentioned APRA and RBA going through more scrutiny as the great Australian Credit & Property Bubble  starts to burst and debt in the international wholesale lending market starts to become discriminately scarce for Australian financial institutions.

It has taken far too long for Australia as a whole to realise that house prices in Australia were never rising due to the common supply v demand theory. This is due to the artificial sums of debt our banking system sloshed to home buyers year after year and the party is nearing an end.  And believe me when i say, there is no such thing as a housing shortage and 3% rental returns in the same housing market. This will be realised by most Australians when its unfortunately too late. When it comes to the housing market, Australians got fooled, and unfortunately, will get burnt.

Australia has built too many homes for its population and the risk of emigration and default on the back of increasing job losses is high. Remember, all those residential construction workers need a constant flow of new housing developments to keep their jobs. And from the looks of the movements in the housing market today, there is little evidence there will be any incentive for the residential construction industry to pump out more unneeded housing stock.

The mining sector will continue to struggle into 2016. And unless there is some miracle, we can expect several Iron ore miners to begin to throw the white flag up in the air (alongside increased private jet movements between Canberra and Perth). China has simply overbuilt and there is no other country in human history that built as much housing and infrastructure over the last 15 years as China has. This incredible construction binge seems on track to hit rock bottom as we move into 2017. If it happens earlier, this will drive the spot price of Iron Ore to below $20 a metric tonne as there will still be too many large players in the iron ore market struggling to stay afloat.

On the back of the challenges facing the three pillars of the Australian economy, there is some good news, albeit small in size. There should be more new Australian startups in the tech, biotech and fintech spaces coming in 2016. This is pleasing to hear and looking forward to checking out the new innovation and technology the next generation of Aussie entrepreneurs that will be brought to the global market. And I look forward to making my small contribution to help facilitate it.

I wish you all a great Christmas and a very Happy New year.

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

 

The RBA is short on ammunition

It’s definitely worth revisiting my post from June 2015 now that we may be in the very early stages of a downturn in the housing market. See below. 

History tells us the RBA is now short on basis points (ammo). On three occasions over the last fifteen years, the RBA has burnt at a minimum 200 basis (on top of government stimulus packages, grants, etc..) points to stop a housing crash and to allow household credit to continue to expand uninterrupted (hence no national housing bust to date).

2000-2002 – 6.25% to 4.25% (2% drop)

2008-2009- 7.25% to 3% (4.25% drop)

2011-2013- 4.75% to 2.5% (2.25% drop)

Today the reserve rate is 2%. With the $AUD a third-tier currency (weakens on the back of bad news locally, or internationally), a 0% interest rate would simply crush the local currency.. especIally if the Fed raises its interest rate.

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

New LF Economics Report ‘Parental Guidance Not Recommended’ now available

The LF Economics ‘Parental Guidance Not Recommended‘ report assesses the challenges new First Home Buyers (FHBs) face versus previous generations in not only achieving home ownership, but the financial risks many Australian parents have taken in the name of securing home ownership for their adult children. Long-term trends in housing and unit prices, interest rates, household incomes and mortgage costs are analysed to determine affordability in the Australian residential property market, via the LF Economics Affordability Index.PGNR

Economic conditions to deteriorate as Australia runs out of risk.

The reversal 25 years in the making will be a tough pill to swallow.

Today, the Australian economy is living on borrowed time. Aussie banks are full to the brim of household debt, our lenders mortgage insurers (LMI) can only cover a small fraction of the risk they hold and job losses in 2016 are all but guaranteed. On the back of a mining sector simply extracting too much iron ore from the ground that may never be consumed, the Australian economy is seemingly heading towards its doomsday scenario.

Australia’s double-edge economic sword situation is not unique, nor is it unusual. But it is incredibly leveraged relative what we have seen around the world over the last two decades.

Banks are caught up with significant sums of debt to lend to homebuyers to keep house prices up. If they can’t lend more to homebuyers (or homebuyers are unwilling to take on mega-mortgages), house prices start to fall. When house prices start to fall across the country, our lenders mortgage insurers will start to run out of cash very quickly because when an industry holds less than $1 for every $100 of risk insuring an industry that holds just above $1 for every $100 of risk, there is no margin for error as the default rate rises. Hence would force borrowing rates to spike regardless of the interest rate the RBA sets as the RBA brought interest rates down on an upswing property market to stop it from crashing. This simply leaves a dire scene as the crash will simply be bigger than what it would have been had it happened a few years back.

There seems to be no circumstances where Australian financial regulators have concluded that our LMI’s will not be able to honour their commitments to the mortgage market in their stress testing. Hence it is critical for APRA and the RBA to revise their stress tests to build a battle plan that simply eases the pain of what could be the economic tsunami of Australia’s lifetime. Because there is simply no simple fix to this challenge. Unfortunately Australia cannot afford to bring its interest rate down for too long in a recessionary environment as it would simply render our currency worthless. With less money flying around, the value of our assets fall, alongside the risk of an inflationary shock.

Remember, Australia is a net importer of debt. If foreign funds do not lend to our banks, the economy is shot. If the RBA raises rates to try to attract offshore debt, the economy is shot. We must ask ourselves, was it worth the RBA bringing interest rates down as far as they have at the expense of an inevitable problem? In other words, running out of risk.