Tag Archives: Australia

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.

 

 

 

International Tax Lawyers – Reality hard to find in Australia

If you have spent enough time dealing with various international tax lawyers whom are based outside of Australia (E.G. Hong Kong, Singapore, Switzerland etc..) and assisting their ‘Ultra-High Net Worth (UHNW)’ clients who seek new pastures in a foreign country, you get to quickly grasp what their main priorities are.

The priorities of both the UHNW individual and International tax lawyer (who looks out for the best interest of the client)  will usually identify the following issue as the upmost priority

‘Tax rate/ benefits for high income earning individuals in the particular jurisdictions the UHNW seeks to move to’

And as most international tax lawyers overseas who manage the affairs of UHNW individuals whether it be in Asia, Europe or anywhere else, they more often than not classify the following countries, (for tax reasons) as a red-flag no-go zone and more often than not will advise their UHNW client against moving to the following countries;

1) France

2) Denmark

3) Sweden

4) Norway

5) Australia

The main reason being is that the highest income tax rates on worldwide income in these nations are among the highest in the world and more often than not, UHNW individuals will be required to pay the highest tax rates. However more often than not, international tax lawyers will advise their clients to move to the following countries with significantly more favourable tax conditions. Among the wealth of nations offering incredibly favourable tax advantages to wealthy foreigners are nations such as;

1) UK

2) Switzerland

3) Hong Kong

4) Singapore

In the UK the ‘resident non-domicile’ program allows foreigners to reside in the UK but are not subject to be taxed on their ‘worldwide’ income. Switzerland ‘under the forfait’ tax system can negotiate a flat tax rate  in some cantons that would leave UHNW individuals paying hardly a single percent of income tax. Hong Kong and Singapore also have very favourable tax rates. Even in the USA their are ways to truly optimise (legally) the tax situation of a UHNW individual when compared to Australia.

For Australia, the Significant Investor Visa is the only visa to UHNW individuals that gave them a short window to optimise their tax situation whilst ‘not’ permanently residing in Australia (less than 90 days per year). Less than 800 foreigners have taken on this visa, which tells us that there are not as many wealthy foreigners moving, or seeking to move to Australia as we think…. Unless international taxation lawyers are ‘not’ acting in the best interest of their client, there is no real evidence to suggest that wealthy foreigners are moving to Australia in droves.. Quite frankly,  unless UHNW foreigners already have a significant proportion of their family already residing in Australia there is no meaningful incentive to move here and pay a whole lot of income tax.

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

 

Australia’s household debt to GDP level must soar or it’s a bust

The risk profile of household debt in Australia

What will Australia’s household debt to GDP ratio look like in the coming years? Well by as early as next year Australia will overtake Denmark to have the highest indebted household ratio than any other nation relative to the size of the economy. OZ Debtgdp

If the Australian economy starts to contract, the ratio will grow faster.

Can Australia’s household debt to GDP ratio decrease whilst maintaining high house prices?

Absolutely!…. But Australia will need a whole lot more than just some luck for that to happen in the immediate future.  A bear minimum of 1.3% QOQ GDP growth and a a minimum of 1.2% QOQ household credit expansion. If credit expands at a slower pace…house prices in major cities start falling.
ozDEBTGDP1,3

As I argue in my book ‘Print: The Central Bankers Bubble,’ society and mainstream economists ignoring this reality will be the greatest mistake they have ever made.

Australia’s credit bubble turning Japanese

When private sector credit over 20 years expands as fast as the Japanese before they hit a brick wall,.. you know there is a problem.

Lindsay David – Author Print: The Central Bankers Bubble

At least the Japanese invested in some innovation and technology. Australia borrowed to flip houses and dig for rocks. Japan V Australia

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 chart that ends the housing bubble debate..

Its a credit-fuelled housing bubble, now let’s try to solve the problem

Lindsay David – Author Print: The Central Bankers Bubble

Auscharts1This shocking chart tells a million words. Australian household credit and banks balance sheets have expanded at a heinously rapid rate relative to the other major economic fundamentals.

It’s time Australia’s politicians, the RBA & APRA admitted something is not right and tackle the credit-fuelled housing bubble before the markets decide how to tackle it. As history tells us, there is nothing worse than the open market deciding how a credit-fuelled housing bubble bursts when interest rates are at record lows.

Banks balance sheets are overinflated; house prices are overinflated, and Australia has no plan B. 

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

When the housing affordability debate switches to a household debt debate

Talk is talk and data is data. 

As the housing bubble debate rolls on, society is still avoiding the hot topic…That is household debt and where this debt came from and how household credit and bank assets have expanded at such a rapid rate relative to economic growth and inflation4 indexes

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 wrecking ball is loose and swinging towards the banks.

If we have a credit-fuelled property crisis, a mining crisis & an income crisis…We’ll have a banking crisis.

Lindsay David – Author Print: The Central Bankers Bubble

It has been 16 long months since my book Australia: Boom to Bust was published. And watching from the sidelines Australian society realising  it was caught completely off-guard to the macroeconomic headwinds sheds light once again that:

1) When it comes to the common laws of economics, history has an excellent track record of repeating itself when a nation attempts to defy it.

2) Common sense always prevails.

3) Australia’s skyrocketing house prices had very little to do with Australia’s own housing supply v demand theory (Load of BS). But everything to do with artificial demand created by toxic sums of debt flooding the Australian housing market (similar to what happened in Ireland last decade).

Australia’s economic structure is clearly breaking down. The second and third pillars of the Australian economy are by all mathematical accounts in trouble. Iron ore (2nd pillar) prices have tanked, alongside the property bubbles bursting (3rd pillar) in a host of mining towns.

And though eight years too late, it looks like there is finally a national housing bubble debate brewing. Objective data by objective economic researchers/clowns  (each using their own unique methodologies) is now accepted as credible data by most mainstream media organisations. And those last year who called a housing bubble or pending mining crash don’t sound so crazy these days. Which leaves one specific pillar of the Australian economy left unchecked and un-debated. Particularly its relationship with the property market. That is the industry that fuelled the housing bubble fire through toxic lending… the first pillar of the Australian economy, THE BANKING SYSTEM.

House of Cards

The national debt trap

Whilst mortgage defaults in a host of mining towns slowly start to weigh a smidgen on the unconcerned banking system, larger and over-leveraged property markets such as Perth are now starting to look ever so fragile. Job losses over the coming twelve months are all but guaranteed in WA. If we start to see Perth house prices start to fall, we could expect to see housing construction in WA come to a screaming halt. This would only exacerbate job losses causing more highly leveraged mortgage holders to default on their mortgages. If this happens, banks are forced to cover significant mortgage writeoff’s. This in turn affects the banking system’s ability to lend more to homebuyers in the high-leverage/high-risk Sydney and Melbourne housing markets because banks were holding too little capital against existing home loans in the first place and must pay back its own creditors whom they acquired the money from.

Our banks have acquired significant sums of short term financing through the wholesale lending market whilst issuing significant sums of multi-decade loans that must be rolled over time and time again with new debt from the wholesale lending market in a low interest rate environment. When fear sets in, the wholesale lending tap gets turned off from overseas and local banks are forced to either borrow from each other or tap into the RBA’s $300 billion+ CLF (A bailout) to cover their losses. If Australia gets to a point where the RBA has to print roughly 20% of GDP to bailout dodgy loans, the $AUD crashes (unless interest rates rise)  driving inflation leaving banks with interest to repay the RBA and no revenue stream for the money the RBA has printed for banks because the funds are used to cover their losses (repay creditors & depositors).

Make no mistake, when the Australian credit fuelled housing bubble truly bursts, the RBA’S CLF is essentially a band-aid solution to open heart surgery.

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

NAB Economist adds to the wish wash

“Traditionally you’d expect to see the ability to borrow against the house price would be historically high, you’d expect to see very fast growth in credit funding it.” Alan Oster

Lindsay David – Author Print: The Central Bankers Bubble

As per yesterday’s article on the Domain, once again we have a chief economist at a major Australian bank rushing to shoot down the thought that a housing bubble exists in Australia. In the Domain article, NAB chief economist Alan Olster said:

“Traditionally you’d expect to see the ability to borrow against the house price would be historically high, you’d expect to see very fast growth in credit funding it.”

The LF Economics Australian Consolidated Private Gross Debt to GDP ratio figure below tells us that Australia has in fact done just that. Australian Consolidated Private Gross Debt

Like in housing bubbles of the past, mainstream economists (who more often than not work for an institution with skin in the game) become blinded to the facts… or they simply hide them. In this instance, Australia is no different. Lets face it, how often do you see the above figure released in a chart pack by the RBA, APRA, a major bank, or those with skin in the game? The sooner this nation as a whole aknowledge there is a household debt crisis in the making, the sooner Australia takes the economic hit and recovers from it. Where is your backbone RBA and APRA?

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 Bogan Tiger: RBA policy has failed

Trying to borrow your way out of a debt problem to flip houses will not work

Lindsay David – Author Print: The Central Bankers Bubble

Close to another $20 billion in housing finance was created in the last month alone in the Bogan Tiger economy. As I have argued in the past flipping houses is not a sustainable wealth creation model. History tells us it has a 100% track record of failure.

The RBA has utterly ignored all the warning signs of a colossal credit-fuelled housing bubble and have opted to continue copying the Irish wealth creation (Celtic Tiger) model which we know does not work. History will unfortunately prove Glenn Stevens and his team of Ponzi mathematicians at the RBA wrong…Not to mention the massive pay cut to retirees income for being responsible for keeping money in the bank.

But good to see that the overwhelming majority of first-time homebuyers have walked way from the market altogether. And rightly so..

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 Sacred Cow will Die

If the Australian government does not get rid of negative gearing, the market will inevitably do the dirty work on its behalf. 

Lindsay David – Author Print: The Central Bankers Bubble

By all mathematical accounts, the end-game result for negative gearing (Australia’s sacred cow) is an inevitable economic disaster. Just think about it, with more than a million dwellings in Australia negatively geared investments (running at a loss), we know hands-down that these dwellings are highly exposed (toxic) assets to an economic downturn. Has anybody asked themselves what happens to the Australian economy if the capital gain train runs out of steam and property prices start to fall significantly? At least based on the maths of it all, you end up an Irish-style economic disaster.

The biggest problem of all would be the impact on Australia’s highly leveraged banking system. The Australian banking system does not hold enough capital or have enough cash sitting on the sidelines for a rainy day to cover their losses in the event of a significant downturn in the housing market. Negatively geared property investors (alongside first home buyers) are the greatest risk to the banking system because we know that their investments are loss making schemes whilst in pursuit of capital gain. And if there is no capital gains made.. a real world problem arises.

The highly leveraged nature of the Australian housing market will inevitably put pressure on the banking system when house prices head south or banks are restricted (regardless of reason) on their lending capacity. And imagine putting yourself in the shoes of a negatively geared property investor in pursuit of capital gain, who recently purchased a property in Sydney or Melbourne and then property prices fall by 10%-20%? Unfortunately, in terms of sum value, that 10%-20% equates to a lot of money and capital losses. Would you still hold on to your investment if it’s losing you both income and capital… or do you try to sell? Now times the answer by 1 million. Next step…Now imagine where house prices fall to once you have an extra several hundred thousand investment properties on the market at the same time?

With the Australian speculative debt frenzy continuing, it would be wise for Australia’s financial regulator to take immediate action on restricting the Australian banking system from making any loans to property investors whereby the investor is willingly investing into a property where beyond a shadow of a doubt the rental income will not cover the costs of servicing a loan. Because the way the Australian banking system lends to the Australian household sector today is not normal. If the rent can’t pay the mortgage…no loan. Thats what APRA needs to look at.

Either government makes a concerted effort to put a stop to this leveraged frenzy, or the market will inevitably to the dirty work on behalf of the government. Either way, Australia’s sacred cow will die.

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