Tag Archives: banks

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

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

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

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.

History Not on APRA’S Side

Assuming no bank in Australia could fail with a 40% drop in property prices is like assuming you will survive jumping off the Sydney Harbour Bridge.

Lindsay David – Author ‘Australia: Boom to Bust’

With the Australian Prudential and Regulation Authority Chairman Wayne Byres releasing new stress tests on the Australian banking system, it showed that all 13 major banks in Australia would be able to weather a 40% downturn in property prices alongside close to 14% unemployment. In reality, history tells us a different story. You will be struggling to find an example throughout modern history where (after prolonged economic growth and lending) an economy sharply retracted by -5% alongside 14% unemployment and have no banks fail (or mass bailouts).

This stress test could only assume that the banking system (as a whole) would be able to sell all homes from non-performing loans within a very quick span of time between receivership and a sale at a small loss..Furthermore, the stress test should have assumed that there is at least one bank failure out of thirteen to be on the safe side of assuming what would be a worse case scenario (AKA, a systemic risk assessment).

I find it mathematically impossible for this outcome to occur based on the fact that the banking system in Australia cannot sell-off assets as quick as what could be assumed if the banking system itself cannot lend massive sums of debt to new homebuyers in a sharp downturn. Australian real estate as an asset class is simply too big in value and volume. In an economic downturn the Australian banking system would simply not have the applicable funds, nor enough equity converted to hard cash in such a short amount of time without creating even more excess supply of housing and other asset classes then there would already be under APRA’s stress test.

Though APRA points out that they are concerned about the risks following a downturn, it has failed to look through the modern history books to see what caused banks to fail in other jurisdictions where there was less household debt. No housing bubble in recent memory has burst without banks failing. History is not on APRA’s side.

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

The Banks Passed their own Stress Tests But will Fail The Real Deal

All it takes is some regulatory help from APRA to hide the reality by shifting the goal post.

Research and commentary compiled by: 

Lindsay David – Author ‘Australia: Boom to Bust’
Paul Egan & Philip Soos- Co-Author’s ‘Bubble Economics: Australian Land Speculation 1830 – 2013’  

When it comes to the Australian banking system, if there is any chart on this planet that exemplifies something very fishy going on in Australia’s banking system it is definitely this chart below by ‘Bubble Economics: Australian Land Speculation 1830 – 2013’  co-author’s Philip Soos and Paul Egan.

Risk Weighted Assets

In my opinion this chart is the smoking gun that explains how on paper the banking system in Australia can currently be regarded as a safe, well-capitalised banking system whilst taking on an incredible sum of risk by lending to property investors and home buyers. Looking at the above chart definitely raises questions as to how the banking system in Australia can lend such enormous sums of debt to property buyers year-on-year whilst reducing their risk exposure at the same time. Because mathematically it is impossible to reduce risk whilst taking excessive risk at the same time.

In relation to the current lending environment, interest-only debt lending is at an all-time high, whilst tax deductions through negative gearing are at an all-time high which clearly exhibits that the Australian real estate market is in a speculative state. In other words, overloaded with risky debt.

Mathematically, the banking system can simply not be as profitable and well capitalised at the same time without doing something incredibly risky. As Philip Soos suggests, ‘we can thank Basel II’. Why? Because ‘Basel II rules in 2006 allowed for lower risk-weights on mortgages.’

So today every loan that should be regarded as a risky loan is not because the goal posts were moved in favour of the banks reducing the risk profile on paper– but not in reality (E.g. AAA rated CDO’s in 2008). In the meantime, APRA has had all the time in the world to reduce the risk profile of the Australian banking system when it comes to residential mortgages, but has failed to do so. APRA’s Financial Services Inquiry (FSI) which is currently reviewing the financial health of the banking system may want have the banks redo the stress tests, and this time include the mere fact that there is zero chance that there can only be a small fraction of all the loans currently in play that may one day not be repayable. Because today, this is the difference between a risk-weighed asset and a non-risk asset under regulatory terms.

There are loans today where because a first time home buyer managed to have access to funds (e.g. from parents) to make a 30% deposit on a home, but is living paycheck to paycheck, would not hold risk in the eye of the banking system compared to the home buyer who only had a 15% deposit and is living paycheck to paycheck. That is because house prices have increased significantly in recent times. But if the reverse occurs alongside rising unemployment, both loans hold significant risk.

The problem today is that most homebuyers particularly in Sydney and in Melbourne are forced to take loans that are excessively disproportionate to their incomes. And more often than not, are forced to borrow more relative to incomes on top of the deposit than what American’s or Irish were required by their banks during the peak of their property bubbles.

The day this lending binge unravels will be the day Australian’s realise that their banking system was taking excessive risks in order to keep the property market rising. And today there is no margin for error. And for APRA, it is probably too late to reduce the risk-profile of the Australian banking system. Because all the risk in the world has already been taken. The problem is, due to the regulatory framework, its near impossible to see on paper.

Hence my strong view that though the banking system seems to have passed the internal stress tests conducted, when reality arrives, they will simply fail. This is a common historic fixture of failed banking systems of the past.

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

Click to download a copy of  ‘Bubble Economics: Australian Land Speculation 1830 – 2013’  

When Banks Run out of Local Cash

They Import It.

By Lindsay David- Author of Australia: Boom to Bust

When the financial services industry of a country runs out of domestically sourced cash to lend to new homebuyers it is forced to venture overseas for funds. Australia is clearly a country that cannot financially stand on its own two feet without a massive sum of foreign derived debt. The sustainability of our banking system depends on foreign wholesale lending markets to quench the thirst of an overheated housing market. In essence, a high risk game of ‘don’t bite the hand that feeds’. Today there is no housing market in the western world so dependant on the decisions of foreign lenders.

The mining industry is slowly but surely coming to the realisation that the super-cycle is now over (better late than never). In the meantime,  the two largest local miners are able to outplay their smaller and more leveraged competitors to the dirt. If you think Qantas and Virgin Australia are competing aggressively, wait till you see the outcome of a clear excess supply of iron ore. Essentially the larger and smarter mining giants (just two of them) may end up in a golden position where long-term sustainability is secured. Even if they forever remain less profitable and smaller.

The mining war of excess supply will inevitably cost jobs. The knock-on effect for the greater Australian economy could be disastrous. The impact could make foreign wholesale lenders think twice before allocating funds to the Australian banking system which has placed all bets, and the deposits of a proud nation in a casino-like gamble called real estate. If the banks cannot lend more to homebuyers than the previous year, the entire business model of the Australian banking system will simply breakdown. And when its too late, a nation will realise that the so called ‘housing and land shortage’ was nothing but a myth

I fear one day the Australian banking system will be at the complete mercy of foreign creditors. A position no banking system, nor a nation wants to find itself.

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

My take on the FSI

Apparently Australian’s don’t panic

By Lindsay David- Author of Australia: Boom to Bust

Last night I attended the Financial Services Inquiry’s public forum held in Sydney.

With a microphone in hand,  I told Mr Murray that the risk profile of the major banks resembled that of Lehman Brothers. Following my statements you could hear the laughter under the voices of many in attendance. Not to mention the fact that Mr Murray and the other two sidekicks sitting on the panel did not seem to take my comments seriously. Smiles and shoulder-juggling also erupted when I claimed that new Australian homebuyers are the most over-leveraged in the Western world relative to incomes. And don’t get me started when I mentioned only Bernard Madoff had a better track record of profitability than our banks.

Mr Murray said that the banks have already been stress tested. If  I was a betting man these stress tests do not include the possible impacts of human behaviour. The behaviours of erratic panic and rush for withdrawal are yet to be mentioned or implemented into the stress tests… period.

Furthermore, he was not able to answer how, or who would come up with the hundreds of billions to cover depositors for the government’s bank deposit guarantees; should a bank in Australia fail. Mathematically if one major bank fails, there is a systemic collapse of the Australian banking system.

Questions asked by those in attendance related to real estate and mortgage lending were not well answered my Mr Murray. If the investments in the form of debt by our banks to homebuyers on top of the leverage relative to incomes are not taken into ‘very’ serious consideration by the panelists, their job will not be well done.

There have been some questions arising on whether the FSI inquiry will bring a fair and objective few to the health of the financial services industry. One thing is for sure, there is skin in the game for those appointed to conduct the inquiry.

If this was a political inquiry into the state of the financial health of the Australian Treasury, one would not think we would get an objective view  if Wayne Swan was to hypothetically investigate Paul Keating or if Joe Hockey had to hammer into Peter Costello. I personally believe Keating and Costello were tough treasurers who made tough decisions in the nations best interest.  Hypothetically, if either of these ex-treasurers were to have fallen asleep at the wheel, would one of their own party members take the challenge of bringing to great attention to their economic malpractices?

This leads to my question, With most FSI panelists ex-bankers engaged in building a blue-print for the future direction of the financial services industry, will we get an objective view? Or will the panelists let some of the most crucial elements of what is essential just skim under the table?  More importantly, will they take all FSI submissions seriously? I fear that unless the media bring this to attention, the FSI inquiry will end up just as a report with a handful of wrist-slapping, whilst the unsustainable growth strategy our major banks have adopted will go unchecked.

Increasing the banks Tier-1 capital and more importantly, improving the cash-stockpiles of the banks cannot happen without putting a dent in the banks ability to lend more to homebuyers than the previous year. As I mention in my book Australia: Boom to Bust, this is enough to bring the banking system to its knees. The risk profile of the major banks do not allow them to increase their own financial stockpile whilst lending more to homebuyers.

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





The Reserve Bank of Blackjack IZNOP

Too much time betting, not enough time managing

By Lindsay David- Author of Australia: Boom to Bust

In my book Australia: Boom to Bust, I lay the argument that since the Global Financial Crisis, the Reserve Bank of Australia (RBA) has been managing a bubble—not an economy.

Unfortunately, as every day passes, I become more and more confident in my prediction that at least one of the Big4 banks will either go bust, be bailed out, or nationalized before the end of 2017. Australians are told by our political leaders that our banking system is safe. Unfortunately, judging by the balance sheets of the Big4, the complete adverse is the reality.

Let’s cut to the chase. When you look at the balance sheets and the asset growth of the Big4 from 1999 to 2013 you cannot help but to think of a historic business model that is ultimately destined for failure. I call it the ‘IZNOP’ business model.  Like a Ponzi scheme, the IZNOP business model suggests that in the event of a leveling-off of investment/lending (for whatever reason), the business model breaks down due to the absolute dependency on uninterrupted growth to hold the business model together.

Without growth in both assets and dividends, the IZNOP business model breaks down, human instinct and panic sets in, and the rest is history. Unfortunately that is what history tells us. A strategy that requires an uninterrupted  build-up of assets on a banks balance sheet (year-after-year), whilst maintaining the bear minimum of cash and strong dividend growth to investors has rarely succeeded over the long-term.

My question to the RBA leadership is this. How did Australian banking system get to look like this chart below?


If the above chart does not represent a credit-fuelled asset bubble, what does?

Since 1999, there have only been two instances where the balance sheet of a Big4 bank declined over a twelve-month period. The first was in 2002, when the assets on ANZ’s balance sheet declined by 1.3%. The second time was in 2009 when the asset value of the balance sheet at NAB declined by just 0.41%. Only Bernard Madoff had a better track record of consistent year-on-year growth before his Ponzi scheme broke down… No cash-flow.Assets on Balance Sheets

What does the bulk of this money on the balance sheets of the Big4 represent?  Investment in Australian and New Zealand Real Estate. Today, all bets are on house prices only going up via more debt issued to new homebuyers both in terms of sum and relative to incomes.

If for one reason or another homebuyers do not have access to, or take more debt then previous homebuyers took on from the Big4 banks, the IZNOP business model breaks down and Australia, alongside New Zealand, may find itself experiencing its very own house of cards moment.

The lack of intervention by the RBA over the last several years has left the Australian banking system with an inevitable confrontation. A confrontation that will suck the very life out of the Australian economy; and our way of life.  Lets face it, incomes, and GDP are simply not keeping up with the banks toxic spending binge. Big4 Asset Growth v Wages v GDP

In a recent blog I wrote with Bubble Economics Co-Author’s Philip Soos and Paul Egan (The Propertied Federal Political Class), Australian politicians are doing what they can to prop up the bubble. What is certain is that the financial results from the Big4 over the next few days will show big profits. But when the IZNOP business model breaks down, it will be nothing less than an economic disaster. This is what happens when a central bank lets four primarily domestic focused banks take an economy, and the life savings of a proud country to the casino.

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



Chart 1- Financial Results from ANZ, CBA, NAB &WBC 1999-2013

Chart 2- Financial Results from ANZ, CBA, NAB &WBC 1999-2013

Chart 3- Tradingeconomics.com, RBA & Financial Results from ANZ, CBA, NAB &WBC 1999-2013