Inquiring minds have been investigating the property bubble down under and are asking the question “How Safe is Australia’s Banking System?”
Australian economist Steve Keen addresses that question and more in a presentation on his blog How to Profit From the Coming Aussie Property Crash (and Banking Crisis). The answer to the question is on pages 19-23
Be prepared to short the banks! In particular, CBA and Westpac.
- 50% of Australia’s mortgage market is held by CBA and Westpac, 25% are held by ANZ & NAB (see CoreData’s Australian Mortgage Report Q1 2010)
- As at December 2009, 60% of CBA’s lending books are mortgages. 50% of Westpac’s lending books are mortgage.1 Both figures are set to continue to grow.
- Look at CBA 2009 annual report—Leverage ratio is almost 20 times (total assets of $620.4 billion against $31.4 billion of equity). Of $620.4 billion of assets, $473.7 billion are loan assets. If around 6.6% of CBA’s loans go bad (any loans, not just mortgages), 100% of its shareholder equity will be wiped out!!2
- Australia’s banks have $13 trillion of off-balance sheet liabilities, according to RBA’s figures!3
In 2008, The Australian reported1, The Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.
Bear in mind I do not make stock recommendations of this nature and neither does Steve Keen. I am merely quoting an opinion from the article Steve Keen referred to.
Global Bust II – Perfect Storm for Australia
Please consider this Email from Australian reader “RP” in response to Global Bust Round II; Australia Mining Contagion; Vindication for Steve Keen Coming; What about the Loonie and Australian Dollar?
As an Australian, I believe that you are totally correct in pointing to Australia’s economic vulnerability, and exposure to global commodity price changes.
Looking into the drivers, global commodity prices have been fueled by Chinese demand, pumped up by massive infrastructure spending.
Australia’s dependence on China thus has one leg in China’s commodity demand, but it also has another leg, which is directly linked to China’s domestic bubble.
For many years Australia has sought “services exports” through attracting overseas full fee paying students to come and live and study in Australia. Many tens of thousands have done so, including from China, on the understanding that they could apply for permanent residency at the end of their course. Citizenship could follow a couple of years later, and then they would be eligible to bring their parents out, under the “family re-union” program.
Over the same period, Australia developed an overvalued property market, to the extent that international benchmarks showed Australian housing to be severely unaffordable.
These two factors came together at the end of 2008, when the Australian Government, fearful of the implications of a collapsing property market, relaxed restrictions on overseas students purchasing Australian residential property.
The inevitable happened. Chinese families with a child studying in Australia (ie the newly monied Chinese) went into the market with their ears back. Demand and prices at the top end in Sydney and Melbourne went through the roof.
Even when domestic (underline) loan approvals started sliding seven months ago, demand and house prices continued to surge, under a wave of foreign demand. Clearly, overseas Chinese cash buyers were driving the market.
Finally, three weeks ago, the Australian Government responded to a political backlash against the unaffordability of housing, and announced the re-introduction of restrictions on the purchasing of residential property by non-residents. Coming just as global share markets turned sharply down, and reports surfaced about a downturn in China’s property markets, the effect on the Australian property market was immediate, and will be huge.
Not only will housing demand shrink, it is likely that supply will increase, as previous buyers try to cash out of a market that suddenly looks risky and toppy.
To quote one example of what is happening. A property near to my home went to auction two weeks ago (in Melbourne the usual selling method is by public auction at the property after a 3-4 week marketing campaign).
This property (http://www.marshallwhite.com.au/?pagecall=property&propertyID;=1334407) was passed in against a reserve of $A1.99 million (=$US1.63 million). There were no bids. The auctioneer tried hard to get a bid from a group of Chinese who had previously been interested in the property. They would not bid. I’d ask you to look at the property description to see how expensive the property is compared with good quality US houses. It will be interesting to see how long it now takes to sell, and what it sells for in the end (although it will be hard to find that information, as it will now be a private sale, and there is no need for public disclosure of private sales).
The upshot is that significant commodity price declines, together with a housing market collapse, would be a perfect storm for the Australian economy.
Thanks to Steve and “RP” for those views from down under regarding the property bubble in Australia.
Mike “Mish” Shedlock
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