Damian emailed from Australia unsettled by the general torpor among his Australian buddies about the dangers of an Australian housing bubble collapse. He’s been living there for 20 years. Australia dodged the global financial crisis after a modest A$11.8bn Government stimulus but has, along with several other OECD countries ingested global cheap money and quantitative easing programmes. Globally the rescue is now transmuting from a cure to a disease, as the world grapples with the imbalances created and frets at the impact of rising interest rates. Australia is no different and neither is Ireland which is once again experiencing runaway land price escalation – it is not the houses that are more expensive, it is the land.
The Australians have no folk memory of a recession. The last reverse in economic growth is 26 years ago since which, blessed with an abundance of natural resources and a vociferous appetite from East Asia most especially from China, Australia has powered its way to becoming the second richest country in the world on a wealth per head basis, pipped only by Switzerland. But in an eerie echo of Ireland, much of Australian wealth is tied up in housing where 70% of housing stock is owner occupied and many have gone on to buy multiple houses to let, without cash down, leveraging increased equity to get full mortgage finance on an interest only basis, meanwhile rents have flat-lined but prices have kept rising, until this year. This compression of rental yields while liabilities have been climbing followed by a lull in rising values, looks like the hoary old the soft landing phase.
In the classic late stage a flattening of prices after very sharp run ups which have seen median prices in Sydney shoot to A$910,000, Melbourne to A$695,000 and Canberrra to A$575,000, may not mark pause but the beginning of a downturn because average wages have not been rising to match increases in borrowing costs. Nationally Australian debt to income has risen steeply to the second highest in the world at 190% of national income which means that ever more income has been committed to debt servicing.
Insiders will argue that Australians have lots of wealth to absorb a shock, that their economy is nicely balanced, resource rich and well policed, that it is the haven of choice for migrant millionaires and billionaires because it is bolted on to the fast growing economies of East Asia with their huge infrastructural and urban development appetites. All of this is true. Insiders are praying for incomes to catch up with the runaway housing train, stablising the market and de-risking its banks over the next number of years. But a bubble is only as strong as its weakest parts and this one faces a number of risks from rising interest rates, tighter capital and lending controls by the Regulator, a potential slowing in loan rollover and loan supply and ultimately a loss of consumer confidence in the soft landing theory. When consumers become convinced that prices may be cheaper next year, the market moves from stable to goosed.
Recent Australian bank downgrades by credit rating agencies concerned at higher risks has not yet led to any diminution in Australia’s AAA rating where national debt to GDP is a tidy 46% but nearly twice as high as Ireland’s roaring Celtic Tiger. There is justifiable concern at the scale of the Australian bank interest only book. Two years ago interest only mortgages peaked at nearly half of new housing loans driving up the total average in the loan book to close to four in every ten mortgages. The total housing loan book which accounts for 60% of total bank loans stands at A$1.5 trillion (about a trillion Euros) and is roughly equal to current Australian GDP. The financial regulator, the Australian Prudential Regulatory Authority (APRA) hopes to see that ratio fall to three in ten as interest only loans, meanwhile the Reserve Bank of Australia (RBA) has been slashing the base rate from a pre-Lehmann peak of 7.25% to 1.5%, with the market pitching variable mortgage rates between 3.5% to 4% for three year fixed money. The Australians may steer their way out of tightening credit and rising interest rates but I wouldn’t bet the house on it.
During the worst of the austerity years it is estimated that 100,000 Irish people emigrated to Australia bringing the total holding Irish passports down under, like Damian to 250,000 among Australia’s 24.7m population. What should Damian do? A basic test has been past, there is sufficient reasonable doubt about the stability of the Australian housing market, to be cautious, to prepare a Plan B. Damien is moving his cash out of Australian banks in favour of those with little housing market exposure, he’s also openning an account in a European bank regarded as one of the world’s safest and he’s hunkering down in Euros, Gold and Inflation-linked bonds ready to move in when everything is next for sale. Damian is telling his chums to deleverage their balance sheets and sell their buy-to-lets, but expects to be met with puzzled stares. That is what unnerves him more than anything else. If that sounds familiar, it should.
Next month exclusively available from www.jackandjill.ie Eddie Hobbs book, The Pivot, is available to pre-order and is about the excess debt in the global financial system and how to prepare Plan B.