Who crashed the economy?

If you were the Treasurer announcing your budget tomorrow, what would you cut and why?

Is it possible to grow a housing bubble the size of Australia’s with prudent lending standards?

So it probably comes with little surprise when Denise Brailey from the Banking and Finance Consumers Support Association (BFCSA) suggests there could be an estimated $100 billion worth of toxic loans in Australia. Bill Hoffman of the Sunshine Coast Daily sums it up as “AUSTRALIA has the world’s biggest sub-prime mortgage problem per head of population.”

Today tonight has aired a story tonight on the large toxic loans banks are providing the unemployed. The video can be watched here.

» Toxic loans – Today Tonight, 10th May 2013.
» ‘Hidden’ loan trouble looms across Australia – The Sunshine Coast Daily, 4th May 2013.
» Victims reveal ‘rogue’ swoops – The Sunshine Coast Daily, 4th May 2013.
» Senate briefed on Subprime crisis : Day 1 – Who crashed the economy, 8th August 2012.
» Senate briefed on Subprime crisis : Day 2 – Who crashed the economy, 9th August 2012.
» Banks try to hold Subprime floodgates closed – Who crashed the economy, 10 August 2012.
» Banking and Finance Consumers Support Association

Treasurer Wayne Swan says it is “utterly irresponsible” to call today’s 25 basis point cut to the official cash rate as a cut to “emergency” levels. He is referring to the emergency low 3.00 per cent the cash rate reached after the collapse of Lehman Brothers and at the height of the global financial crisis. So to avoid conflict, we will report the official cash rate now sits at levels “lower than emergency lows”.

As the economy continues to deteriorate, today’s slash to 2.75 per cent is the lowest setting ever announced by the Reserve Bank after it started setting rates in 1990. It is also the lowest cash rate in 53 years. It could be seen as a tipping point.

The media release from the Reserve Bank of Australia states “The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued.”

This time last week, the Reserve Bank of Australia released credit aggregates for March 2013 showing housing finance once again fell to the lowest level since records existed 37 years ago. Monthly housing credit growth now sits at just 0.37 per cent.

Even with interest rates at record lows, the confidence to borrow for a huge mortgage required at today’s mind-boggling prices is close to non-existent. The Reserve Bank will hope today’s cut will turn this around, but it is unlikely to stroke much, if any interest, for buyers to leverage into a bubble.

Today’s rate cut is the first this year. Figures from the Australian Bureau of Statistics (ABS) Australian National Accounts show interest payable on dwellings as a percentage of household net income stood at 5.7 per cent in the last quarter of 2012. Record levels of household debt means it’s still noticeably higher than in 1989 when interest rates where in-excess of 17 per cent.

The ABS today announced official house prices nudged 0.1 per cent higher in the March 2013 quarter, bringing year on year gains to 2.6 per cent.

The move today by the Reserve Bank could also be seen as an attempt to cool the strong Aussie dollar. The Australian Industry Group manufacturing index released last Wednesday shows manufacturing has slumped to a four year low in April under the burden of our defiant dollar.

» Interest rates not at emergency GFC levels: Swan – Yahoo Finance, 7th May 2013.
» Australia Manufacturing Gauge Plunged to Four-Year Low in April – Bloomberg, 1st May 2013.
» Home loan growth stuck at record lows – The ABC, 30th April 2013.

Among the backdrop of growing budget deficits, the government struggling to fund Gonski and the National Disability Insurance Scheme (NDIS), the Australian Taxation Office (ATO) yesterday released figures showing negatively geared property investors lost a cool $13.285 billion in 2010-11 with much of this loss funded by the taxpayer. It wasn’t good timing for the government, but it has help propelled the issue to the forefront for more debate.

An article featured today on Fairfax online portals titled, “Negative gearing losses a key drain on revenues” is glowing hot with 248 comments. It reports on comments from Bank of America economist Saul Eslake saying “I have to translate the words ‘negative gearing’ to people overseas because it just sounds crazy to have a system that rewards people for losing money.”

According to the tax office, Australia had 1,811,174 property investors in 2010-11. Of those, 1,213,597 made losses totalling $13.285 billion.

But any debate is likely to be fruitless. Simply, Australia is experiencing the largest property bubble in its history. Any government which abolishes negative gearing is likely to instantly pop the bubble and be blamed for plunging Australia into a severe recession. Throw in a slowing mining boom, and a manufacturing sector decimated by the high Aussie and it could easily turn into a depression. It’s a lot of blood to have on your hands for $13 billion.

Should Negative Gearing be an election issue?

» Negative gearing losses jump – Macrobusiness, 30th April 2013.
» Negative gearing losses a key drain on revenues – The Age, 1st May 2013.

ABC News 24 interviewed Dr Nigel Stapledon on the Australian Housing Market on Friday. The interview upload is courtesy of Macrobusiness.

Dr Nigel Stapledon remarks, “Well Australia has been pretty lucky on the housing front in recent years. In the US we saw a major correction downwards in house prices, Australia missed out that, and a lot of it’s to do with the resources boom.”

“So if you go back in the early 2000’s house prices in Australia were probably, at least as over valued than they were in the U.S., where the correction in the U.S. happened by a sharp correction in prices, here it has actually happened by a significant up trend in rents, so that has corrected the sort of misalignment in the house price, and that significant rise in rents very much aligns with the resources boom.”

“And as we know the Treasurer is having trouble balancing the books because with the resources boom coming off, revenues are getting a bit tighter and the same things are going to start to happen to household incomes and hence also a slowing also in rental growth.”

We will let you decide if there has been a “significant up trend in rents” and if this will save us? But most of what Dr Stapledon says is good information and the video is worth a watch. He uses the word ‘lucky’ to describe our situation, dismisses the notion that inflation will reduce the value of your debt, and warns against borrowing to the hilt and with the idea that house prices will double every 7 to 10 years.

» How mining saved housing – Macrobusiness, 29th April 2013.

Stats out from the Australia Bureau of Statistics show continued weakness in the first home buyer segment. The portion of first home buyers taking out loans fell 1.5 per cent in February to make up only 14.4 per cent of the market.

Analysis from ANZ show changes to first home buyer grants in New South Wales, Victoria, Queensland and the Northern Territory has caused the plunge. Without the incentive of free money, smart first home buyers are deciding to defer home ownership.

Loans for owner-occupier homes were up 2 per cent in February showing a healthy pick-up. Loans for the construction of dwellings increased 1.5 per cent.

» 5609.0 – Housing Finance, Australia, Feb 2013 – Australia Bureau of Statistics, 15th April 2013.

» Housing finance rises but first time buyers absent – ABC News, 15th April 2013.

Thursday morning I almost burn a hole in my shirt. I was ironing my daily attire when Steve Mickenbecker from Canstar joined Kochie on Sunrise to talk about if it is cheaper to rent than buy.

Kochie introduced the segment with the following slide showing the stats over the past decade:

While average wage growth (probably distorted by mining) increased a little more than inflation over the last ten years, average mortgage repayments have surged, up 105 per cent. Kochie explained the mortgage is taking a larger chunk of your income now despite lower interest rates.

The following graph shows house asset prices have outstripped both CPI and rents over the last decade:

This has led to a significant rise in household debt as a percentage of household disposable income:

And while interest rates might be at close to record lows, mortgage repayments are a product of both interest rates and the amount you choose to borrow. Interest rates are low, but debt is astronomical. This results in substantial interest payments as a percentage of household disposable income. From this graph, you can see households today pay a greater portion of income to mortgage interest repayments than in 1989 when interest rates were over 17%.

Apparently Steve Mickenbecker has been crunching the numbers. Kochie asked “Were you a bit shocked by the mortgage increases?”

Steve Mickenbecker responded, “People talk about affordability in quite short term measures, they say well affordability is improving over the past couple of years. When you look at it over 10 years, you really see the impact. And doubling of repayments for people entering the market is a massive hike up when salaries have only gone up half that amount. So new home buyers are really paying a lot.”

At this stage my arm was frozen, iron caught on my shirt pocket, my eyes glued to the set. We have someone that knows what they are talking about on main stream television. I was truly stunned.

Steve Mickenbecker continued, “Well shock, should not have been, because property doubles every 10 years or so.”

D’oh! We were so close.

Hopefully for some gluey viewers, they were concentrating more than I was on my ironing and questioned how house asset prices/interest payments rising faster than wages are sustainable in the long term? If prices double every 10 years, but someone’s ability to make the repayments don’t, what gives? We may have dual income households today, but what does the future lie? In twenty years, will two couples (four breadwinners) occupy a house together? In fifty years, four couples (eight breadwinners) in a three bedroom house? Maybe the dog and cat will have to get a job to help service the mortgage?

If you scroll up to the top graph, did house prices double in the 10 years prior to last decade? Maybe, just maybe, house prices don’t actually double every ten years. Maybe the last ten years were an anomaly, or bubble if you like? Maybe Mickenbecker, like the average real estate spruiker, only looks at prices in “quite short term measures,” say under 10 years?

Economist and Yale Professor Robert Shiller created a real home price index for the United States (blue line on the graph below) going back over 120 years. Real means the house asset prices have been corrected for inflation. What you can observe is house prices have not increased much more than inflation over the 110 years – i.e. in the late 1990′s the index was barely over 100 where it started. However, quite visible is the very distinguishable “Subprime” housing bubble that in essence triggered the Global Financial Crisis. You will also note, house prices in the United States are almost back to long term trends (index of 100).

Ex Westpac Chief Economist and Academic at the University of New South Wales, Nigel Stapledon has done the same for Australia, going back 130 years to 1880. While there is a slight upwards trend postdating rent controls during world war II, there is a very distinguishable and sharp rise in house asset prices after 2000.

Answering the age old question of if it is better to rent or buy, Mickenbecker said “.. Rent is cheaper, buying costs you more in current terms – however you don’t get the pleasures of home ownership, the stability of home ownership. And probably most importantly, participate in capital gains. And if properties double every 10 years, and you are renting, you are funding that, for your landlord.”

You can watch the interview here.

On a side note, We are ramping up our facebook page. Please like us and share among your friends.

» Renting vs buying – Sunrise, 11th April 2013.

After last month’s anomaly, the unemployment rate for March has increased to 5.6 per cent, up 0.2 per cent. While 36,100 jobs were lost, a falling participation rate helped soften the headline increase.

This compares to Roy Morgan’s unemployment rate of 10.8 per cent for March, down 0.1%.

Contributing to rising unemployment in the coming months will be jobs lost in the automotive manufacturing sector after Holden this week announced 500 jobs to go, the biggest round of cuts from Holden since July 2009. 400 jobs will go at the production line in Elizabeth, north of Adelaide and 100 engineering jobs from Melbourne. Many more are expected in the component supply chain, as the industry adjusts to lower volumes.

While job cuts are never pleasant at the best of times, what is angering the government and tax payers is the amount of government funding Holden has received to keep automotive manufacturing & jobs alive. Figures from Holden suggest it has received $2.17 billion dollars worth of handouts from state and federal governments over the past 12 years. Ford has received $1.1 billion, while Toyota got handouts of $1.2 billion.

The Australian reports “The cuts come barely a year after the company received a $275 million assistance package, $215m of which was from the commonwealth, $50m from the South Australian government and the remainder from Victoria. The package was intended to underwrite investment in new models and preserving manufacturing until at least 2022.”

Another industry currently getting substantial government handouts is the residential construction industry. After the predictable fate of the Automotive sector, should government’s now be questioning the fortune of spending good money after bad by propping up jobs in the construction industry? The residential construction sector is in a downturn of depths that have not been seen in decades. The reason is severe unaffordability of the product they offer. Can throwing endless buckets of money at it, fix this problem?

Small and medium business leaders, many close to insolvent, should rightly be asking – where is their bailout?

» 6202.0 – Labour Force, Australia, Mar 2013 – The Australian Bureau of Statistics, 11th April 2013.

» Holden ‘cannot guarantee jobs’ after axing 500 jobs – The Australian, 9th April 2013.

Bank of Queensland CEO Stuart Grimshaw is just one of a growing number of individuals who can’t justify property prices in this country, and chose to rent instead.

According to the Courier Mail, Mr Grimshaw rents a home in inner Brisbane.

“Property in Brisbane is a bit expensive,” said Mr Grimshaw.

“Where I’ve looked to buy (here), I just couldn’t justify the prices.”

Read more here.

» Don’t Buy Now! Property Buyers Strike – Facebook.

» BoQ boss says Brisbane homes overpriced – The Courier-Mail, 5th April 2013.

TV producer and freelance writer, Tom Whitty’s frustrations of living in the largest housing asset bubble in Australia’s history has gone viral today. What originated in the main stream media has spread rapidly to social media and forum sites around the country. At the time of writing this, it has 862 comments on the Sydney Morning Herald, the link has been tweeted 176 times and shared on 1200 facebook pages.

Tom shares his frustration of being dragged around by his girlfriend, looking at over priced and under quoted dog boxes out of this price range. He is tired of lack of political willpower to do anything about negative gearing, or the lack of enforcement of regulation in the real estate industry.

You can read his frustrations here.

» Sick and tired of chasing dreams of finding a home – The Sydney Morning Herald, 5th April 2013.

Generous government incentives, cash rebates, flat screen televisions, motor vehicles, holidays and even cooking lessons have failed to prevent new home sales slumping 5.3 per cent in February according to data released today from the Housing Industry Association (HIA).

Volatile unit sales fell 11 per cent, while detached homes fell 4 per cent. Victoria lead the falls with detached new home sales plunging 13.7 per cent, while South Australia followed behind experiencing falls of 6.7 per cent in February.

The Sydney Morning Herald reports on comments from MacroBusiness economist Leith van Onselen indicating sales of detached new homes is now at the lowest point in the 16 year history of the HIA series.

» New home sales say no to recovery – Macrobusiness, 3rd April 2013.
» New home sales fell 5.3pc in February, says Housing Industry Association – The Australian, 3rd April 2013.
» New home sales hit 16-year low in February – The Sydney Morning Herald, 3rd April 2013.

House price statistics released today from RP Data shows the housing market is back in force with national dwelling prices increasing 1.3 per cent in the month of March and 2.8 per cent for the quarter. According to experts, this marks the “best” result in three years. If annualised, prices are once again increasing by unsustainable double digit figures.

For the March quarter, Hobart dwelling prices surged 6.1 per cent, Perth 4.3 per cent, Canberra 3.8 per cent, Sydney 3.4 per cent, Melbourne 2.5 per cent, Darwin 2.4 per cent and Brisbane 1.9 per cent. Adelaide was the only capital city to be experiencing falling prices, losing 0.5 per cent for the quarter.

Abnormally low interest rates have been the stimulus to many a housing asset bubble, and this time is no different. The Reserve Bank now has a dilemma on its hand – does it increase interest rates to prevent an even bigger housing asset bubble? Only last year, Governor Glenn Stevens said the Reserve Bank should not “engineer a return to a housing price boom.” But increasing the official cash rate is likely to see the Aussie Dollar strengthen even more, putting pressure on Australia’s fragile manufacturing sector.

The Reserve Bank decided today to keep the official cash rate unchanged at 3.00 per cent, but there is speculation the cash rate will be heading up later this year.

Earlier last month the Australian Bureau of Statistics released housing finance figures for January showing the number of dwelling commitments for owner occupier’s fell 1.5 per cent, commitments for construction of dwellings fell 0.2 per cent and commitments to purchase established dwellings fell 1.9 per cent. The only segment to see an increase in commitments was for the purchase of new dwellings – up 2.3 per cent on the back of generous grants and incentives from both state governments and builders. If you took the artificial incentives away, would the number still be positive?

In February we reported that the number of first home buyers participating in our market had fallen to 14.9 per cent in December, the lowest level since 2004. There was speculation this may have been a once off fall due to changes in first home buyer grants and data in subsequent months would shine further light on this trend. Well the data is in, and the portion of first home buyers in the market in January was no change – just 14.9 per cent. First home buyers have abandoned the market.

But while the number of housing finance commitments fell, the aggregate value of commitments increased. This suggests there may be fewer loans, but they are bigger and could explain why prices are rising. Leading the increase in commitments by value is the investment segment, with the value of finance commitments for investment housing increasing 4.4 per cent in the month of January.

Last Thursday the Reserve Bank released financial aggregate data for February showing growth in housing finance sits at an annual rate of just 4.4 per cent, and once again is the lowest figure since records started 36 years ago. Annual growth for owner-occupier mortgages sits at 3.9 per cent, while investor mortgages come in at 5.6 per cent. The Reserve Bank believes some of the weakness in credit growth is due to households using the low interest rate environment to pay down debt. Because investors have tax incentives to do otherwise, growth in credit for this segment is greater.

With the data on hand, it would appear investors are leading the market and while turn-over is still low, investors are paying a premium to get in on the “cusp of the next boom”. Could dismal returns on bank deposits also be driving some of this shift into property?

In the owner occupier segment, job security appears to be a valid concern. The Glenworth Homebuyer Confidence Index we reported on last week paints a bleak picture of deteriorating confidence. But, it was to be expected jobs will be lost as households deleverage and consumption consequently falls.

Concerns of job security comes amid Australian Bureau of Statistics unemployment data released last month showing more than 70,000 jobs were created, the biggest increase in 13 years. But, It’s hard to find anyone outside of Canberra who believes these figures. It seems almost everyone knows someone who has lost a job recently. A private survey by Roy Morgan indicates unemployment sits at 10.9 per cent based on their methodology. Looking forward, the number of job vacancies fell 10.1 per cent in February alone.

Employment will be the key to the future performance of the housing sector baring any intervention by international markets. Credit Rating agencies continue to warn that Australia’s large household debt levels leave it vulnerable to external shocks.

» First home buyers out, investors move in – The ABC, 13th March 2013.
» First-home buyers exit the housing market – News Limited, 14th March 2013.
» Where are all the first-home buyers going? – News Limited, 23rd March 2013.
» Fitch reaffirms Australia’s AAA credit rating – The ABC, 29th March 2013.
» RPT-Fitch affirms Australia at ‘AAA’; stable outlook – Reuters, 28th March 2013.
» Labor rejoices in surprising unemployment figures – The ABC, 14th March 2013.
» Jobs put paid to RBA gloom – The Australian, 15th March 2013.
» Job vacancies fall 10.1pc to three-year low – The Australian, 28th March 2013.
» Job vacancies fall 10% – Yahoo!7 Finance – 28th March 2013.
» Job worries keep mortgage holders stressed – Yahoo!7 Finance – 28th March 2013.
» Annual mortgage credit growth hits new low – Macrobusiness, 28th March 2013.

According to Bloomberg, the Australian Genworth Homebuyer Confidence Index has declined to 93.4 in March, down from 98.4 last recorded in September 2012.

Despite lower interest rates, the number of borrowers who expect to hit mortgage repayment difficulties in the next year has spiked to 27 per cent in March 2013, up from 19 per cent in September 2012, the last time the bi-annual survey was conducted.

The story is even worse in the first home buyer segment. The confidence index for this segment now sits at 85.9, down from 98.5 in September. The number of first home buyers expecting to have trouble repaying their mortgage has surged to 41 per cent, up from just 18 per cent in September.

The cause of the lower confidence at a time of record low interest rates is thought to come from deteriorating job security.

These latest results from mortgage insurer Genworth, goes against the grain of both sentiment portrayed by real estate professionals and current unemployment data.

» Australian Homebuyer Confidence Hits Lowest Since 2008 – Bloomberg, 27th March 2013.

Cyprus is the latest country joining the list with Greece, Ireland, Portugal and Spain to receive a bailout. While Cyprus only makes up 0.2 per cent of the Eurozone economy and the bailout is worth 10 billion euros, it is making news headline around the world for its unprecedented ‘levy’ on deposit holders.

Deposit holders with less than 100,000 euros will be hit with a once off tax at 6.75 per cent, while those with over 100,000 will contribute a higher 9.9 per cent.

The announcement has sparked outrage with everyday citizens, queuing to withdraw their life savings. However, it is believed the government has frozen electronic transfers until Tuesday so the levy can be processed on the Monday public holiday.

The ounce of logic for this unprecedented decision comes about as almost half of the depositors are foreign, many wealthy Russians. In addition to the Eurozone bailout, Russia is planning to extend a loan of 2.5 billion euro by five years.

But this is no consolation for Cyprus citizens who will wake up Tuesday morning poorer, some losing as much as 10 per cent of their life savings. In a world economy where we should be encouraging prudence, this decision will undermine any belief in saving, and could have wide spread implications.

» Why today’s Cyprus bailout could be the start of the next financial crisis – The Washington Post, 16th March 2013.
» Cyprus’ savers bear brunt of eurozone bailout – The ABC, 17th March 2013.
» Cyprus shellshocked over eurozone bailout – The Sydney Morning Herald, 17th March 2013.
» Cyprus set for emergency parliamentary session over bailout – The Australian, 17th March 2013.
» Cyprus bailout comes at a cost to bank depositors – MarketWatch, 16th March 2013.
» Cyprus bailout: Man threatens bank with bulldozer – The BBC, 16th March 2013.

QBE Insurance has been forced to withdraw building indemnity insurance from July after a rise in the number of builders becoming insolvent. Legislation in many states requires home builders to hold indemnity insurance to protect the property owner in the event the builder collapses, disappears or the builder passes away.

A QBE spokesperson said “QBE has reassessed its participation and we consider it no longer viable as significant increases in premiums would be required.”

Lobby group, Master Builders Australia says the industry is facing a crisis not seen since the collapse of HIH.

The Australian reports, “The South Australian Labor government said it would not let the market collapse, with options now being considered to cover the shortfall.”

With the market expected to further deteriorate, it is unlikely any insurer will touch the sector forcing the South Australian state government to pick up the pieces at the expense of the taxpayer.

» QBE pullout tipped to spark building crisis – The Australian, 15th March 2013.

» QBE Insurance to withdraw from building indemnity insurance market in South Australia due to too many builder insolvencies – Adelaide Now, 15th March 2013.

» ‘No better time’ to flog a dead horse – Who Crashed The Economy, 20th October 2012.

Last Monday, we briefly reported on new regulations being introduced by the Chinese Government to help curb rampant property speculation and help put a lid on China’s property bubble. The shock move created jitters in world stock markets, including wiping approximately $21 billion from Australia’s resource lead bourse.

The Chinese Central Government has made repeated attempts over the past two years to rein in property speculation, but house prices have recently showed signs of moving in the wrong direction. As a result, on the 1st of March, the Government introduced further measures including the re-introduction of a 20 per cent capital gains tax, but failed to provide any dates for when the tax will come into play. This uncertainty has property investors flooding real estate offices in a bid to sell their empty investment properties before the capital gains tax comes into effect.

The Shanghai Daily reported Deovolente researcher, Lu Qilin saying “The latest announcement by the central government to implement a 20-percent capital gains tax on existing home transactions has had an immediate impact on the local market.”

Forbes reports on data from the Beijing Municipal Commission saying 9,400 homes were sold in Beijing last week, up 279.5% from the same time last year. Existing home sales have tripled last week in Beijing.

It is still earily days and it is unclear what longer term effect these new measures will have on the Chinese property market and what this will mean for Australia. Many Chinese investors purchase brand new homes as a place to park their wealth. They do not rent these premises out for fear tenants cause wear and tear, hence devaluing the property. In August 2010 we reported on data showing 64.5 million urban electricity meters recorded zero electricity consumption over a 6 month period indicating empty apartments suitable for housing over 200 million Chinese. This followed a report earlier that year from China Reality Research suggesting almost a fifth of all recently sold apartments were kept vacant.

If a capital gains tax frees up these empty homes for first home buyers, then it could be expected the sales of new homes and apartments, built using some of Australian resources to come under significant pressure.

» Selling Frenzy In China As Gov’t Slams Housing Bubble With Tax Hike – Forbes, 12th March 2013.
» Planned tax revives housing transactions – The Shanghai Daily, 13th March 2013.

Ratings agency Moody’s believes a severe economic shock should see Canadian house prices plunge as much as 44 per cent. The assessment has Canada joining the ranks of Australia, Spain and the United Kingdom in the club of high flyers where a run-a-way housing market has seen housing market fundamentals shift from sustainable to “overheated”.

“As with Australia, Spain and the U.K., we expect house prices in Canada to suffer the most due to the misalignment of current house prices with historic fundamentals,” Moody’s said.

According to Moody’s, house prices in Canada has “far outstripped” growth in incomes, leaving the country exposed to significant shocks.

After a brief period of cooling, house prices in Australia could be about to make a short term resurgence. Unusually low interest rates (easy money) was one of the contributing factors to house asset bubbles around the world, and it would appear the Reserve Bank’s three per cent cash rate setting combined with the unrelenting property spruiker has the green shoots sprouting once more.

But with asset prices and household debt still sitting at close to records high, our market, like Canada’s could be just an economic shock away from tipping. Just in case, the RBA has quietly increased the Committed Liquidity Facility to $380 billion…

Stock markets hitting all-time highs in recent weeks have triggered renewed talks of GFC 2, a more severe and damaging version of GFC 1. After much of the world spent more than they earned for a good portion of last decade the only ‘solution’ governments have found so far is to go on bigger spending sprees to help stave of recession. Leaders may literally avoid recession and in making these bubbles bigger, plunge countries into depression.

The majority of the world’s financial issues sit unresolved, slowing forming into a head. China turned to fixed asset investment to stave off the effects of the GFC, in turn leading to a large fixed asset and debt bubble. America has lost count what round of quantitative easing they are now in, not to mention the fiscal clift, sequesters and debt ceilings. Eurozone is simply a mess, and now Japan has joined the bandwagon with the aim to end years of deflation with a boost to its quantitative easing programs.

As Nouriel Roubini outlook stands, “short-term bullish, long-term catastrophic.”

» Moody’s ‘stress’ analysis assesses 44% decline in Canadian housing prices – The Financial Post, 11th March 2013.

» Mother of all bailout funds – The Age, 6th March 2013.

1.5 per cent was wiped off the value of Australian stocks today, in part on the news the Chinese government is tightening regulations to help contain China’s Housing Bubble. The Shanghai Composite fell 3.6 per cent dragged down by some construction stocks falling as much as 10 per cent.

Australia has been one of the benefactors of this boom, supplying resources to help build these empty cities.

America’s 60 Minutes has just aired a story on China’s property bubble, dubbed the largest housing bubble in history.

China turned to fixed asset investment to help offset collapsing demand for its manufactured products during the GFC.

» China’s real estate bubble – 60 Minutes, 3rd March 2013.

» China moves to curb property speculation – Macro Business, 4th March 2013.

» Stocks slump on Chinese slowdown fears – The Sydney Morning Herald, 4th March 2013.

» China property bubble close to ‘Tipping Point’ : Zhiwe – Who Crashed the Economy, 28th September 2011.

» Is China’s Construction Bubble ready to Burst? – Who Crashed the Economy, 25th June 2011.

» China extends stress tests to steel & cement – Who Crashed the Economy, 6th August 2010.

It’s the end of the month again and time for another update from the RBA on private credit aggregates. The trend continues with another all time record low for growth in annual housing credit growth, this time down to just 4.4 per cent.

On a monthly basis, there was no change for owner-occupier housing with growth remaining at a positive 0.3 per cent, but a slight kick up in investor appetite for debt to 0.5 per cent. This caused a monthly rise on overall demand for housing debt to 0.4 per cent.

» Financial Aggregates, January 2013 – The Reserve Bank of Australia, 28th February 2013.

» Annual mortgage growth plumbs fresh lows – MacroBusiness, 28th February 2013.

S&P has reaffirmed Australia’s AAA credit rating for now, but has warned a number of vulnerabilities exist.

One vulnerability is a housing correction due to the “substantial [household] debt mainly due to elevated property prices” in Australia.

The report indicated “The sustainability of high household debt levels has not been tested in an environment of high unemployment for a long time.”

“Australian house prices, relative to household incomes, are also elevated. While there has not been a build-up of aggregate excess supply, the housing market continues to appear somewhat vulnerable to a downturn, in our view.”

Other concerns include Australia’s increasing reliance on overseas funding and Australia becoming increasingly interlinked with China’s growth and business cycle.

» S&P gets positive on Australia – MacroBusiness, 27th February 2013.
» AAA rating vulnerable to debt, house prices: S&P – The Australian Financial Review, 27th February 2013.
» Economy strong, but housing vulnerable: S&P – The Sydney Morning Herald, 27th February 2013.
» S&P rating safe, but foreign debt a worry – Yahoo 7/aap, 27th February 2013.