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In this week's Australian Alert Service
17 October 2018

Housing bust demands urgent solutions

The downturn in Australia's Sydney-Melbourne-dominated housing market is suddenly very serious. Due to the major banks' exposure to mortgage lending, an Australian housing crash inevitably means a banking crash. The need for solutions is not academic: either we achieve a Glass-Steagall banking separation to protect savings and the real economy, or the bank regulator APRA will use its powers to "bail in" the public's deposits to prop up banks, but that won't be enough to save their system.

There's a sense of déjà vu about the current situation in the housing market. In 2007-08, the Citizens Electoral Council headquarters in Melbourne received countless anecdotal reports from all over Australia that pointed to a brewing housing crisis. Very little of the turmoil being reported to the CEC was covered in the mass media. We now know, however, that plunging prices had alarmed policy makers at the time, and as part of its 12 October 2008 rescue package for the banks, the Rudd government intervened to prop up and actually push up the housing market by tripling the first homebuyers grant, which kicked off a new expansion of the housing bubble that only stopped this year.

The bubble hasn't just stopped expanding; it's tanking, and nerves are fraying. Less than a month after economist Stephen Koukoulas challenged Digital Finance Analytics' Martin North to a bet that North's scenario of a 45 per cent fall in house prices wouldn't happen, he said to Sky News on 15 October, in response to a question about the collapse in weekend auction clearance rates in Sydney, "I'm getting worried."

Koukoulas is not alone. Australia's biggest superannuation fund, AustralianSuper, is actively preparing for a housing plunge. On 9 October AustralianSuper announced a rule change to come into effect by mid-November that "in exceptional circumstances in response to a market stress event" it will freeze withdrawals and contributions to its property investment funds for up to two years. "If the market experiences a stress event which causes lots of investors to sell property assets at the same time, or makes it more difficult for investors to finance transactions, we may not be able to find willing buyers at reasonable prices", AustralianSuper explained to the 40,000 of its members who have flocked to its popular property funds, 4,000 of whom have parked more than 70 per cent of their entire super balance in these funds.

The 11 October Australian Financial Review reported that investment bank Morgan Stanley had informed its clients that "tighter credit and overbuilding had worsened its house outlook on property prices". It is now forecasting the deepest "correction" to house prices since the early 1980s. Sydney property consultant Edwin Almeida has long warned of oversupply, but he told DFA on 14 October that even he is surprised at how quickly prices are starting to fall. Like before 2008, the CEC is again getting anecdotal reports of 20-plus per cent falls in prices in Sydney and Melbourne in less than a year—much higher than the official figures. MacroBusiness on 16 October reported a Roy Morgan Research survey which showed that households with no equity in their homes, many of whom would now have negative equity (i.e. owe more than their homes are worth), has risen more than 11 per cent this year. On 11 October MacroBusiness showed how far prices can fall, with a list of mining towns in Queensland and Western Australia where prices have plunged by up to 84 per cent from their peaks in the mining boom in 2011. While Sydney and Melbourne aren't affected by mining, with 40 per cent of all economic activity in Australia related to housing in some way—banking, real estate businesses, construction, regulation, surveying, infrastructure—a fall in prices will set off a vicious downward spiral more devastating than the end of the mining boom in those towns.

The situation is that stark. A bust is inevitable—we must win banking separation, or expect bail-in.

Articles include the following:

  • More evidence that APRA can 'bail in' Australian bank deposits
  • 'Box of chocolates' fight to save Australia from TPP looting
  • Labor MP's foreign meddling puts Canberra's hypocrisy on display
  • IPCC climate report: fact vs fiction
  • Former Mayor of London: no single superpower will again dominate the world
  • MI5's 'licence to kill' revealed
  • Dangerous new derivatives for dummies
  • 'Winter is coming': time to replace the financial system!
  • Italian Government: Instead of austerity, emulate FDR's New Deal to stabilise economy
  • Italy confronts EU, works with China
  • Chinese to take BRI to Korean Peninsula
  • Trump releases long overdue manufacturing study
  • 'Made in China 2025' is Hamiltonian policy
  • New Bretton Woods: A rendezvous with destiny
  • ALMANAC: Why accusations against China for 'debtbook diplomacy' are a hoax Part II


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