Zero Hedge readers might have noted our increasingly bearish tone on all things Australian – economic that is, since the cricket team just whipped the English in the first test match in Brisbane. The focal point of our concern is the housing market and, earlier this month, we discussed how the world’s longest-running bull market – 55 years – in Australian house prices appears to have come to an end. We followed this up with “Why Australia’s Economy Is A House Of Cards” in which Matt Barrie and Craig Tindale described how Australia’s three decades long economic expansion had mostly been the result of “dumb luck”.
As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.
Last week, in "The Party's Over For Australia's $5.6 Trillion Housing Market Frenzy", we highlighted some scary metrics for Australia’s housing bubble cited by Bloomberg. In particular, we showed how the value of Australian housing is more than four times gross domestic product. This is higher than other western nations, like New Zealand, Canada and the UK, which are experiencing their own housing bubbles. The ratio of house values to GDP in the US seems positively tame in comparison.
It seems that it’s nor just us and other market commentators who are becoming progressively more pessimistic on Australia’s outlook. Australians are coming round to the same opinion, as Australia's Domain.com explains (note: Roy Morgan is an Australian market research company).
The number of Australians optimistic about the year ahead has dropped to a never-before-seen low as mortgage holders eye a combination of record-high household debt and the possibility of interest rate hikes in 2018.
According to a Roy Morgan survey taken in mid-November, 31 per cent of people think 2018 will be “better” than 2017 – the lowest figure recorded since the survey began in 1980.
Along with a slide in positivity, the survey showed a spike in active negativity, with 30 per cent expecting next year to be “worse” than 2017 and 39 per cent saying it will be “the same”. Younger Australians are more positive than older generations, with almost half (46%) of 18-24-year-olds expecting next year to be better, while just 20 per cent of over 65s feel that way. In fact, a noticeable drop in optimism can be seen as Australians age.
AMP notes that the greater level of optimism among younger Australian’s is probably due to them being saddled with less debt. Their older countrymen are becoming fearful that a rise in interest rates could lead to a housing crash.
“(Older Australians) have the debt,” AMP Capital chief economist and head of investment strategy Shane Oliver told Domain. “There’s a growing problem in Australia where a lot of people might own their home by the time they’re 65 but they still have a lot more debt than previous generations.
“If you were going to worry about a property price collapse, you wouldn’t be as worried about it if you were a younger Australian – they might actually see an opportunity. If you’re an older Australian with a lot of debt it might be more of a worry for you.” Households are sitting on record high debt, above 190 per cent of income, which is why talk of interest rate hikes have been hitting confidence.
While the Australian central bank sees a rate hike as unlikely in the “near-term”, Domain.com notes that the next move is likely to be up.
Reserve Bank governor Philip Lowe reiterated last week he sees the next move from the central bank as being upwards, and while most economists expect those hikes in late 2018 or even 2019, ANZ is hanging onto its call that two rate hikes await next year.
While Australian citizens are the second most-indebted in the world, the country’s banks are the most exposed to housing debt.
They are also potentially in the firing line for a government enquiry as AMP’s Shane Oliver tells Domain.com.
Meanwhile, confidence in the institutions to which Australians are so deeply indebted has scarcely been lower, with scandals and the threat of a royal commission a part of the landscape.
“The bank questions seem to keep coming – it seems to have a life of its own,” Dr Oliver said. “This idea of the royal commission or commission of inquiry… putting aside the should we or shouldn’t we… that constant talk that there’s some sort of problem with the banks is probably affecting people as well.”
This was Australia’s ABC News earlier today.
The calls for a full inquiry have been relentless for years, emanating from a broad section of the community — from farmers, small business and households, jaded and disillusioned with the industry's rampant profiteering, fee gouging and blatant disregard for the law. How many times can a Commonwealth Bank chairman sincerely apologise for a yet another breach of trust? What, pray tell, will be the cause of next year's?
But the overwhelming reason for an inquiry rests on just one principle — accountability. What has been forgotten in the endless round of scandals in recent years is that the Australian banking sector is a taxpayer subsidised industry. It's an industry that pays ridiculously bloated salaries to its leaders; that showers itself with massive bonus payments when profits are soaring but instantly demands taxpayer protection and support when the tide turns.
Having resolutely opposed a formal enquiry, the Australian government may have its hand forced as Liberal National Party Senator, Barry Sullivan, is threatening a to put a motion to the senate, possibly as early as this week. This might undermine confidence in Prime minister, Malcolm Turnbull. Furthermore, as ABC News notes, the banks have also taken the usual, and likely misguided step, of appealing to their biggest critics.
Senior Coalition members are terrified, having been forced for so long to walk the tightrope between hauling bankers into line and staunchly opposing an inquiry. If the motion gets up, it would be a major loss of face for Mr Turnbull and the Government, with serious ramifications for his grip on leadership.
In a show of desperation, the banks have opted to go straight to the public, the area where they possibly have the least support, with a multi-million dollar propaganda campaign on free to air television and newspapers. And the fight is likely to get ugly.
With pessimism on the part of Australian public already at record low levels, we suspect that a messy political confrontation between politicians and the banking sector could only be an additional negative for the popping of Australia’s housing bubble. AMP’s Shane Oliver is not optimistic, as Bloomberg notes.
And the general sense of “malaise” could be here to stay, according to Shane Oliver.
“It seems the old days of ‘she’ll be right, mate died off with the Holden Ute,” he said.
For those unfamiliar with the Australian vernacular, a Holden Ute is an iconic pick-up truck. Sales hit record lows last year and the Adelaide manufacturing plant is being shut at the end of this year.