23/03/2019 Australian economy: Australia could be ‘first domino to fall’ in collapse

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Australia could be ‘first domino to fall’ in next GFC
A collapse in the housing market could spill into the banking sector and send “shockwaves” through the global economy,
experts have warned.

Frank Chung @franks_chung MARCH 19, 2019 4:01PM

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Australia could be the “first domino to fall” in a global economic crisis for the first
time in its 200-year history.
That’s according to economist John Adams, Digital Finance Analytics founder
Martin North and Irish financial adviser Eddie Hobbs, who argue Australia’s
economy is looking increasingly similar to Ireland’s prior to the 2007 housing
collapse. Australian Economy: Heading for recession?

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For nearly three years, Mr Adams has been predicting a looming “economic
Armageddon” in which a vulnerable Australia is overwhelmed by an overseas
Negative Bad news Unemployment Risks
financial crisis due to property, household debt and net
gearing foreign
hidden in debt bubbles. hits eight- ‘heightened’
changes to good job year low but don’t
But as house price falls across the country begin to pick
cost renters
up steam, the former
figures panic: RBA
Coalition adviser has$5K
revised his view. “Australia has never been the first economic Log in No account? Sign up

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23/03/2019 Australian economy: Australia could be ‘first domino to fall’ in collapse
domino to fall during a global economic crisis,” he said.
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He points to previous downturns including the 2008 crisis, the 2001 dotcom bust, the
1997 Asian financial crisis, the 1991 recession and the 1974 OPEC crisis, all of
which started overseas — from New York to London to Thailand.
Today, he argues, given Australia has one of the highest levels of household debt in
the world, and the “stark parallels” between Australia in 2019 and Ireland in 2007,
“there is a very logical case to make that Australia may buck this trend and go first”.
So what are the parallels with Ireland?
Australia’s household debt to GDP was 120.5 per cent as of September last year,
according to the Bank for International Settlements, one of the highest in the world.
In 2007, Ireland was sitting at around 100 per cent.
At the same time, the RBA puts Australia’s household debt to disposable income at
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188.6 per cent. Ireland was 200 per cent in 2007, while the US was only 116.3 per
cent at the start of 2008.

RBA figures also show more than two thirds of the country’s net household wealth is
invested in real estate. In 2008, that figure was 83 per cent in Ireland and 48 per cent
in the US. Meanwhile, 60 per cent of all lending by Australian financial institutions
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is in the property sector. RECESSION
In 2007, the International Monetary Fund gave the Irish economy and banking WATCH 2019 
system a clean bill of health and suggested that a “soft landing” was the most likely
outcome. Last month, the IMF said Australia’s property market was heading for a
“soft landing”.
House prices in Sydney and Melbourne have fallen nearly 14 per cent and 10 per
cent from their respective peaks in July and November 2017, coinciding with sharp
drop-off in credit flowing into the housing sector both for owner-occupiers and
investors.
According to Mr North, analysis from other corrections around the world suggests
once price falls exceed 20 per cent it can create “second order falls as buyers seek to   FIND OUT MORE  

sell”. “Further falls then become self-perpetuating,” he said.   FIND OUT MORE  

“We have already passed this benchmark in some postcodes like Liverpool NSW
(with 23 per cent falls). Plus, we know many households are finding it hard to
manage their finances as flat incomes, rising costs and large mortgages create Trading risks are magni ed by leverage – losses can
exceed your deposit. Know your risks before trading.
medium-term pressure on many.”
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The key indicator to watch is the unemployment rate, currently at 5 per cent. “If this
starts to rise, then we know the crisis has started,” Mr North said.
The question then becomes, could an Australian crisis spread?
Last year, UK-based advisory firm Absolute Strategy Research (ASR) warned
Australia, Canada and Sweden’s banks posed a risk to the entire financial system,
with their combined weight on global share markets four times larger than their share
of the global economy.
Investors were “underestimating just how damaging a group of countries that account
for just 3 per cent of global GDP can be”, the group said in a client note reported by
Australian Financial Review.
ASR said a banking sector that accounted for 20 per cent of the total share market
was a “danger signal” in developed markets, citing Japan in the 1990s, the UK in
2003-04 and the eurozone in 2007.
Australia’s big four make up more than 25 per cent of the ASX200 index.
Australian Economy: Heading for recession?
“High house prices, a build-up of household debt post-GFC, and — for Canada,
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Sweden and Australia — banking sectors that are more than 20 per cent of local
Negative
market cap and 13 per Bad news
cent of ‘global banks’ make these markets likely sources of Unemployment Risks
gearing in the year ahead,” ASR said.
financial market instability hidden in hits eight- ‘heightened’
changes to good job year low but don’t
cost renters figures panic: RBA
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23/03/2019 Australian economy: Australia could be ‘first domino to fall’ in collapse
“The banking sectors in three of these economies have increased in size relative to
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their own economies and, potentially, in importance in the global financial system.”

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‘We’ve heard these doom and gloom stories before.’ Source:Supplied

The danger is if sharp falls in property prices lead to widespread job losses in
construction, real estate and retail, hitting consumer confidence and discretionary
spending and affecting Australians’ ability to service their mortgages and other
debts.
“Then we could see a domestic property and household debt crash starting to spread
throughout the Australian economy and adversely impact the solvency of Australia’s
banks,” Mr Adams said.
With Australia’s banks holding more than $38 trillion in derivatives contracts, a
significant proportion of which involve overseas counterparties, an implosion in the
Australian economy “could send highly disruptive shockwaves throughout the global TRENDING IN FINANCE
financial system”.
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“Such an occurrence could have profound global implications,” Mr Adams said. Patricks: Tradie’s $15
million luxury men’s
Mr Hobbs, an author and former presenter of TV programs including Rip-Off hair and skincar...
Republic, slammed “daft” Keynesian money printing policies for the idea that “you
can print growth and solve a structural problem of excessive debt with more debt”.
“Those that avoided the GFC bullet unhappily ingested the vast misallocation of
mispriced capital that has flowed from global central banks,” he said.
“Australia is top of the pile and is systemically significant. Much like Ireland
ingesting mispriced capital caused by the aftermath of German reunification which
stoked the Irish bubble, Australia has had a similar steroid after the GFC and
precisely at the wrong time.”
Mr Hobbs believes Australia is “likely to be one of the first to crater” in the “destiny
with excessive debt that is coming, in the so-called everywhere bubble”.
Australia, much like Ireland in 2007, “may be past the point of no return”. “The next advertisement
recession is unlikely to be cyclical, short and shallow, but structural, long and deep,
and among the outliers may be Australia,” he said. “It will have company.”
AMP Capital chief economist Dr Shane Oliver said while his view on house prices
was “quite negative” — he is among the most bearish of the major forecasters,
predicting total top-to-bottom falls in Sydney and Melbourne of 25 per cent —
comparisons to Ireland or the US prior to the GFC were overblown.
Australian Economy: Heading for recession?
“All up, we’re about halfway through. We do have more downside to go, and that’s
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going to have a significant negative impact on the economy,” he said. “But I’m not in
the camp that says we’re doomed and about to go intoBad
Negative recession,
news and there’s no Unemployment Risks
helping us.” gearing hidden in hits eight- ‘heightened’
changes to good job year low but don’t
cost renters figures panic: RBA
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23/03/2019 Australian economy: Australia could be ‘first domino to fall’ in collapse
Dr Oliver said we had “heard these doom and gloom stories lots of times before”,
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particularly after the end of the mining boom, but those predictions “tend to ignore”
the diversity of the Australian economy and the flexibility of Australian authorities to
respond.
“There’s plenty of scope for the RBA to cut interest rates, and there’s also scope for
tax cuts,” he said. “Whereas if you go back to Ireland, it actually led to much higher
interest rates.”
Ireland’s property boom was largely caused by huge capital inflows to the country’s
banks, something Australia hasn’t had, Dr Oliver said.
“We have a flexible exchange rate, we’re not part of the euro, we can set monetary
policy in response to economic conditions. We’re not like Greece or Ireland. It’s a
huge difference.”
He added lending standards in Australia were nothing like as lax as the US, where advertisement
banks were handing out so-called NINJA loans — no income, no job, no assets — to
borrowers who could simply hand the keys back to the bank and walk away.
And while the looming rollover of $120 billion worth of interest-only loans to
principal and interest posed a challenge, Dr Oliver said comparisons to US subprime
mortgages were off the mark.
“There will be a bit of a drag, but it’s not the same as a subprime borrower who
didn’t have a job, didn’t have assets,” he said. “Interest-only is very different to
subprime.”
The bottom line, he said, was “we’re unlikely to have forced selling (like) in other
countries which causes a spiral”.
Dr Oliver predicts house prices will start to rebound some time next year. Price falls
of 25 per cent will bring them back to late 2014 valuations, enticing buyers back to
the market. By then we would “probably have two more RBA rate cuts”.
“But that’s a story for 2020,” he said. “We’re not quite there yet.”
frank.chung@news.com.au

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Australian Economy: Heading for recession?

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gearing hidden in hits eight- ‘heightened’
changes to good job year low but don’t
cost renters figures panic: RBA
$5K
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