Australia’s
not ‘the Lucky Country’ anymore
Bryan
MacDonald is a journalist, writer, broadcaster and teacher. He wrote for Irish
Independent and Daily Mail. He has also frequently appeared on RTE and Newstalk
in Ireland as well as RT.
RT 9/9/2014
Two months ago, I warned that Australia’s status as 'the Lucky
Country' was doomed and that an economic crash was imminent.
Sydney Harbour
Then,
many Australians derided the prognosis, but now the penny has finally dropped
as optimistic press splashes are replaced by mounting fear.
'Clear
and present danger' screams the Sydney
Morning Herald while the Australian warns 'Economy faces a difficult ride'
and the Australian Financial Review doesn’t hold back either, with 'Economy
enters danger zone'. Bloomberg is even more pessimistic: 'Australia
gives up on Australia as investment dwindles'.
The
headlines indicate that something has changed Down Under this antipodean
spring, as smart locals have realized what serious analysts have known for a
long time and was predicted here – Australia is poised
for a Greece-style financial meltdown.
The cause is a dramatic freeze in Chinese construction, which
feeds on Australian iron ore, as the Land of the Rising Dragon reaches capacity
in residential dwellings – completing a decades-long building program. The
average price of new homes has been tumbling in China for months, with the rate of decline accelerating from June (0.5 percent) to
July (0.8 percent). It plunged another 0.6 percent in August, bringing the
average to US$1,737 per square meter. Not exactly happy news for Chinese
financiers, but horrifying for those in Sydney where a gigantic property bubble
has stoked up prices to $21,700 a square meter, a vast multiple of those in the
world's second-biggest economy.
The City Of Ordos China
Screeching halts are a wonderful thing for runaway trains but tend to cause havoc in frothy markets and, as previously outlined, the sudsy Australian housing casino is as precarious as a plane where the passenger is trying to switch off the engines. This actually happened last month in New South Wales. Now, China’s slowdown is turning off the dynamo which fuels the entire Australian economy, mining.
Iron ore accounts for $1 of every $5 Australia exports, and oversupply issues and diminishing demand have seen the price drop to $84.38 a ton, with most pundits predicting a further slip to $76 a ton soon. That price level hasn’t been seen since 2009 – indeed only last year the precious metal was trading at around $160. Already, one mining company, Western Desert, has folded in the Northern Territory, crippled under an $80million debt and whispers of mass layoffs are stalking remote regions and Perth - often described as the world’s most expensive city. One commentator, Lindsay David, who we'll get to later, has warned that the iron ore price may yet collapse to $20 a ton.
So how much danger is Australia in and does the populace realize what’s around the corner? The media finally seems to be waking up, but to get an impression of the situation in Sydney, I spoke to some of the country’s leading analysts.
Jonathan Shapiro, a journalist at the Australian Financial Review, has been an objective voice on the globe’s most out-of-control property market. He’s noticed a change in discourse:
“Where I have noticed a shift, and it’s only been very recent, is in the tone from some regulators, such as the Reserve Bank and APRA whose responsibility it is to monitor the risks in the financial system.
“They have been careful not to sound the alarm but they are constantly messaging to investors not to expect house prices to continue to rise and to those that are investing in property that their assumptions might be a little on the heroic side. It’s not fear and loathing but it’s a start,” he says.
In a country about to enter recession, where the cost of a new home in New South Wales is now higher than the average 'purchase price' of a property in New York City ($507,000 last year, or 7.6 times the average household income in the region) this seems like common sense.
Indeed,
this southern hemisphere winter, as the Sword of Damocles hovered over the
economy, crazed investors fueled the highest house price growth since 2007 –
just before the Great Financial Crisis – probably a signal that last orders are
imminent. The surge was once again driven by the Sydney and Melbourne markets,
which clocked increases of 5 percent and 6.4 percent, respectively. A common thread running through all historic property
bubbles is that prices intensify just before the crash.
The
man who did more than anyone to force Sydney's media to face up to the coming
crisis was Lindsay David. The GreenRigCo founder and former strategy consultant
published a fantastic book entitled 'Australia: Boom to Bust' earlier
this year and, since his appearance on RT, his views have gained traction.
Lindsay David agrees with Shapiro's sentiments.
"My
book was independently written so it was able to tackle head on and openly this
very sensitive topic and the fundamental challenges of the Australian economy
and squash the thought that there is no housing bubble in Australia.
“This is still a very sensitive topic in Australia because we
all know the consequences to the Australian economy if the property bubble
bursts or if China stops buying our iron ore. Australia as an economy is 100
percent dependent on mining, banks and real estate. But still the majority view
is that Australia is immune from recession – kind of like believing in Santa
Claus. And the shock the day you find out [edited for younger readers] is on
the horizon,"
David says.
A 100-tonne Tipper Truck Is Loaded At Atlas Iron's Woodgina Mine
Former
Reserve Bank of Australia employee Callam Pickering now writes for Business
Spectator and the Australian. Like Shapiro, he’s been prepared to buck the
previously prevailing mood and honestly evaluate the bubble Down Under.
“To
understand Australia's attitude to housing you need to understand the
complacency that 23 years of uninterrupted economic growth creates. Australia
is a country where 30-year-olds cannot remember the last recession and anyone
under 35 probably wasn't old enough to care even if they can remember it. It
has created a belief that recessions and downturns only happen in other,
less-fortunate countries. Australians don't fear asset bubbles because they are
just a problem that other countries deal with.
“Although
we are deeply cynical about banks and politicians, we seem to implicitly
believe that they would never do the economy any harm. The Reserve Bank of
Australia is almost never questioned within the mainstream media, which is
unusual given the sheer power it holds over household and business balance
sheets. So getting the public to believe that they are getting ripped off by
housing is understandably difficult. Made all the more difficult by the fact
that high house prices in Australia are considered normal, despite house price
multiples that scream bubble to the rest of the world,” Callam says.
I
put my contention that Sydney’s media appears ready to countenance the risks of
implosion to the local experts. Shapiro, while acknowledging that the sharp
drop in iron ore prices is causing some alarm, thinks the real rousing has yet
to come.
“I
don’t think Australians realistically believe there will be a house price crash
in the near future,” Shapiro says. “There
have been calls that the property market would crash and the last big scare in
2008 didn’t cause as much damage as the bears predicted. In fact property has
now come back bigger and stronger. It’s so ingrained in the Australian psyche
and the tax system and so many Australians are dependent on stable property
prices that few would envisage a correction. There’s a small minority that
believe a crash is around the corner but they are on the fringes. That could
change if some of the canaries in the coal mine start chirping. Lately the iron
ore price has fallen sharply and most Australians recognize the importance as a
measure of national wealth.
“All
the official evidence is that Australia’s economy and banking system could
handle a property crash – the banks and regulators say they have stress tested
the impacts of a severe downturn and the banks are big and strong enough to
weather a sharp correction,”
Shapiro says. “I have my doubts.”
The
balance sheets of two of Australia's four pillar-banks have cash-to-asset
ratios that are lower than what Lehman Brothers held in the US 15 months before
its collapse. Worse again, the asset sheets of each of the 'big four'
financial institutions represent close to half of Australia's total GDP –
Lehman's was just 5 percent of the American total. That seems to question
whether the regulators are living in the real world and Shapiro’s doubts are
well-founded.
Pickering
echoes the feeling that myopia still prevails in the streets of Australia, but
credits the media for debating prospects.
“There
has been an increase in discussion about house prices and bubbles. My articles
on Business Spectator have done incredible numbers and my readership – most of
whom are older, rich men – have been surprisingly open to the idea that housing
may not be the great investment that it once was. More importantly, the greater
chatter hasn't been met by the usual cynicism. Normally when someone questions
Australian property - particularly if they are from overseas – they are met
with a wall of criticism. Australians are reassured that property in Australia
is nothing like other countries.
Photo / William West)
“It
might be reasonable to say that the media are now more open to the idea of a
bubble or at least to idea that prices have to fall. As always though it's
tough to get a read on the public and the fact that prices push ever higher
suggests that they haven't yet got the message,” Pickering says.
David,
whose book has been topping Amazon Australia bestseller lists, also believes
the press has opened up, by contrast to two months ago when he claimed there
was a wall of silence.
"There
is a lot more open discussion in the mainstream on whether Australia is
experiencing a credit fueled property bubble. More analysts/economists, with no
political or financial bias, are also coming out expressing their concerns.”
However,
David counters that the general public aren't getting the message yet.
"This
view still only exists on the very fringes of society. The main reason being
not many people have done the math. Australians really think the Australian
economy is different – we don't appreciate the fact that it is normal for a
country to go into recession from time to time.
"Real
estate in Australia is a sport. Aussies think prices only go up, but this
hasn't been tested by a recession since the early '90s. Still today, the
absolute majority of Australians have absolutely no clue whatsoever about the
risks (in the form of toxic debt running out of control) that have been taken
to get the price of real estate to the point It is today," he says.
In
the early July piece, I equated the Australian economy to a 1958 Disney film
called 'White Wilderness' and explained how like the lemmings in that
fascinating documentary, 'the Lucky Country' was about to jump off a cliff.
That view has since solidified and the message is finally hitting home Down
Under. The question now is, in the dash to extract the last dollars from the
imploding bubble, how exactly will it end? The portents look extremely gloomy
for 'the Lucky Country' and the exits appear to be sealed.
Sinn Féin
Mountmellick – Serving The Community
