Real Estate Is Different In Australia — It's not Going to Happen There — Unfortunately It's Never Different This Time

While the Australian real estate bubble seems to have popped, people are still in the first phase of the collapse, that is, denial. See Mish's post: Permanently High Plateau Theory Touted for Australia Housing.

In addition to the Australian being in denial, foreigners are, like the moth attracted to the candle's flame, attracted the high yield Australian RMDS, which obviously will make things far worse. The extent of the euphoria is yet again reaching historical records, as shown by the sentence highlighted below: Australian RMDS as a discrete asset class separate from the others.

Moreover, you can see the destructive and dangerous policies of central banks in action as well: Japanese investors are buying Samurai RMBS because the yield in Japan have been sitting at around 0% for so long.

Additionally, it looks like the market has finally realised that rates must be reduced in Australia — something I forecast almost a year ago, while 100% of the pundits were sure of the opposite:
I'm about as sure as anybody can be that rates have topped in Australia and that the next move is going to be down. They are following the US steps with a 3 year lag. It's almost a certainty that the RAB will cut rates almost to zero to save their banks, and in doing so, will create a massive collapse of the AUD.
Although there has been a 0.25% rate increase since last July, I think my forecast was still pretty good. 
July 20 (Bloomberg) -- Mortgage bond sales in Australia are accelerating from the busiest half since 2007 as investors snap up higher-yielding notes while Europe’s sovereign crisis causes the market for other corporate debt to slam shut.
Australian RMBS may be viewed as a discrete asset class that’s separate from the volatility” caused by rising sovereign risk in Europe, said David Goodman, Sydney-based Westpac Banking Corp.’s director of asset-backed securities. “It’s performed very well, so people are clearly buying.”
Bendigo and Adelaide Bank, the Australian regional lender, priced A$1 billion of notes on July 14, including 20 billion yen of securities, the first time an Australian issuer has sold mortgage bonds in the Japanese currency, according to Moody’s Investors Service. It paid 425 basis points more than the bank bill swap rate on the lowest-ranking portion of notes and a spread of 105 basis points on the main class, according to a stock exchange filing.
Sales of prime securities peaked at A$57 billion in 2006 before tumbling to A$13.4 billion in 2008, Standard Poor’s data show. The first six months of 2011 was the busiest half since 2007, according to Westpac.

The Australian government has bought A$13.6 billion of the debt since 2008 as part of a support package to help smaller lenders obtain funding, according to information on a government website. [...] 
Australian mortgage holders grappling with the highest benchmark interest rate in the developed world may get some respite as traders bet the central bank will cut the official cash rate of 4.75 percent.

There is an 84 percent chance RBA Governor Glenn Stevens will cut the benchmark rate a quarter percentage point in October, cash-rate futures showed at 5:22 p.m. in Sydney yesterday.

The central bank, which has kept the rate unchanged since November 2010, had scope to extend the pause because risks posed by Europe’s debt crisis and a slower-than-forecast domestic recovery eased inflation concerns, minutes of its July 5 meeting published yesterday show.

Australia’s economy shrank 1.2 percent in the first quarter, the biggest contraction in two decades, after flooding in Queensland state slashed export earnings. The RBA signaled this month that growth this year may be weaker than its earlier forecast of 4.25 percent.
“We’re starting to see a bigger divergence in Australian collateral performance between regional or smaller lenders and the major banks,” said Nick Bishop, a portfolio manager in Sydney at Aberdeen Asset Management Plc. “Overall though, it’s a deteriorating but still sound picture.”
The truth is, outside of the mining industry, Australia's economy is sinking, and when the Chinese bubble pops, the mining sector is also going to fall like a rock. By the way, did you know that 50% of the Australian economy was the household spending? Isn't that amazingly counterproductive and dangerous at the same time? I was told mining and agriculture were driving the economy in Australia?
July 18 (Bloomberg) -- A drop in Australian consumer demand that sparked the biggest weekly slump in retail stocks in more than two years is spilling into the nation’s credit markets.
Australian household spending, which represents about half the nation’s economy, has stalled amid natural disasters, falling home prices and increased savings. [...] 
“The weakness in the Australian retail sector has taken a further leg down, and we expect an increasing number of retailers will be requiring rent assistance or being forced to close their stores and default on leases,” said Ben Byrne, a Sydney-based credit analyst at Nomura Australia Ltd. “While this will have a greater impact on equity, it will also cause a general underperformance of the sector in credit.”
As I stated above and about a year ago, I do no think there will be any more interest rate rise in Australia, and that the next move is down. Expect to see the AUD fall like the GBP did in 2007-2008. Similar pattern, probably even more dramatic.

Congratulations to Westpac economists, which after lagging for a whole year behind me, are the first among the nation's lender to predict a rate cut.
July 15 (Bloomberg) -- Australia’s central bank may push back its next interest rate rise by three months as languishing consumer spending gives it time to assess Europe’s debt crisis and whether a mining investment boom will stoke inflation.

The Reserve Bank of Australia will raise the official cash rate a quarter of a percentage point to 5 percent in November, according to the median estimate of 21 economists surveyed by Bloomberg News this week. A survey three weeks ago showed the median estimate was for a rate increase in August. Economists at Westpac Banking Corp. went further, becoming the first among the nation’s four biggest lenders to predict a rate cut in December.

In an economy Treasurer Wayne Swan last week maintained is “the envy of the developed world,” Australian households are closing their wallets as the developed world’s highest interest rates, rising energy bills, falling home prices and global concerns sap confidence. With spending accounting for about half the nation’s economy, consumer caution is restraining growth even as the mining industry increases investment.

“The consumer is wary,” said Warren Hogan, chief economist at Australia and New Zealand Banking Group Ltd. “They’re being told that there’s this economic boom either happening or coming for Australia, but they’re not seeing it.”
Westpac, with A$279 billion ($297 billion) in home loans outstanding, today said in a statement that “interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy.” The Sydney-based bank predicted the nation’s unemployment rate may rise as high as 5.75 percent next year from 4.9 percent last month, sending the local currency and bond yields lower.
This week’s “awful reports from the big retailers” are among the latest evidence that consumers are still struggling, said Helen Kevans, an economist at JPMorgan Chase which this week changed its forecast for the next RBA rate increase to November from August.


Tiho said...

I agree that Australian house prices are in a bubble. I live here, so I have to say that it's been obvious for ages. But they might not collapse for awhile longer due to the commodity bull market which is filling the country with money. I personally thought 2008 was it... But they are still moving higher.

By the way, you are way wrong on the Aussie Dollar. This is a commodity bull market. Aussie Dollar might even double from here in the next several years. I keep telling you, but you won't listen.....

ITS A COMMODITY BULL MARKET! Don't you get it dude!!?!?!? Stop shorting commodities and commodity related assets. You will just keep getting run over, like road kill.

pej said...

I don't understand what makes you sure about this statement. You can keep on repeating with every other analyst that we're in a commodity bull market, but it won't explain why and how.

BTW, i just closed my short oil position, with a gain of 120% :-)
I wish you to make a bundle on your long position as well, though I am looking for a bounce to short it again.