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Australian Housing Disinformation

Know Thy Banker

Know Thy Banker

A short note today on the difference between the RBA’s comments on the stability and durability of the housing market and, well, reality:

The Reserve Bank said Australian banks had been able to concentrate on profitable and relatively safe domestic lending to households over the past decade. They had not lent heavily abroad, where risks are higher, and they had avoided exposure to securities, such as collateralised debt obligations, that have brought such heavy losses to other banks.

How can they pretend that Australian household incomes are immune from international events? The difference between foreclosures on Australian mortgages and those overseas is one of timing and not necessarily magnitude. Claiming that we will survive this worldwide depression like we survived the other, smaller recessions, is nothing more than a random statement. Nobody really knows that.

It’s no secret that the New Zealand economy is in a terrible recession, and everyone is aware of the economic collapse in Ireland, Iceland, Eastern Europe and, it appears, even the United Kingdom. It’s now official news that Australian wealth fell by as much as 38% over the past twelve months. Unemployment is already rising and there is no evidence to support the notion that the trend won’t continue.

If we separate opinion from fact in all of this, we can see that the RBA has plenty of opinion but not much fact behind its confidence in Australia’s real estate market survivability. At the very least, the RBA is tight-lipped on how it arrives at its optimism.

Part of this optimism may come from Chinese investment into Australia which is a particularly smelly bucket of fish:

Market insiders believe China is buying 15 to 20 per cent of the $2 billion in Treasury securities being issued every week.

This would make China the single biggest lender to Australia, although details of who owns the bonds are cloaked in secrecy.

The program, authorised by Treasurer Wayne Swan, will leave Australia with a debt bill approaching $200 billion.

Our Government is playing a very dangerous game in doing so, and any assumption that China won’t want its pound of flesh in return would be foolish indeed. In a way, all this is a bit like taking out a mortgage to buy the kids a Playstation, a swimming pool, and some other expensive entertainment thingies, all in the face of impending unemployment. Hey, we might be lucky and not get unemployed!

Can this all be a reason to hope that real estate prices in Australia won’t fall? It cannot be, because ultimately, borrowed money has to be paid back and the artificial propping up of Australian living standards through foreign debt is not sustainable, even in the medium term, because economic resurgence has not yet occurred anywhere in the world. The stock market rally in the US is not to be taken seriously, as there is no fundamental reason behind it. Where are the glowing US trade figures? Where is the news of factories reopening, or of a jump in forward orders for commodities?

Australia is only in the early phase of the economic storm. Good economic news that is not based on indisputable fact should be considered to be nothing more than disinformation.

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