If Philip Lowe of the Reserve Bank of Australia were the Wizard of Oz, he would be furiously working away on a precautionary alchemistic solution to prevent all that’s golden from turning in lead. As the Australian economy grinds onward into its 103rd quarter of unmatched continuous growth, some property and government analysts seem quite nervous on reports that the housing bubble has entered its terminal phase. The latest warning is a doozy.
There has been no abatement to the stream of articles and reports published in the Australian media detailing how the slumbering housing affordability monster that almost brought down the US economy in 2008 may be stirring beneath the suburbs of Sydney and Melbourne. However, property analysts have been sounding cautionary alarms on the overheated Australia housing bubble for so long that it’s become merely distracting white noise to market participants.
In fact, if you were an Australian investor that listened to the poo-poohing of your colleagues on the idea of investing in the over-supplied residential property market in 2000, you would have missed out on the financial opportunity of a lifetime. Seventeen years later you can still hear those same “tall-poppy” sentiments being heard and quite understandably, people have stopped paying attention. The ‘lucky country’ may be experiencing the longest period of uninterrupted economic growth, but perhaps you can also hear the longest wolf cry ever heard.
Yesterday, the Bank of International Settlements (BIS) released its annual report. The commentary contained was uncharacteristically upbeat on the world economy however it contained a powerful, credible caveat on risks facing the Australian economy. Keep in mind, the BIS is the Swiss-based bank of central bankers and one of the few institutions that warned of the risk of a global financial crisis a couple of years before it happened. The warning is that residential buyers have accumulated vast sums of household debt following a protracted period of low interest rates and foreign investor spending and now households are vulnerable to a sharp rise in global interest rates and falling debt servicing capability. In fact, recent private sector surveys have shown that almost a quarter of households face “mortgage stress”, meaning other consumption is crimped to make way for mortgage payments.
With these alarm bells sounding, the RBA will surely show no willingness to indicate raising rates for the near future, even as the rest of the world seems ready to pull away from loose monetary policies. Low interest rates have fuelled a housing boom, but weak consumption coupled with high indebtedness make it very difficult for the RBA to raise rates without weakening the already-languishing consumer sector.
If the BIS is correct and global interest rates start rising in the direction forged by the US Federal Reserve while Australian interest rates remain motionless or decline even further, the Australian dollar, which is has been for years propped up by attractive bond yields, could depreciate heavily from the exodus of a soft currency. A growing unemployment rate leading to even higher debt-to-income ratios would be disastrous forhousing but importers, foreign workers and holidaymakers would also loose.
If the Chinese economy continues to slow without an offset taking up the slack, this author speculates a deteriorating financial environment for Australia leading to the AUD falling to a range between .55 and .45 US cents in 2018. Inevitably, the pace of the pick-up in global inflation will determine how hard and how fastthe Australian dollar will fall. Haplessly, there doesn’t appear to be much padding to cushion its fall.