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Australia: The Land Down Under(water in mortgage debt)
A few minutes ago, I posted an informational piece on Australia’s creeping
protectionism in the form of taxing multi-national mining companies in ”In Australia, Tax as a Contagion“. This begs
the questions, “Why is Australia So Tax Happy as to Potentially Chase Away
Investment in the Down Under?” Well, the answer most likely is because it is
actually a ”Land Down Under(water in mortgage debt) and foreign export reliance.
We, at the BoomBust feel that the government is actually attempting to take a
proactive stance in meeting the consequences of what is probably going to befall
most export reliant countries which is why Brazil and Chile are strongly
considering following suit!
As an extension of the Chinese macroeconomic discussion at BoomBustBlog
throughout 2010, there may be an “Asian Contagion” spreading as a result of a
Chinese
investment slowdown. Those at risk are the countries and regions that have
supplied China with the commodities necessary to build empty
cities. While the (comparatively, in terms of GDP) enormous Chinese
stimulus package from the first part of the financial meltdown in 2008 has
generated incredible growth in GDP and asset prices, the game appears to be over
for flipping 1000 square foot apartments in Shanghai. After the direct hit
taken to China, the picture looks very grim for Australia, where a bursting
Chinese housing bubble could drive industrial commodities lower, sparking higher
unemployment in one of the nation’s largest sectors, and in turn pop their domestic housing and property bubble. In the near to
medium term, Australia is showing some major red flags.

The Australian Department of Foreign Affairs and Trade reported
an increase in Chinese exports of 31.2% from 2008 to 2009 in its latest summary
on Australian trade, and more than 20% of total exports. Within the top 25
national exports, iron ore, copper, and aluminum are the main industrial metals
that make up a part of Australia’s commodity export based economy. Of all these
metals, China is the largest export destination for each one, particularly in
the iron ore trade necessary for real estate development. The growth in export
production has caused Australia to run a trade surplus with China for the first
time in the past five years. As Chinese financial markets begin to slump along
with industrial commodity prices, Australia should be the next domino to fall.
The Australian Bureau of Agricultural and Resource Economics (ABARE) has
forecasted continued growth in commodity exports. However, considering the
dependence on China as shown in the following graphs, any sort of slowdown in
Chinese demand will prevent export led growth.



All of the data above is from the 2008 to 2009 fiscal year. While relatively
useless in a vacuum, the data from 2007 to 2008 indicated incredible growth in
Chinese copper and scrap/waste consumption. It is reasonable to attribute the
growth in industrial commodity consumption to measures taken by the Chinese
government and
central bank to stimulate economic growth and investment.
These measures have created a large Chinese bubble that Australia will be unable
to insulate itself from unless it uses trade protection measures, inevitably
destroying all “growth” made since the financial market led expansion began in
March of 2009. Don’t believe the hype about Australia avoiding the economic
crisis of two years ago. Instead, they were fortunate enough to see a major
trade partner engage in an enormous attempt to spur investment and export
production, and now that the Chinese are on the verge of private investment
destruction, expect the Australian economy to get flushed down the toilet as
well.
Of course, with the US in full print mode, spraying more ink on pulp than a 4
year old HP inkjet (those things never lasted more than 3 years for me), we have
just the solution for export economies going down the crapper (pan right).
Please consider the following articles:
- Chinese Copper Imports Drop for First Time in Three Months:
Bloomberg - Iron Ore Prices Slump on China Housing Concerns:
Bloomberg - Australia Plans 40% Mining Profit Tax: Bloomberg


I recommend all paying subscribers download the full document (Australia Macro Outlook (611.47 kB 2010-05-27
04:43:48) to explore the direct linkages between nationalism, taxes,
China, employment, housing bubbles, and what they mean for Australia and macro
investment oppurtunities. We will probably be following up with specific company
forensic analysis.
BoomBustBlog China-related links
- A Summary and Related Thoughts on the IMF’s
“Strategies for Fiscal Consolidation in the Post-Crisis - What Are the Odds That China Will Follow 1920’s
US and 1980’s Japan? - Signs of a China Credit and Real Asset Bubble Are
Now Unmistakable!
Subscribers should reference the following related topics/documents:
Additional and relevant commentary on the bubble in China:
- It Doesn’t Take a Genius to Figure Out How This Will
End - Can China Control the “Side-Effects” of its Stimulus-Led
Growth? Let’s Look at the Facts - HSBC is Performing as Expected
- Part 2 of the Mechel Overview is Available
- Some Light Shown on My Developing China Thesis
- Follow Up to the China Short Thesis Debate
- China’s Most Expensive Export: Price Inflation
- Believe Those China Growth Stories at Your Own Risk – Just Ask
Google! - He Who Bloweth the Bubble With Wet Lips Should Stand Back Lest
Spittle and Saliva Spray Upon Ye Face - Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit
More Than I Do! - All of my warnings about China are starting to look rather
prescient - Now that the world is forced to agree with Reggie on China’s
growth propsects…
- advertisements -


Call me insane but I've converted all my AUD for USD. So effectively I'm hoarding USD...I hope this isn't deemed sacrilegious?
Hey abs, i have done the same, transfer to US share account. and have been using that to buy puts. no point just leaving it there right?
I've stopped trying to trade these markets Matto. The volatility is too unpredictable. The time will come when cash will be scarce & the market will reflect this. Until then I'll work on my virtues & try & practice self control.
The Australian property market declined about 5-10% during the financial crisis before recovering. Mainly because of the stimulus package that put cash and confidence into peoples hands and, China's stimulus package coming on-line.
Most people were not aware that a recession was coming and there were some allegation that it wasn't needed because there was no recession, lol.
This however is a trick that wont work twice. People's confidence will be hit the second time around as they will be much more aware and this time China maybe winding back its demand.
The second time around we will get much larger unemployment and that leads directly to loss of confidence, mortgage stress etc....which will hit the mortgage market much harder than the previous 5-10%. (It varied from state to state, city to city).
There is no avoiding that housing here is very expensive and to the limit of affordability.
The RBA will drop rates in a flash knowing the associated risks of a mortage crisis. But when people worry about their jobs, income and future the idea of buying a house is less attractive, especially at sizeable prices.
The problem in Australia is that most missed that sense of foreboding and fear that comes with increasing unemployment..that sprilal of decreasing consumer confidence.
I dont doubt that Professor Keene and Reggie are dead right.
And as Keen notes - Australian banks have a high exposure to the mortgage market which wouldn't auger well for liquidity and rates.
The smart thing to do would be see that the probability of a property crash is high enough to cause one to take risk avoidance - ie cash in capital gains, keep the money safe and look at a lower market later.
Keen recommends bullion and opening an overseas bank account to be out of the dollar.
However gold should do that trick since it is priced in USD you get the benefit of gold appreciation and the exchange benefits when the AUD plunges.
Of course if both move against you it is a double whammy.
Hi Kina,
Im picking up what youre putting down here. I see the RBA as having built a cushion in our interest rates, and potentially by doing that have brought on the first seeds of the slowdown. However they do have a lot of room to move and along with deposit insurance by the fed govt like during the GFC part 1 act 1. My guess is that they have the ability to hold the economy through the first stages of the the next act but the currency will suffer strongly from risk aversion. Unfortunately (fortunately?) at the end of the next part of GFCII they'll have shot their load like every other western country and will be facing the full brunt of asset devalution/debt deflation and we'll have a long way to fall.
Have been thinking about the aussie banking industry and their exposure to residential real estate and think people should remember that all resi mortgages are insured in australia, mostly by the large insurers AIG & Genworth. However there is one lark bank that self insures (i wont say which one but its pretty easy to find out) although i dont know yet if they re-insure through underwriters.
Nice Kina, nice.
YEP YEP YEP, that about sums it up
It is sad, indeed.
I joined this forum to learn how to better integrate economics and environmental activism.
I also like to share information & knowledge and at this very moment Wildlife Victoria needs help. It is the only environmental organization I have helped support financially, aside from our own:
http://www.wildlifevictoria.org.au/
They handled the brushfires rescues valiantly.
Excellent post Reggie.
Australia is one of the few country improving deficit number.
Paying down the debt.
I have to stop. It is getting absurd even defending it.
AUD/USD 0.844 +2.5% today.
LOL I'm here in Australia..
Houses 8 to 10 times income (Income 60k)
No recession, thanks CHINA
2 of the 4 big Aussie banks have 50% of their assets in mortgages
Yeah its all SWEET, just dont lean on the house bubble
Private debt 160% of gdp - mainly mortgages
No its NOT different here
http://en.wikipedia.org/wiki/World's_most_livable_cities
So you find the two most livable country's in the world.
Canada and Australia.
Doesn't get any dumber than that.
Hey I bet there is a bubble forming in Maldives
Austrlia super-tax is exactly to counter this possible heating of economy and the concentration of capital in mining activites.
You have a country with huge potential. You have a country with huge resources.
THe artcile is superficial.
You forget about the Australia governament and the very good decision taken.
Did you know that Australia was one of the few country's in the world that AVOIDED recession in 2008 ?
Do you know the interest rate in australia and that they got huge space to manouver.
You say Australian homes are overvalued. Do you know the wage in Australia ?
What about demographic ? Did you study that ?
Population vs sqare km ?
Anyway - superficial is a compliment.
Try to present all the facts not the pesimistic view.
Have you visit Australia ? It's a huge difference now compared to 15 years ago.
Oh well. You have 4 cities from Australia in the TOP 10 places to live world wide.
4 out of 10 from a single Country.
Amazing.
Oh yes DMA, it's different in Australia.
The only thing different is the toilets swirl the other way.
I lived in a major Australian city for 25 years. Conducted business in multiple industries, real estate being one of them, of which I've owned and sold several pieces.
While you make good points in relation to wages and demographic:
- Australia has very little room to move on interest rates. Just because they are high, does not mean they can just drop them. It is a country funded by foreign capital, rates need to be attractive so that capital does not flee.
- Wages are only high as mining sector jobs pay well, and this flows through the economy. When this even slows slightly, it's game over for housing.
- The only reason they averted recession was due to China stimulus equalling almost 1x Australia's entire GDP. Won't/can't last.
- Housing is on average 6x - 8x gross wages. This is a BUBBLE, by any stretch of the imagination. Completely and utterly unsustainable AND unaffordable.
- It is a fantastic place to live, with great climate, clean cities, and friendly people. But citizens are now under the gun as inflation is punching them left and right. Deflation will shatter th economy when it becomes entrenched. Don't think it will be pretty.
Just my take.
Totally agree.
But.
What do you think folks at ECB can do with the rates at 1%
What about the FED at 0.25%
Even Canada is so low.
So thats why Australia still has a "lot of space"
I agree with bubble in Sydney but there is a big difference of housing prices if you switch from Sydney to Adelaide just a "few lol" miles away :)
About the super tax I think it's a good idea. They will help over the long term.
And about China (and I'm not in the "Gloom, Doom, Bust, Suicide, I don't have a reason to live" Camp.) I thing and this is my humble opinion, China is where USA was in 1980.
So there is plenty of room for them witch should benefit Australia too.
Don't drink and post.
you should be ashamed.
you should bring arguments not being rude.
how dumb can you get.
arguments my friend arguments.
do you know how to bring them.
no. lazybones
by Apostate
Great analysis, well done. The "Chinese miracle" will be studied in history as one of the biggest economic charades of all time. China will try to keep the party going by throwing around money, but at some point it will be easier to use their growing military strength to annex (i.e. take by threat of force) needed resources. Remember Sun Szu's dimensions of strategy:
1) Win All Without Fighting
2) Avoid Strength, Attack Weakness
3) Deception and Foreknowledge
4) Speed and Preparation
5) Shaping the Opponent
We are currently at # 1, and moving to # 2.
The prospect for the Aussie dollar not that good then. Most definately better max up on Perth Mint bullion quoted in USD while I still can.
Trying to sell the home of course, now that have persuaded wife on such a course. See how that goes.
Any medium / long term predictions on the AUD I wonder.
Excellent work !
Pity the RBA "don't get it".
There again most Aussies don't get it either, I can imagine what it would have been like in places like the US at the height of the house bubble. I think it may even be worse here. Quote "come on our house prices will neva fall, it can't happen here, never has".
Should house prices decline and repo rates rise it sure looks bad for the 4 pillars, especially Westpac and Commonwealth. I think this may be a few years off yet.
As this plays out the AUD might even revisit the 48s. My guess AUD around mid low 70s before Christmas.
Anyone waiting for a cheap house might have to wait a while, I guess the govt will throw everything at the bubble to prop it up.
I think the next 3 - 5 years could be pretty ugly, but the bottom line is this:
1. Coal
2. Natural gas
3. Uranium
4. Copper
5. Gold
Australia is a non-trivial producer of all of that stuff, and a currency backed by production of this stuff is a lot prettier than a lot of other currencies in the mid to long term.
Sure...but on the way to that place, they have to come to grips with the fact that BRIC and Oz growth wasn't FUNDED with local currency; it was funded by carry currencies like the dollar (which underpins ALL world currencies as a matter of the legacy of Bretton Woods) and the JPY which because of ZIRP for 20 years has become a de facto reserve currency via the yen carry.
All you have to do is watch the forex crosses. On these bad days, all drop versus the dollar except the yen.
reggie...don't forget there is quite allot of chinese Nouveau riche backed RE and CRE down here...talk about your murder/suicide pacts and lets not forget Singapore's roll in all of this.
Skippy...BTW when factoring mining exports with regards to Australia don't forget greater Papua New Guinea and East Timor...same same...ummm mining cash flow streams, running like liquid love straight through the CBs.
Nice Reggie, though I personally think the answer to the question, “Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?” might have more to do with the $140 billion & counting of federal government bond issuance.
Government debt is out of control & I haven't even included state government borrowing in the above figure.
MHFT won't be posting in awhile after your lovely piece of journalism and his totally useless fundamental take on why you should buy the aussie... Give the AUD/USD 200 more then it's time for a reality check.
Excellent, concur with the entire article.
reggie,
awesome peice....what are your thoughts on canda?
I spend four months of the year in Canada - they've been using construction and easy finance (CMHC) as a way to keep things rolling - now there is a bubble housing sector with prices that increased 20-30% over the past two years. The average home in Canada now costs about 5 times annual income. The Bank of Canada is also trapped in a low rate policy because a fair increase in mortgage rates would create a storm.The bigger province's are in full blown structural deficit mode and like most countries - the public sector is where the growth is and the huge wages. BUT, Canada can grown its own food, produce its own oil and has lots of water... In a big time (worldwide) decline this may be the place to be.
I can verify the real estate situation. Their government officials are repeating similar rhetoric when asked about the housing bubble.