"They're Going To Have All Sorts Of Issues" - Citi Urges Regulators To Address Australia's "Spectacular Housing Bubble"

Tyler Durden's picture

Citigroup Chief Economist Willem Buiter says Australia is experiencing “a spectacular housing bubble” that needs to be addressed with tougher regulatory measures – something we’ve noted time and time again.

A shortage of housing, coupled with record-low interest rates, has made Sydney the world’s most second-most expensive property market. The city’s home prices jumped 16% in the 12 months through April, stoking record household debt and putting home ownership out of the reach of many.

"It had better be focused on immediately, to try and tether a soft housing landing,” Buiter told reporters in Sydney Wednesday, according to Bloomberg. “Clearly if these things are not managed well they can be a trigger for a cyclical downturn.”

Australia’s biggest banks have been tightening their lending standards under pressure from regulators, making home loans for investors and interest-only mortgages more expensive, Bloomberg reported.

The Reserve Bank of Australia, which has cited the east-coast property markets and their impact on financial stability as a key concern, is in a tough spot. While it’s reluctant to cut the benchmark interest rate from 1.5 percent and stoke prices even higher, lifting borrowing costs would place a greater burden on households saddled with debt already at 189 percent of gross domestic product, Bloomberg reported.

Investors, for their part, are starting to come around to the dangerously overvalued nature of Australian stock and housing markets. Earlier this week, Australian asset manager Altair Asset Management made the extraordinary decision to liquidate its Australian shares funds and return "hundreds of millions" of dollars to its clients according to the Sydney Morning Herald, citing an impending property market "calamity" and the "overvalued and dangerous time in this cycle".

Parker said he wanted "to make clear this is not a winding up of Altair, but a decision to hand back client monies out of equities which I deem to be far too risky at this point."

"We think that there is too much risk in this market at the moment, we think it's crazy," Parker said with a candidness few of his colleagues are capable of, at least when still managing money.

"Valuations are stretched, property is massively overstretched and most of the companies that we follow are at our one-year rolling returns targets – and that's after we've ticked them up over the past year. Now we are asking 'is there any more juice in these companies valuations?' and the answer is stridently, and with very few exceptions, 'no there isn't'."

Parker outlined a list of "the more obvious reasons to exit the riskier asset markets of shares and property". These include:

  • the Australian east-coast property market "bubble" and its "impending correction";
  • worries that issues around China's hot property sector and escalating debt levels will blow up "later this year";
  • "oversized" geopolitical risks and an "unpredictable" US political environment;
  • and the "overvalued" Aussie equity market.

But, to Parker, it was the overheated local property market that was the clearest and most present danger. "When you speak to people candidly in the banks, they'll tell you very specifically that they are extraordinarily worried about the over-leverage of the Australian population in general," he said. He flagged how exposed the country's lenders were to a correction.

"If they get a property downturn anything similar to 1989 to 1991 then they are going to have all sorts of issues," Parker said.

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aloha_snakbar's picture

"If it wasnt for bad news... there would be no news at all"...

strannick's picture

Graph Australian Canadian RE against rising money supply, and the prices become a correlated effect, not an outlier

philipat's picture

Central Banks' favorite song "I'm forever blowing bubbles". They are now trying to pass the buck to the politicians but in reality this is a problem entirely created by the Central banks who see themselves as Masters of The Universe who can eliminate the business cycle and prevent recessions, far beyond the reaches of so-called Keynseianism.

AUD's picture

The Central Bank is the government bank. While your average politician may not know shit about how the central bank operates, there are plenty of bureaucrats at the Treasury & other government departments who know exactly what's going on.

Yen Cross's picture

 Z/H needs more ladies. The big four dictate rates in OZ.

Darth Vader's picture

OZ hasn't had a property downturn for nearly 30 years (all my adult life).  I't's one huge ponzi scheme and it pisses me off that once it bursts the gov will bail the banks out just as they did in the US.  I bought young and paid off my properties by saving and hard work.  But i and my children will be on the hook for the bankers and greedy investors for decades to come.  There's no winning whether it pops or not.

The Alarmist's picture

Just because it takes 10x someone's salary to buy a house in the Sydney metro region does not mean that this is a bubble.  You can still find something reasonable in Hornsby.

Seriously, nothing to see here.

Darth Vader's picture

Hornsby's the frikkin boondocks.  Just kidding, years back i lived near there and it's a nice area.  The country and most regional centre's arn't nearly as bad.  It's really Melb and Syd that are nuts.  But even regional areas could do with a fair price haircut.

slipreedip's picture

I agree.

Given how soul destroying the commuter hampster wheel is around the big cities, regional Australia is still paradise.

keep the bastards honest's picture

Agree but if a person's career(study training investment skills) can only be carried out in the CBD of  the two major cities there is no way the joy of distant suburbs or regional can be  done. Even Perth cant give the employment.  

anyway its  foreign  proeprty buying whih is almost unchecked, and neg gearing which wrecks it for  those  locals who need a home and to have children. Bringing in immgrants and preventing the local most highly educated and  productive from having children. 

effendi's picture

Hornsby has an average house price of 1.3 million (about a million USD). It is also a long way from the city.

BandGap's picture

Here in the US it's called The American Dream.

 

Zero Point's picture

Australian property values propped up by compulsory superannuation funds. Should end well!

keep the bastards honest's picture

no, more foreign buyers .. the anti money laundering bill via property from 2003 has never been put. It socrruption and neg gearing.. Turnbull has 7 houses, plus money in the Caymans, politicians  have many many neg geared  houses. Most people have very little in their super funds... but politicianas wih neg gearers  and property developers, Scomo ex Property Council now treasurer... yes. banana republic

venturen's picture

pay off....just leverage up with as much 1% debt as possible and when it goes....just reap the benefit. I know people living in houses for 10 year...no mortgage & no taxes.

I paid my house off and am an idiot...next disaster....I lose!

Darth Vader's picture

Your probably right....but it goes against my morals.  I'm old fashioned like that.

 

DelusionsCrowded's picture

Not this time . The banks are toast . ecurrancy blockchain doesn't need banks . The Fed can lend directly to consumer . If you don't do something constructive with it . You won't get a lone for a couple of years . Everybody will be on a universal wage .

 

indygo55's picture

I know! I might end up laughing my ass of watching those "fail" videos. 

buzzsaw99's picture

been reading this stuff for a over decade about australia, canada.  it's like a bad movie you can't leave that never ends.

LetThemEatRand's picture

It's a no-brainer to the banks to keep lending anyway.  They know they will be bailed out when TSHTF.  Ask Eric Holder about too big to jail, and I'm sure there is some Australian counterpart who will agree.

gunzeon's picture

well, it's the banks that own the house and they're paying 5% franked share dividends, so why wouldn't they want to lend more ?

All the debt will spell calamity if/when rates go on the rise again, which might never happen because it'll spell calamity so banks will never put the kybosh on it.

Imo prices will come under control because the state governments are finally waking up and want a slice of the negative gearing pie; they are upping non resident owners capital gains tax, transfer stamp duty, ntm rental income tax.

Prices will drop because owning a second property will become one big pain in the arse!

Yen Cross's picture

   Based on some the models I've run, I wouldn't be surprised to see aud/usd back on the 60's handle by the end of '17.

  It will be good for Australian exports, and energy costs are low. The housing market is parabolic, and lower F/X rates allow the RBA to adjust interest rates wiith more latitude. [target certain segments of the market]

  This clap-trap, I keep reading about flows into emerging markets is b/s. Emerging markets are commodity based.  Commodites aren't going up!

  With the exception of 'value stored' safe haven commodites.

Is-Be's picture

Bricks and mortar is the new religion in Australia.

We are all going to get rich, rich beyond our wildest dreams renting each other houses. (I read it in a book, so it must be true).

Millions of migrants are shipped in to ensure demand does not flag.

Recently in Hobart the homeless mothers walked round and round the sports oval to highlight their plight. They were treated with ignore.

Because we are all gonna become rich.  

sinbad2's picture

Bricks and mortar is the oldest religion in Australia, when I was a kid, most Australians owned their own home.

Government policies, courtesy of Australian banks, who are now owned by American banks, is to turn Australians into renters, of houses owned by the banks.

slipreedip's picture

In what way are Australian banks owned by US banks.

 

Dude, I read through these comments and every time I read something completely wrong, I see you are the one who wrote it.

sinbad2's picture

ANZ 19% owned by HSBC JP Morgan 16% Citibank 4%

NAB 17% owned by HSBC 14% JP Morgan.

Look for yourself, Google is a search engine.

https://independentaustralia.net/business/business-display/who-owns-corp...

http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/EDEB646A9...

gunzeon's picture

Excellent information!

Déjà view's picture

Time for another oil bath...been a while...

I'm rich Bick...

~ Jett Rink

https://m.youtube.com/watch?v=50WphCvOubE

order66's picture

China Housing bubble, Australia housing bubble, Canada housing bubble, U.S. everything bubbles. What could go wrong?

Not to mention Santander's subprime auto loan bonds. Only 8% of those loans had income verification. Solid.

Yen Cross's picture

 Good job with the Santelli avatar.

CJgipper's picture

I'm buying bitcoin based on my belief that the fiat printing has just begun.  More good news for me it seems.

 

They WILL print this stuff back into the black.  Prepare accordingly.  Fiat is worthless

learnofjesuits's picture

templars were bankers

later jesuits took that buisness

it is that simple folks

indygo55's picture

Its more complicated then that newbie. Way more complicated. 

Indiana1's picture

Urges regulators to address it?  Kinda late for that.  It's been going on so long that all my Aussie friends literally think real estate just won't ever go down there ya know, because it didn't yet.  This one's been wearing a neon sign for several years. 

Nexus789's picture

The most deluded in Australia are the ones that have built up property portfolios on the back of cheap debt. Only a small percentage rise in interest rates will cause big issues such is the debt burden.

pitz's picture

Sounds identical to the Canadian "landlord families" who have been going crazy in Canada. 

techpriest's picture

I'm guessing none of them are using that rent to start paying off the properties one-by-one? So they have at least some assets that will not be negative when it hits?

Or is it more a case that every spare dollar goes to the next house, or to lifestyle?

sinbad2's picture

If you buy a property as an investement in Australia, all interest paid to the banks is tax deductible.

So around here we have doctors lawyers, and even an Arab sheik who own macadamia farms. Because the farms take a long time to turn a profit they buy to use them as a tax deduction against the income they earn from their high paid job. When the farm starts to make a profit, they sell, and buy another.

At one time I owned 3 houses, collected rent from 2 and worked, I never paid a cent in tax.

In Australia, the richer you are, the less tax you pay. At one time there was a mini scandal in the press, because it leaked out that Australia's richest man, paid 27 dollars a year tax.

keep the bastards honest's picture

and Malcom Turnbull has 7 and politicians are right into it

The Real Tony's picture

Or if the Chinese stop buying it all collapses like a house of cards.

sinbad2's picture

It's not the Chinese, it's the Australian Government, they won't release enough land to keep up with demand, and the land they do release is taxed to the tune of 100 grand per house block.

Americans might find this difficult to understand, but land is hard to come by in Oz, the Government owns 99%, they call it Crown land, and they only sell it to connected developers.

 

slipreedip's picture

you are completely wrong and dont know what you are talking about.

yes there is crown land but it is more about what areas the governments and municipalities designate for housing.

there is of course lots of private property in australia and it is not at all hard to come by.

as with most cities, land closer to the cities goes for more $ but unlike the US there are nowhere near as many cities.

due to infrastructure costs only certain "corridors" are developed although in reality most of the Australian suburbs are a bit of a shit show because of lack of adequate planning in the development stages.

yes the market is set for a big fall, like many around the world if interest rates go up.

 

sinbad2's picture

"yes there is crown land but it is more about what areas the governments and municipalities designate for housing."

 

So why don't Governments designate enough land for housing, to satisfy the demand?

Who benefits from the Government keeping land availability lower than the population growth?

 

And it isn't limited to the cities, I live in a rural area, and the local Government wants 100 grand a block to allow a rural subdivision.


keep the bastards honest's picture

sinbad if  you work in the CBD( and have NO choice) land release 2 hours or more commute each way from work is no good.

The chinese and indians and poms want their kids in the best private schools in Melbourne which means those houses near are 2.5 million for entry and the locals crowded out...lots of local kids do not want to be a caucasion minority at school. There is a dire shortage of schools in central Melbourne area and for  any shcool for the extremely intelligent. The 'best' schools were reporting lack of seating, little kids sitting on the floor this year.  The immigrants dont go to the regional areas they stay in the city... Pauline is right,  and its more corect that immigration should stop completley for 5 years.

effendi's picture

A few years back I lived near a selective high school (they take the best and brightest kids in government schools)in Sydney and the student body was 97% Asian. 

DelusionsCrowded's picture

The 'highly successful' MC state is headed for a fall . Sheeple group think in Media and Politics just keep repeating this litergy , whilst the chickens are pecking each other . At first passive aggressive ...

slipreedip's picture

to be fair, this is true in most developed economies

Nexus789's picture

I'm in Australia and the economy is stuffed. The debt house of cards is about to collapse and this could wipe a significant percentage of GDP as a big part of the economy is based on and around debt. State governments derive much of their revenue from 'stamp duty' as a result of house sales. 

I would guess that some of the property speculators will start to panic soon and try and offload properties. 

Is-Be's picture

Prof. Steve Keen points out that Govt. debt is comparatively low in Australia and private debt is ummm, embarrassing.

This points to some sort of Jubilee where private debt is transfered to .gov.au

Silly old me is out of step,( Again.) I am not in debt so I may miss out on the party.

Yen Cross's picture

 Citi should spend some time evaluating it's own balance sheet.

 I'm digging through some numbers here, and and based on sector book values vs earnings/revenue [citi is a piece of shit that got a Trump bump in q-1-17]