Is This The Canary Of Australia's Collapsing Housing Coalmine?

Tyler Durden's picture

When thinking of Australia, one traditionally imagines a country that is nothing but a secondary derivative of China's trade surplus, and an unpegged currency that allows for more trading flexibility than the Yuan. As a result, recurring calls warning of a housing weakness in the country are often ignored as there always appears enough liquidity to mask the issue just long enough. That may all soon be changing. Earlier today, insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring. Unfortunately for GNW, and soon for the entire Australian financial sector, instead of merely blaming market conditions, in the IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013, GNW laid out a far more nuanced, and detailed explanation of what is happening. Alas, it also may be the canary in the coalmine that has been so long overdue in yet another regional, bubblelicious housing market.

Morgan Stanley's David MacGown explains:

Genworth announced that it will delay the IPO of up to 40% of its Australian mortgage business to 2013 from a previously targeted 2Q12 transaction. Recent news reports hinted that weak equity market conditions could delay the unit’s IPO, but GNW’s rationale was more problematic: the company cited deteriorating market conditions in the Aussie mortgage market. Specifically, the company noted “…elevated loss experience in Australia as lenders accelerated the processing of later-stage delinquencies from prior years through to foreclosure and claim at a higher rate and severity than expected, particularly in coastal areas of Queensland that experienced natural catastrophes and regional economic slowdowns and among certain groups of small business owners and self-employed borrowers.

If anyone is desperately looking for a clue that things may be about to go, er, downer underer in Austrlia, it doesn't get any clearer than this. And if China is indeed facing a hard landing, or whetever the CCP wants to telegraph to the world in its first and foremost desire to avoid popular discontent, this may just be the straw that breaks the camel's back.


Unlike the troubled US MI business, GNW’s Canadian and Australian businesses have been consistently profitable, with the Australian business producing run rate quarterly earnings averaging about $50 million per quarter over the last two years. GNW now expects the Aussie MI business to report a “modest” first quarter loss.

It gets worse for the US company, whose loss of nearly $1 billion in market cap today alone may be just the beginning.

  • I had been constructive on the GNW recovery story, anticipating an improving trajectory of US MI losses (helped by profitable new business written), continued performance of the International MI business, and in particular the 2013 return of the US life companies to positive earned surplus and thus dividend-paying status to the holding company. I viewed the Australian MI IPO as another positive step in this process in that it was expected to provide additional financial flexibility (estimated proceeds of approximately $500mm as estimated by MS equity analyst Nigel Dally (Pressure Building to Shrink to Prosperity, 2/1/12) to the holding company while managing the company’s global MI exposure.
  • With the IPO shelved until 2013, I see little in the way of near-term positive catalysts for the credit. But it’s important to note that a 2012 IPO isn’t necessary for the company to maintain strong holding company liquidity. With $1.4B of cash in hand, GNW can easily cover an estimated $350mm of holdco interest and operating expenses and $222mm of maturities. Moreover, with the US MI subsidiaries running above the 25:1 risk-to-capital ratio limit (28.8:1 for the segment, 32.9:1 for the lead company at 12/31/11) and climbing as the company writes new business this year, it’s reasonable to posit that GNW’s North Carolina regulators will require the company to inject additional capital in order to continue writing new business. NC and numerous other state regulators have granted waivers of the 25:1 limit, allowing the company to write new business without injecting fresh capital. I estimate as much as a $250mm injection. The net of these cash uses implies that GNW would still end 2012 with nearly $600 million in holdco liquidity, and note that this estimate assumes no dividends from operating subsidiaries. GNW has previously projected $300mm of dividends from its life insurance and wealth management units this year and dividends of $160mm from International MI. Holding company liquidity is the key credit positive for GNW at this point.

Yet for those who are worried the only move here in GNW is up, the trade may well be to start getting increasingly cautious on other Australian equities such as QBE, ANZ, NAB, WBC and CBA. Because, to mix metaphors, when the light is shone, there is never just one canary. And central-planner can only delay mean reversion for so long...

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Conman's picture

It's ok we can bail them out too, then the Reserve Bank of Australia can get in on the race to debase.

ihedgemyhedges's picture

TD, shouldn't the tagline be "emu" instead of canary............

NotApplicable's picture

Red Alert! Red Alert! Man your swap-lines!

TheGardener's picture

A cockatoo at the coal pit does`t mean a thing.

80 years of makeshift housing can`t be wrong, at any price.

pashley1411's picture

Bank of Zimbabwei have the jump on all you lame-ass 1st world Ctl-P mf's. 

"To become the financial cornerstone around which Zimbabwe's economic fortunes and developmental aspirations are anchored."

Fed, eat your heart out.

ekm's picture

There is only one natural rule that defines housing prices and one only:


Whoever thinks that this natural rule can be abolished, is an idiot, either here in Canada or 180 degrees away in Australia.

USA proved this natural rule is unbreakable.

Ratscam's picture

as can be observed in Germany, Austria and Switzerland. RLST is becoming unaffordable for the average income earner, but interest rates are low and financing conservative. Never the less, the consumers are out of the stock and bond markets and are going all in with their 20% equity into RLST. During hyperinflation or during outright default the terms, even of the 10 yr. fixed loans WILL change.
Good luck on that house.

Arnold Ziffel's picture

rats, I'd rather wait until interest rates rise to their historical median (7.5%) and house prices fall another 50%. The median house price in Ozland is $635,000. The median income is lass then $60,000. Not good. 

Renting is too cheap right now and gives wonderful freedom to relocate whenever...were ever.

Ratscam's picture

that's exactly what I,m telling my friends but they don't listen.
They believe that the interest expense will be their rent, forgetiing their cost of capital, maintenance,insurance, taxes, garden, heck there are so many obligations as an owner. If i have a problem i delegate it to my landlord, ha!

ekm's picture

...and add to that the house value will end up being under water so they can't have home equity line of credits to spend with, particularly for the ones late in their age.

I love renting. In Toronto is a little bit high, but way better than voluntary enstupidation by enslaving yourself to a house.

qussl3's picture

Never underestimate the sheep and their willingness to go into debt regardless of how much of lifetime income they are sacrificing.

Japan and their multigenerational BS mortgages come to mind.


wang's picture
wang (not verified) ekm Apr 18, 2012 2:05 PM
Household debt is ‘biggest domestic risk:’ Bank of Canada

Bank of Canada warns on home equity lines of credit

NotApplicable's picture

Is it really too much to ask for you to get your own ID? Or do you have too much time invested in being fake slewie?

chunga's picture

That's awful slewie.

The Last Waltz is something everyone needs to see at least once in their lifetime.

[edit - we have a fake slewie - wtf]


slewie the pi-rat's picture

yeah!  and they aren't making any more aussie real estate, either!

[clonie continues to mix up her posting times and try to establish a "newPattern"]

TheGardener's picture

Waltzing Matilda still running in Aussie

theMAXILOPEZpsycho's picture

even so I still find it hard to be too bearish about a country with tonnes of gold, silver, copper, iron, coal, uranium, farmland, and huge wide open spaces and a pretty hard working population and still (relatively speaking) smallish public sector...its not like those houses are in southern spain; there where many europeans and americans would like to flee to

GeneMarchbanks's picture

Dry as a bone though. Desalination plants are going to be needed long term, not to mention over reliance on metro areas.


theMAXILOPEZpsycho's picture

populated areas are not dry as a bone; unpopulated areas have enough natural resources to pay for irrigated until said resources are used up...

I'm sure a gold price above $2000 and silver above $40 would keep kallgorlie going a few more years...

AttilaTheHun's picture

Kalgoorlie has got a finite life-span due to the geology of the situation. It will close in about 2017. Can't dig it any more irrespective of the price of Au.

TheGardener's picture

Bearish for Perth's females "work" vacation ?

Sell the place to Hollywood studios for a second moon landing as sequels , though mad max can be made at any location by then.

Rantabulous's picture

Hi Attlia - I lived in Kal for 5 years about 10 years ago. I did not work in the mines - but most of my friends did and all everybody talked about was mining. 

My understanding is that the mountains of lower yield tailings have decades of recoverable gold (Kal has been mined for 100+ years), but recovery was not viable at the "current" (at that time) price (which was a few hundred dollars p/oz then).

I had assumed with gold up and going up that people would start to look recovering that lower yield stuff now... 

I am curious about your 2017 date - what is the basis of that. Ta in advance.

AttilaTheHun's picture

"I am curious about your 2017 date - what is the basis of that. Ta in advance."

I actually went on an official tour of the super-pit and spoke with some folks there. Check e.g.

AFAIK the mine is getting too close to the water table now.

There may be plans to open other sites, I do not know.

Check the owner's site for further info


ChookChoker's picture

I have lived in Kalgoorlie for 15 years now and spent 5 years with KCGM at the Superpit at one stage. The pit has been below the natural water table for many years and is now about 300 metres deeper than the natural water level. Historic underground workings go down over 2 kilometers and at no stage did the underground workers have to wear SCUBA gear. Dewatering is an old and well understood business now.

The mine life at the superpit is alway about ten years. It is the same at the majority of mines worldwide. This is a function of the difference between blue sky, inferred and indicated resources and the cost of drilling a resource to the level where a sane person can confidenty plan the mining of it. At current gold prices, KCGM will continue running indefinitely. They are making good profits at 2 g/t au at the moment and could probably turn a profit processing 1 gram dirt. There are many millions of tonnes of 1 gram plus dirt in the vicinity of the current pit. Hell, there are millions of tonnes of low grade ore stockpiled to process after active mining is finished.

KCGM recently negotiated an Enterprise Bargaining Agreement with the majority of its workers. One of their tactics was to talk down mine life during negotiations in an effort to cry poor in order that the workers would ask for less concessions. This was seen through and the workers recieved the majority of the concessions they were after. Another EBA is currently being negotiated with a subset of workers so the same tactic is probably being extended.

Kalgoorlie is in no risk of shutting down in the near future unless the gold price drops back well below $1000.

Gully Foyle's picture


Not to mention the deadly snakes, insects and plants.

TheGardener's picture

Who junked you maxi ? Probably Aussies "taking offence" of being called pretty and hard working...

Dugald's picture

Yeah, pull yers flaming head in yer wanker.....

o2sd's picture

It's not a difficult economy to run. However, there are plenty of reasons to be bearish on HOUSING in Australia, if not the economy as a whole.

GlenD's picture

Don't agree. During great depression not all countries collapsed at same time, many were years apart, but none escaped.

Major percentage of Australians gdp growth comes from importing debt for the housing bubble. As soon as import of debt slowed Government started to import their own debt - National insulation, broadband etc etc Look graph greece GDP growth and compare to australia's.

The mining sector only represents 10% of Australia GDP. 1/3 profits are owned by oversea's investers and they have been re-investing to grab increasing profits from mining sector (research financed by greens party).

Like US, unemployment has been massaged to hide true picture (see roy morgan research).

Australian Public sector is huge and unsustainable.

Mentaliusanything's picture

Long overdue maybe but the blood is flowing out of a gashing wound.

Tis only a small canary but it mirrors the "Big Four"

From little things big things grow.

JW n FL's picture



The reality is.. that GNW is still going to do the Business and ALL! that Extra cash no wasted on an IPO.. which is nothing more than PR in a down market.. will be put into a war chest for the bumpy ride that thus way comes!

EVERYONE!! Around! the World! is STASHING CASH!! for an EVENT!

No one knows what this EVENT IS!!??!!

But EVERYONE! is NONE! the less putting money under the Mattress..

Lines of credit (think Ford Motor Co back in 2006 2007) are being extended..

People are preparing for some Invisible Threat

a LOT of Long Tailed Cats are Nervous!

I hope they ALL GET CAUGHT!


China 8.1% LOL Growth!! they need an extra 5 Cities next year on top of the 20 already on the board!


Jonas Parker's picture

Everyone is stashing cash, which will be great as long as the currencies don't crash. If (more like when) that happens, there will be lots of both digital and printed toilet paper available, but damn little cash!

Gully Foyle's picture

Jonas Parker

Global reset, digital currency, cash not necessary.

Black market will not use it, just trade, crack for sex/weed for tide.

Lot easier to keep tabs on everyone.

Probably during Romneys second term.

US crash, mid Mittens first term.

Genpop will be happy with troops in the street, Rap music will have meaning once again.

buzzsaw99's picture

MI is a scam within a scam.

Dick Darlington's picture

Very bullish for ACGB's. Until it's not, of course.

junkyardjack's picture

When will we finally be able to conquer weather so it can stop causing all these problems in the financial markets!! Isn't anyone working on this? Forget the war on drugs, terror women, Christmas, etc, we need a war on Mother Nature

catacl1sm's picture

So that we can lose to 'her' too?

TheGardener's picture

Weather already got conquered down under. In meteorology
the term "no significant weather" is used for the conditions
prevalent in outback Australia. No pressure differences, therefore no wind , no clouds, nothing but sun. The weather
report always says "fine" , rain or shine :-).

ebworthen's picture

The U.S. housing market is a much bigger rotten bananna; much more forestalled and fluffed than the Aussie market.

U.S. FED and Fannie/Freddie backstopping combined with bailout banks hiding losses in their mortgage portfolios is the skeleton in the closet in the U.S.S.A.

This is why the State Attorney Generals abandoned the rule of law and rubber stamped the mortgage robo-signing scandal "settlement" which was 100% about cash and kickbacks to states and 0% about right and wrong and justice.

People can't afford the 1995-2007 inflated house prices they mortaged their futures out for on unemployment or non-career jobs.

Jobs, jobs, jobs; and no, $10 an hour part time or full-time with no overtime or benefits won't cut it.  The stock markets can double and it won't matter, millions upon millions will default.  You can't make a mortgage payment for long with "savings" or "investments" that are taxed out the ass and difficult to withdraw in the first place (if they let you).

We've all been Corzined and the only people laughing are the Corzines.

theMAXILOPEZpsycho's picture

exactly...there are still good fundamentals at play in ozzy land...

Sure house prices will crash - but its not like it will be a tear them down and farm the land kind of crash like detroit or andalusia...

catacl1sm's picture

I'm waiting for Canada's RE to go bust. Then WHAT will HGTV show all day?!

worbsid's picture

Not to worry.  HGTV will turn into a history channel.  "See little boys and girls, this is what your grandma and grandpa did to you." 

TheGardener's picture

No worries, mate. Mateship getting morphed into some soft
fascismo in popular fashion of world politics and when the dust settles elsewhere , Aussie will still be very dusty .
Can`t hide can`t run, unless you are adapted to the arid part of your continent.

Snakeeyes's picture

Nothing to do with Austrlalia's housing market, but Reuters has a cool MORTGAGE WRITE DOWN CALCULATOR to see how much Obama's vote buying with cost taxpayers.

Pretty cool!

Silversem's picture

No country can escape this worldwide crisis. I stick to daytrading with cfd's.