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

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.


philipat strannick Sun, 06/04/2017 - 22:04 Permalink

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.

In reply to by strannick

Darth Vader aloha_snakbar Sun, 06/04/2017 - 20:42 Permalink

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.

In reply to by aloha_snakbar

keep the basta… slipreedip Mon, 06/05/2017 - 02:40 Permalink

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. 

In reply to by slipreedip

keep the basta… Zero Point Mon, 06/05/2017 - 02:44 Permalink

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

In reply to by Zero Point

LetThemEatRand Sun, 06/04/2017 - 20:32 Permalink

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 LetThemEatRand Mon, 06/05/2017 - 04:55 Permalink

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!

In reply to by LetThemEatRand

Yen Cross Sun, 06/04/2017 - 20:34 Permalink

   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 Sun, 06/04/2017 - 20:36 Permalink

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.  

order66 Sun, 06/04/2017 - 20:37 Permalink

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.

Indiana1 Sun, 06/04/2017 - 20:51 Permalink

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. 

sinbad2 techpriest Mon, 06/05/2017 - 00:46 Permalink

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.

In reply to by techpriest

sinbad2 The Real Tony Sun, 06/04/2017 - 22:48 Permalink

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. 

In reply to by The Real Tony

slipreedip sinbad2 Sun, 06/04/2017 - 23:07 Permalink

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. 

In reply to by sinbad2

sinbad2 slipreedip Mon, 06/05/2017 - 00:37 Permalink

"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.

In reply to by slipreedip

keep the basta… sinbad2 Mon, 06/05/2017 - 02:59 Permalink

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.

In reply to by sinbad2

Nexus789 Sun, 06/04/2017 - 21:01 Permalink

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 Nexus789 Sun, 06/04/2017 - 22:10 Permalink

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

In reply to by Nexus789

Yen Cross Sun, 06/04/2017 - 21:06 Permalink

 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]