Australian Banks - First The Housing Bubble Bursts, Now A Public Inquiry

We keep returning to the subject of Australia and the growing signs that its bubble economy is bursting. Earlier this month, we discussed how the world’s longest-running bull market – 55 years – in Australian house prices appears to have come to an end. We followed this up with “Why Australia’s Economy Is A House Of Cards” in which Matt Barrie and Craig Tindale described how Australia’s three decades long economic expansion had mostly been the result of “dumb luck”.

As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.

Last week, in "The Party's Over For Australia's $5.6 Trillion Housing Market Frenzy", we highlighted some scary metrics for Australia’s housing bubble - notably how the value of Australian housing is more than four times gross domestic product – higher than other nations with housing bubbles, e.g. New Zealand, the UK and Canada. Two days ago, we noted the number of Australians optimistic about the year ahead had plunged to a record low.

Moving on to the nation’s banks, while Australian households are the second most indebted in the world, its banks are the most exposed to housing debt…

…which doesn’t augur well if, as we expect, the housing bubble deflates. We pointed out that an additional risk for Australia’s banking sector, which certainly wouldn’t help the property market either, was the growing demand for a public inquiry. This follows a series of scandals relating to misleading financial advice, attempted rate-rigging, fee gouging and alleged breaches of anti-money laundering laws. According to Australia’s ABC News.

But the overwhelming reason for an inquiry rests on just one principle — accountability. What has been forgotten in the endless round of scandals in recent years is that the Australian banking sector is a taxpayer subsidised industry. It's an industry that pays ridiculously bloated salaries to its leaders; that showers itself with massive bonus payments when profits are soaring but instantly demands taxpayer protection and support when the tide turns.

Australia’s biggest lender, Commonwealth Bank of Australia, is currently facing a lawsuit from the country’s financial crime agency alleging it repeatedly breached anti-money laundering laws. A class action suit has been launched resulting in to further probes into alleged misconduct. In May, the government announced an additional A$6 billion tax on the four biggest banks along with Macquarie.

Having resolutely opposed a formal inquiry into the banking industry, which happens to be a major political donor, Malcolm Turnbull’s Liberal-National coalition government has finally caved in to political pressure. According to Bloomberg.

Australia’s banks will be subject to a wide-ranging public inquiry after Prime Minister Malcolm Turnbull bowed to pressure to address scandals besetting the industry. The year-long royal commission will examine the conduct of the nation’s banks, insurers, financial services providers and pension funds, and consider whether regulators have enough power to tackle misconduct, Turnbull said Thursday. He pledged the inquiry would not put “capitalism on trial.”

The next part of the story is truly laughable, as the banks suddenly did a 180 degree turn and welcomed an inquiry in a letter which, minutes later, provided the political cover for Turnbull to reverse his opposition. Bloomberg continues.

The announcement came just minutes after Commonwealth Bank of Australia, Australia & New Zealand Banking Group Ltd., Westpac Banking Corp. and National Australia Bank Ltd. dropped their opposition to an inquiry, saying in an open letter to the government that months of political squabbling over the issue risked undermining offshore investor confidence.

“Ongoing speculation and fear-mongering about a banking inquiry or royal commission is disruptive and risks undermining the reputation of Australia’s world-class financial system,” Turnbull said. The inquiry will “further ensure our financial system is working efficiently and effectively.”

In the letter to Treasurer Scott Morrison, the banks’ chief executive officers and chairmen said that political uncertainty was “hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people.”

“It also risks undermining the critical perception that our banks are unquestionably strong,” the letter said, and urged the government to “act to ensure a properly constituted inquiry into the financial services sector is established to put an end to the uncertainty and restore trust, respect and confidence.”

No evidence of collusion between Turnbull and his banking friends there then. It was merely damage limitation.

“This is not a win for Turnbull -- at best it’s a face-saving exercise,” said Haydon Manning, a political analyst at Flinders University in Adelaide. “He obviously realized that a public back-flip today would be less embarrassing than the potential sight next week of members of his own government voting against his policy position in parliament.”

The announcement follows months of campaigning by the main opposition Labor party and some National party MPs (the junior coalition partner), which demanded a royal commission to investigate the banks’ conduct. A Guardian Essential poll published on 27 November 2017 showed that 64% of Australians were in favour. As for its impact on the banks themselves, Bloomberg reports Moody’s sees it negatively impacting investor confidence.

A royal commission has the power to compel documents and summon witnesses to answer questions under oath. “In the short term, this could be embarrassing and has the potential to negatively impact the banks,” Frank Mirenzi, a banking analyst at Moody’s Investors Service, said by phone. “There may be some waning of investor confidence simply due to the headline risk. However in the longer-term, investors will look through this and focus on the underlying financial strength and well-regulated nature of the banks.”

The inquiry is unlikely to “meaningfully alter” the structure of the industry, Mirenzi said, adding the ratings company’s assumption that the government would support the big lenders in the event of a crisis -- which underpins their high credit ratings -- was unaltered.

The announcement wiped A$8 billion ($6 billion) off the combined market caps of the “big four” banks in early Sydney trading, with Commonwealth Bank declining as much as 2.7%. By the close, Commonwealth Bank was down 1.9%, ANZ down 1.1%, Westpac down marginally and National Australia unchanged.

Betting against Australia’s housing bubble by selling the big four banks has been a “widow-making” trade for years. Maybe, just maybe, that’s beginning to change.


keep the basta… Fundies Fri, 12/01/2017 - 01:44 Permalink

Sydney has peaked, Perth gone down as mining fell.
Melbourne still rising, Canberra risen a bit and lots more to rise. Some places have bottomed..
Units are falling.
Fkn stupid generalisations, I paid heaps 18 months or 2 years ago for a Martin Armstrong housing report, was generalised rubbish. Everything was still rising with lots to go...14 perecent to 25 percent rises in some places in Melbourne in a yearnbut he said Aus was falling. Exploitation of us by weak generalisation and hubris.
Then he was outraged that there was some investigation of money laundering in Aus property by overseas asset grabbers from countries who do not allow Aust to buy home there and whose govts opposed large movement of money offshore.
Malcom has still not passed the anti money laundering by property law, been sitting in parliament since around 2003, he is wallowing in neg gearing in homes against owner occupiers who can't claim their housing mortgage or costs against their tax but all the Scumbag pollies are doing it.

In reply to by Fundies

The Real Tony keep the basta… Fri, 12/01/2017 - 07:37 Permalink

Here's my report for free!!! The Chinese only buy highest and try to sell higher which never works. They all do the exact same thing at the exact same time. Australia is now seeing the flip-side of the housing ponzi where everything implodes. Eventually the entire Chinese race will end up like the Japanese race... worst than broke and where does that leave Australian real estate?

In reply to by keep the basta…

pigpen Fri, 12/01/2017 - 00:57 Permalink

Land down under, please download brave browser and block by DEFAULT on any mobile device and operating system all advertising, malware and tracking.Time for the Aussies and Chinese to use brave browser and destroy the goobook monopolies.Cheers,Pigpen

asteroids Fri, 12/01/2017 - 00:59 Permalink

US Rates go up. Aussie rates go up. J.Q. public can't pay the mortgage. Banks implode. Rinse and repeat for your country. Do you see the problem now.

keep the basta… asteroids Fri, 12/01/2017 - 02:04 Permalink

Don't worry, all home seekers needing a roof over their head, a bit of grass and accessible to work, perchance to have a child or two DO know all about this.

Peoplle who are not the predators, are trapped. My son looked for for 3 months recently for a liveable 2 bedroom accessible to a Melbourne cbd to rent, prepared to payb800 or 900 a week They saw mould ridden horrors, smelly hellholes and 200 desperate renters would turn up, so eventually they paid 1.7million for 2 bedroom 80 year old small home with some ground. And are thankful.

This suffering is govt policy. Preferential voting has maintained corrupt political parties in office, can't break in like trump did.

Fkn politicians and their mates are rorting everything, the wealth of the banks is inversely related to increasing human misery and misery of parents and little kids since 1970.

Politicians and lobbyists who want to dilute white australia are doing their best to break us, Aus can support 22 million people sustainably and they keep bringing in more. Melbourne is increasingly unpleasant, and depressing, even Canberra has slow traffic jammed peak hour traffic in parts.

Aus people know. Remember this was English prison camp until the 1890s or when the last arrived in Fremantle. Plently of that English blood around and inbuilt in systemic structures since the first women were off loaded off the ships and sold for rum then onsold.

In reply to by asteroids

IvannaHumpalot asteroids Sun, 12/03/2017 - 00:11 Permalink

Yes indeed and now that Trump has his tax cuts through and is cracking down on migration, US wages will rise creating inflation and raising interest rates. Aussie banks must compete for capital on the bond markets so their cost of capital rises meanwhile house prices so high will - must- fall with interest rates rising since aussies can't service the loan and then they have nobody to sell to since Turnbull made it illegal for foreign buyers to purchase second-hand properties.

In reply to by asteroids

Ghost who Walks Fri, 12/01/2017 - 01:23 Permalink

"The next part of the story is truly laughable, as the banks suddenly did a 180 degree turn and welcomed an inquiry in a letter which, minutes later, provided the political cover for Turnbull to reverse his opposition."I suspect that the senior people at the banks and the Federal LNP would be looking for a suitable scapegoat for when the housing bubble pops. They also need cover from voters and shareholders, and who better to blame than the Royal Commission and the Media?The key to the story is of course the terms of reference of the investigation as previously identified by Counterfiat.When the collapse in housing prices start, the LNP and the banks will be saying that it has been triggered by the sensationalist press comments coming from the Royal Commission that has influenced investor sentiment.There won't be a word about the fact that we have got to a point where there are no further customers who can afford the housing prices on offer.

Brazen Heist Fri, 12/01/2017 - 06:57 Permalink

He pledged the inquiry would not put “capitalism on trial.”I think a trial of crony capitalism is needed. Which too would impliciate these spineless sellouts posing as leaders. Anglo countries are way too obsessed with blowing property bubbles and treating housing as a casino.

Ghost who Walks Brazen Heist Sat, 12/02/2017 - 04:27 Permalink

I'm not going to be negative and say "That will never happen!", but I think that the ground needs to be prepared before we can get an inquiry of Crony Capitalism. I think it is unlikely that this inquiry will cover that space unless the terms of reference are adjusted during the course of the inquiry. That will only be possible if there is a change of the political parties in power. If the Bennelong By-election returns a Labor member of the house of reps then there is a chance of change. Some further Citizenship issues will also need to pop up in an un-timely fashion to help this along.Apart from a new set of Politicians, I suspect that a major crisis in Australian Banking which burns the Banks and the current Rentier Class would also need to occur to get sufficient public support. The trend is currently your friend, as this seems to be likely.I am no expert on the Australian Real Estate boom but I have seen some comments recently that have me thinking;Once there are no more potential buyers at current prices, what will sustain the housing boom?What percentage of their loan books will Aussie banks have residential housing in 5 or 10 years time?Once more than 50% of the population has an interest in the price of housing dropping, who will provide the political support for policies such as negative gearing, reduced capital gains tax on properties that the owner lives in in prior to selling?Where will Australian Governments get their revenue from if property sales reduce in number and value?I am reminded of the old proverb "Never stand between a politician and a bathtub full of money" Forget the ideology differences, both groups want to harvest cash from their non-supporters and shower it their mates. My perception of the current and the near future is that the Real Estate area and Banks are looking like fat pigs before a feast.

In reply to by Brazen Heist