Australia’s economy is going down and under
Australia’s economy has enjoyed 26 years of growth but it’s about to come to an abrupt end. It will be triggered by the bursting of its property bubble and falling revenues from its main export commodities iron ore and coal
Australia recently recorded its 104th consecutive quarter of growth without a recession, breaking the record set by the Netherlands. It prompted Australia’s federal Treasurer Scott Morrison to claim that the economy was in “surprisingly good shape”. His statement is reminiscent of that old joke. How can you tell if a politician is lying? His lips are moving.
Australia’s economy is not in good shape. Its growth has been built on demand for commodities like coal and steel from China and investment in an over-inflated property market. These dual dependencies are about to be brutally exposed.
The exact timing and full impact of Australia’s economic tailspin is unknown. However, the precise date and exact magnitude are unnecessary to take advantage of the collapse as a trader. The circumstances that make an economic crash inevitable are already in place and it is far better to be five months early rather than five minutes late for an opportunity like this.
The inevitability of Australia’s financial meltdown is in part due to an external factor which it has no control over: China.
Societe Generale’s China economist Wei Yao recently said: “Chinese banks are looking down the barrel of a staggering $1.7 trillion worth of losses”. Hyaman Capital’s Kyle Bass calls China a “$34 trillion experiment” which is “exploding”, where Chinese bank losses “could exceed 400% of the US banking losses incurred during the sub-prime crisis”.
Simply put, if China’s economy bends Australia’s will buckle.
Australia’s biggest export is iron ore and frequently the country’s main driver of a trade surplus and GDP growth with 81% of its iron ore exports going to China. However, demand for iron ore in China is falling because 50% of it comes from property development which in 2017 is under stress as prices level off and credit dries up. Critically, the price of iron ore has fallen 60% over the last 6 years.
Australia’s second biggest export is coal with supply increasing to 388Mt in 2016 from 261Mt in 2008. Unfortunately, its value has crumbled over that same period dropping from $54.7 billion to $34 billion. Worse still is the fact that Japan and China are Australia’s biggest customers, and both are scaling back their use of it, with China recently committing to ending all coal imports in the near future.
Perhaps the most damning statistic for Australia’s mining industry is that between 2015-16 $179billion in revenue cost $171 billion which represents a paltry 3.9% margin. It explains why mining has dropped from 19% of GDP to just 6.8% and will continue to fall.
The tipping point for Australia’s economy will be when the property bubble finally bursts.
House prices have gone up every year for 55 years representing a 6556% increase since 1961. Australia’s housing market has been fuelled by record low rates of cheap credit, resulting in a debt-to-income level that has climbed to an all-time peak of 189%.
Housing bubble expert, Jonathan Tepper, has described Australia’s property market as “one of the biggest bubbles in history”. He has also criticised the country’s regulators for acting too late to cool the market and adding that the banking system in Australia was “unstable”.
Stressed mortgage holders
A recent study showed 57% of Australian mortgage holders would not be able to handle a $100 loan payment increase.
Should the average standard variable lending rate increase from 4.83% to 5.28% more than half the country’s mortgage holders would struggle to make their payments. That figure increases to 70% for South Australian borrowers, where house prices are at their highest.
Instead of cooling the housing market the government exacerbated the problem by making foreign investment in property easier. They relaxed legislation to make it possible for temporary residents to buy property in Australia.
The interest from China was huge and further inflated the market. However, many of the Chinese who borrowed to buy property from Australian banks used fake statements of foreign income.
USB estimates that major Australian banks are carrying $500 billion of mortgages which are “not completely factually accurate”.
The actions of the government have pushed the price of property well beyond the reach of the average Australian. Urban planners’ scale states a median house price to household income ratio of 5.1 or over is “severely unaffordable”.
Research by the Domain Group found the median house price in Sydney at the end of July 2017 was $1,178,417. The Australian Bureau of Statistics report that the average pre-tax wage for the city is $91,000. This makes the median house price to household income ratio for Sydney 13x. For Melbourne it is 9.6x. After tax these ratios widen still further. This also assumes that your average Australian will go without eating and clothing in order to pay the mortgage.
Clearly, property can no longer drive Australia’s economy, and nor can it rely on demand for its mining output. Australia is also lacking in future proof industries. Its companies are treading water, company tax has remained static at $68 billion for the last three years.
Altair Asset Management effectively rubber-stamped the fact that Australia’s property market is about to implode. In May this year it liquidated its Australian share funds and return hundreds of millions of dollars back to clients because they are so sure of the impending property market collapse. It’s an extraordinary decision for any asset management company to take.
FXB Trading’s experts are equally convinced that Australia’s economy is at the point of no return. They’ve devised a strategy to profit from the situation as many analysts did ahead of the 2008 sub-prime mortgage crash in the US which then caused the subsequent global financial crisis.
In the 2008 scenario their investment returned ratios of between 1:10 to 1:20. FXB’s traders will replicate the trade, but will also hedge their position.
Until the market crashed in 2008 those US traders were in a losing position. Hedging makes it is possible to avoid losses until the crash occurs.