Plunge protection has begun

House prices down! Property market correcting! FHBs Revolt! It’s all happening folks and to many the inevitable asset price correction will gather full speed from here. But be warned and not deluded, the vest powers in every quarter will fight tooth and nail to try and prevent it happening. I had planned to write this post anyway but Swan’s announcement on Friday of increased and unnecessary government support for the RMBS market through the AOFM has signaled another continuous step in the propping up of an unsustainable market and the march to systemic failure.

As I and other bloggers on this site have continually stated, over expansion of credit is at the heart of over heated house prices. Keeping credit available to over indebted borrowers is the coalface where the fight will continue.  Make no mistake it is a fight against those that will grab whatever loot they can, while they can, and then leave us all with the debt and the mess to clean up. Until recently the burglars have been sure they’ve had the upper hand, but other challenges are emerging for the banks and the government to deal with which is starting to make them desperate.

Twice in previous posts I have referred to the problem of an increased FX rate and offshore debt. To put it simply, referenced from the rest of the world, as the A$ strengthens Australia’s offshore borrowings, the majority of which are on the bank’s balance sheets, are increasing substantially even if Australia’s banks do not actually increase its $A borrowings.

The banks’ offshore borrowings are mostly but not totally hedged, unless we either use the hedge proceeds to reduce debt or, take advantage of the high A$ on unhedged debt maturing to repay debt, then we need to borrow more offshore currency (e.g. US$) to maintain the same level of $A debt. As we are not repaying debt but rolling it over, and with a continuing A$/US$ FX rate of 1.05 plus continued strength in Euro and Sterling, our offshore borrowings relative to the rest of the world are growing significantly. A reasonable assumption of the average A$/US$ FX rate of the bank’s borrowings is around 80 cents then our $US borrowings will increase by over 25% just to maintain the same level of A$ debt. As the gross offshore borrowings are around A$700bn then that’s a very worrying prospect.

The strength of the $A is slamming many of our industries but also our indebtedness to the rest of the world. The price to pay for solely relying on houses and holes is very high indeed.

The banks, Swan and the regulators are getting very anxious about this situation and the need to actually significantly increase offshore borrowings to keep the property market dancing. Or at least, let’s dance until it’s someone else’s problem. Consequently we get the unusually timed announcement of increased government support for the RMBS markets of $4Bn. There was no need to actually do this or to do it now. The AOFM has about $3.25bn of previous allocation yet to spend. Was it simply an announcement they wanted to keep out of budget day or a dog whistle to the offshore markets?

The Australian government will do all that it takes at the moment to prop up the bank’s ability to raise offshore funds. This keeps the credit flowing into the hands of anyone willing to take on the weight of debt on the promise of riches for all. A gratuitous $4bn is not actually much for the amounts of debt required but it speaks volumes to offshore investors into our banks of the support which the government will give to keep the dance going. Keep squarely in mind that it’s $4bn of borrowed money. So the government is signaling that borrowing to prop up the market is not a problem.

My view is that the fight back to maintain increasing credit levels will occur on many fronts in 2011 before the weight of debt gets far too much through 2012.  Property market corrections therefore will be sparodic at best for a while to come. Perhaps the fight of a thousand cuts.

Covered bond legislation will be finalized in the second half of the year. The importance of covered bonds will be that the major banks will be able to weaken their balance sheets but still maintain the same ratings with implied government support and so will be able to further leverage up those under capitalised balance sheets. This is stated in the explanatory note to the covered bond legislation [REF] where it says that depositors do not have to worry if a bank fails as the government explicitly guarantees deposits of $1m or less (of course all deposits have an implied guarantee).

But the real rub is that if the government guarantee was ever called upon then a retrospective levy is imposed on the other banks to pay for the shortfall. So actually the banks do not pay for the guarantee unless it blows up. A certain recipe for overt risk taking spelled out in conjunction with a mechanism i.e. covered bonds, for increasing leverage.

So what are the other things that’ll be brought out of the burglar’s bag of tricks to keep Swan in power and the bankers with their snouts in the ever-increasing trough of our indebtedness?

The major banks will continue to falsely represent the strength of their balance sheets through dubious and opaque methodologies for calculating risk-weighted assets on residential mortgages and false comparisons of their balance sheets with offshore banks. Legitinmacy will be given to all this by inaction or even support from both APRA and the RBA. Everything OK here, global investor just dive in!

I’ve also pointed out the reporting that the banks outline for deposits. That is there are significant loans defined as deposits which are not deposits including over $170bn of offshore loans as at 30 Sept 2010 (updated figures in a few weeks).

I was in discussions with a large bond fund manager last week who informed me that his best performing asset was his many hundreds of millions in retail bank deposits. As APRA loves to make the point that deposits are the lowest risk liability of banks. I ask, “What drugs are you on?”.

Don’t be surprised if deposits suddenly qualify for some form of tax break but with no reform of negative gearing of course. More money into houses at the expense of wealth creating sustainable businesses is of no consequence to the powers that wish to abrogate any responsibility for a massively over leveraged housing market.

Will there be a return of FHOG? Although mindlessly stupid and against any sensible non conflicted advice, I do not count it out. Again, it would need to be funded by debt which only compounds the problems.


  1. Yep, the cracks are widening. Hardly surprised by the governments approach of using spac filler instead of really fixing the core issues at hand.

  2. Well
    With Swannie in the financial saddle, the bogan wonder sorting the Carbon issue and our health minister busy redesigning cigarette packets so they look unattractive enough to make addicts quit, I’d say we’re in complete control and have nothing to worry about…

  3. The trick up their sleeve? It will be AMORTISATION schedules.

    ie: the 40 year mortgage will address the mis-nomer of “affordability” by reducing the monthly payment while swelling the interest take for the Bank.

    I don’t think they’ve got anywhere to move with LVR’s.

    And further grants will be unpalatable – there is widespread acknowlegement that FHOG worked against affordability.

  4. I hate to say it, but I really do expect the powers that be to spend nearly the entirely country’s current AND future prosperity trying to stop Oz from sliding into the irresistible black hole that is our inevitable housing-induced deep recession/depression.

    God help us, and our children.

    • They had a crack in Japan, Ireland and the USA and that created a bulltrap upward blip in the indices before continuing their travel south. Why should we be any different?

  5. Absolutely disgusted that we’re tipping billions into artificially propping up house prices, yet they’re looking to slash an already skinny research budget.

  6. Meanwhile, Shadow treasurer Jokey’s idea of banking reform is even worse – a government guarantee of the RMBS market.
    I guess this is his Svengali CJ’s ghost-written idea – for the express purpose of extending the moral hazard to his non-bankster buddies.

    • You’ve really gotta admire CJ’s cojones, I think he was even floating that one while freddie and fannie were sinking the US financial system… that worked so well, why not do the same here?

      If he ever gets his idea for CFD’s on residential property up and running I’m packing my bags and leaving..

  7. Goes looking for a Bundy Rum bottle….I think the best solution might be to stay drunk!
    Thanks DT and others excellent comments.

    • The FIRE sale WILL happen WHILE all measures to prop it up are applied and burnt out.

      After each step change downward the measures applied to resist the trend will be celebrated as successfully “halting” the slide.

      As each “barrier” falls it will add to the fear and build the momentum/energy for the next step change.

  8. You know Australia is different. Thats exactly right. This time it is different because

    People cant take on any more debt

    Housing has reached that point where
    middle class people cant afford it

    Everything except mining is starting to go into a recession therefore jobs will start to go away.

    Wont be long till the job market goes the other way. Negative

    Hey let the govt prop everything back up. The thing is this time is different all the tools they use to have to prop it up wont work. I am all for it then Swan and the rest of the Aussie govt idiots can have a nice big piece of egg all over there face.

    Australia needs to face it demons like the US, Europe and the rest of the world is facing. Get it over with.


  9. Ex mortgage broker

    Hmm … inject a further $4bn, $40bn or $400bn into the RMBS market – what does it matter??

    Affordability is at the ceiling already. Affordability is the issue, not availability of funds (yet).

    If apples cost too much already, does a greengrocer increase his sales by adding yet more apples to his shelf?

    Swan can add more available loans to the system but unless those loans can be afforded by the homebuying public they’re not going to get written.

    The slow deflate will continue …

    • Very good point affordability is a very relevant issue but availability will keep things propped for some time. Would banks start writing loans at a loss? As the data showed last week, honeymoon rates are on the rise!

    • Ex mortgage broker

      In the most laughable case of spin doctoring, Perth’s “Sunday Times” ran a two page spread over the weekend under the headline: “WA REAL ESTATE A STAR SHOW”.

      Complete with a little comparison table (“Then and Now”) it showed the median house price had jumped a massive 900% between 1982 and 2010 compared with other items like a litre of petrol (47c to $1.45 – 208%)or a Holden ($5,322 to $43,490 – 717%). This was meant to convince us what a fantastic investment property is.

      But the most telling item was right there in their table – average weeekly wage ($330 to $1,273 – 286%).

      Hmm … so house prices have risen a whopping 900% while average incomes have risen just 286%. Hello-o-o-o!! Do the arithmetic people. Do we have to spell it out – AFFORDABILITY!

      It didn’t stop REIWA president Alan Bourke from saying he “expected more of the same over the long term as Perth’s housing market kept booming. I can’t see why it should be any different over the next 30 years”.

      I can.

      • What are you talking about? The income-house price ratio went from 3x to 4x in the last 20 years, its nothing by international standards, totally safe… Glenn Stevens said so himself.

        Whats funny is, given the stats you saw in the paper… If it was previously 3:1 (eg house 30k, income 10k), if we take that inflation, houses are now 270k, income 28.6k, so the income-house price ratio according to this went from 3 to 9.44

        Oops. Maybe Glenn didn’t carry a 1?

  10. Good point about rolling over debt at higher FX rates. In USD terms our banks are borrowing more just to stand still. God help the banks if China crashes and they’re trying to rollover their $1.05 loans at $0.60.

  11. You’re all wrong. Over here we get a tax deduction (for 10 years) for home loan interest. You can even transfer the deduction to your spouse in some circumstances. If Mr Goose (sorry Swan) picks up this idea it might destroy the govts surplus but they should be able to spin it strongly enough to get re-elected and prop things up for a good while longer. Insert smiley face here.

  12. why are the public servants propping anything up??? soviet australia will get what it deserves/

  13. Always wanted to ask this: Why the F are our banks borrowing that much? don’t we have a fractional reserve system here? cant they lend out 14x(?) what they have in deposits? and even then my understanding is fractional reserve is BS anyway since they make the loan then find the reserve, not other way around.

    “As the gross offshore borrowings are around A$700bn” is that money just reserves? isn’t there enough money flowing in from foreign speculators to meet reserves?

    i am missing something for sure, hope you can help 🙂

    • I’m no expert, but I think thats the point, they’ve actually loaned out all other avenues, and now need foreign money to keep loaning out??

      Its just absolutely amazing watching this madness and seeing nobody do anything or even acknowledge it (government-wise). Thanks to all the guys running this site at least we have some idea of whats going on!!

  14. US Housing Stimulus Tried and Failed

    Fannie and Freddie nationalized
    Home buyer tax credits
    Home buyer tax credit extensions
    HAMP – Home Affordable Mortgage Program
    Numerous foreclosure moratoriums
    QE round I
    QE round II
    Fed bought $2 trillion in mortgages to keep rates low
    Fed holding short-term rates at zero percent
    Record low mortgage rates

    There is no mercy for the those who learn nothing from other people’s mistakes

  15. It has to be said. When is macro business going to have a conference? I read this blog everyday, it is so refreshing to hear ideas and comments from educated people that have foresight (and actually care) about what is happening to this country….

  16. People, for the most part, stood their ground firmly. But that ground itself was about to give way.
    – Joseph A. Schumpeter — Business Cycles, 1939

    TO paraphrase the silver bodgie-no child will live in poverty–YOU ALL WILL.

    TO Ponzimania’s question-above a quote from an Irish newspaper:

    One example of this is that 300,000 or so negative-equity mortgages were all put down as losses, even though many of them will continue to be paid.
    “Take two public servants, who can’t be fired — they will continue to pay their mortgage, no matter what. Blackrock took no account of that, so the losses are massively overstated,” the former government adviser added.

    PUBLIC SERVANTS WHO CAN’T OR WON’T BE FIRED. VESTED INTERESTS. No cessation of gluttony by the protected species of fat arsed wombats in any civil services in the West. What’s the bet if there are any redunancies that the payout figure will cover their mortgages–front run the system.

    Bank guarantee plus employment guarantee, guarantees depression. Two huge parasites and one small host getting weaker.

  17. I think the Northern Territory is an interesting case regarding property boom and bust and population comings and going.

  18. your trying to tell me that the public servants wont cut staff during a depression? I beg to differ, when it gets worse they will be FORCED to the $ wont be there….the GST income is already SHRINKING and they want a carbon tax?? Are you farkin for real? Seems like they wanna bankrupt themselves, cool I cant wait. Seems its the public serpents in a war to destroy the income stream, self suicide.

  19. Not sure you saw this regarding Aus RMBS:

    “…Ratings agency Standard & Poor’s (S&P) said loans underlying Australian RMBS that were more than 30 days in arrears jumped to 1.59 per cent in January, up from 1.38 per cent in December.

    Arrears for sub-prime loans backing RMBS jumped 126 basis points to 11.45 per cent, the agency said.”

    As an aside- we do have subprime!