SQM: Sydney property prices to the moon!

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From SQM Research’s weekly newsletter comes the latest interesting synopsis of the Australian housing market:

Wow! There has been a lot of apparent ground shifting by real estate commentators in recent weeks. The whole “bubble” question and recent bullish forecasts for dwelling prices has created quite a stir in the sector. Old rivals have found some common ground and old friends have found new division between each other. At least we can say in all this that debate in this country is alive and well when it comes to the housing market.

Of course , we have been out there with our rather bullish forecasts of late, something of which I was expecting some critical scrutiny for (as our forecasts should). Only last week, one commentator (Andrew Wilson) while not explicitly referring to us, inferred in a tweet that we forecast the Sydney market was going to go down by 20% in 2012. If Andrew was indeed referring to us, then his claim is a lie. After some rather furious tweets written back in reply from yours truly, his management wrote me an email claiming Andrew wasn’t referring to us after all…..hmmm okay.

Nevertheless, we are bullish on dwelling prices for the current period and into 2014, and we are particularly bullish on the Sydney housing market. To repeat from our recent Housing Boom and Bust Report, the base case forecast for capital city dwelling prices is for a 7-11% rise in 2014 with Sydney leading the charge. Our forecast for Sydney is 15-20%. If you consider our asking prices series , the current annualised tempo nationwide is about 5% and for Sydney it is about 9% . So even now, it would not take that much further acceleration for our forecasts to come within range.

And then when we consider charts like this, and this, and this, it does become apparent the Sydney market at least is looking very strong.

Here is another chart taken from our recent conference and a modification from our recent Housing Boom and Bust Report. It shows the Sydney market at least has been in this type of premium territory.

ScreenHunter_09 Oct. 09 07.32

Indeed, back in 2003 the Sydney housing market was at a 55% premium to National GDP. Right now Sydney is just at a 5% premium and if our forecast for 15-20% proves right, the market will just move into a 20% premium. I agree this method of measurement of fair market value is not perfect but I think it is one of the best out there.

Such a price rise in one year is certainly not without its precedent. It recently occurred over the 12 month period to March 2010 when the ABS recorded a 19.5% increase in house prices for Sydney – something of which the Doctor decided to leave out of his facts in a recent write up. That time the rise was driven by a massive surge in First Home Buyers. This time, it is investor driven as has been well documented.

In all this talk, you might be forgiven for thinking we have turned into outright property bulls with no sense of the risks in the market. No way! Let me be clear on some points in this regard.

While Steve Keen has, rightfully or wrongfully taken a lot of criticism over the years for his 2008 40% crash call, he needs at least to be paid the respect of raising the issue that household debt to GDP levels in this country are very high, making the market susceptible to changes in the supply and subsequent cost of credit.

Where Stephen went wrong was underestimating the power and determination of both sides of politics plus board members of the RBA to stop a large scale house price crash – something which, when tested again in future, the same, active participants, will likely intervene again unless they have run out of resources to do so.

But for the purposes of the here and now, while household debt to GDP levels are high, they are off their highest levels which was 153% back in 2007. Currently we are at 148%. I note that commentary around a 160% threshold is a point that no one thinks would be a good idea to break through. Assuming that 160% is a key threshold what type of increase in debt (and then translated into dwelling price rises) would it take over a 12 month period to reach that point once again?

Well, we have attempted to roughly work this out. See our chart below:

ScreenHunter_10 Oct. 09 07.34

The answer is there is some runway left at current levels. But not much runway. So if our forecasts come within range next year, we think that could translate into about a 7% increase in total household debt for the year. Assuming nominal income growth of 4%, the market still would not have breached the 160% point, but it would have breached the 2007 high by the end of the next year. Assuming another 7% rise in debt in 2015 and 2016 and then it would breach 160%.

Here is another chart you will find interesting. It looks at the change in household debt verses house prices. It seems roughly that changes in debt roughly lag house price changes. The correlation is about 53%. I have marked up in green what the chart would look like for next year assuming the mid-point of our range for house price rises comes into play (7-11)%.

ScreenHunter_11 Oct. 09 07.35

What would it mean if we breached 160%? The housing market would be, like no other time, more sensitive to interest rate movements and more sensitive to adverse movements in unemployment. Even now, the thought of having average home loan interest rates at 7+% (as they were in 2011) would certainly create a large correction in the housing market. As time goes on it just feels like that monetary policy setting is increasingly put in a corner. Lift interest rates back to what was once regarded as “normal levels” and the economy tanks.

What if we get to the point in future, that having a cash rate of 3% or even 2% is too much for the economy to bear? What then? What if there is another global choke on credit supply? Do we eventually go down the path QE for Australia?

Where does it all end? I don’t know.

But for the here and now, interest rate settings have been low enough to stimulate dwelling prices and they are going to continue to stimulate dwelling prices into 2014. The bubble talk will no doubt keep going too and that will create some worry out in the market. But the market will climb the “wall of worry” and it will likely keep climbing that wall at least until interest rates rise again.

Unconventional Economist
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Comments

  1. “Such a price rise in one year is certainly not without its precedent. It recently occurred over the 12 month period to March 2010 when the ABS recorded a 19.5% increase in house prices for Sydney”

    That may be the case, but it is without context considering the 7% fall in prices that preceded it (not to mention increased FHB grants, amongst other differences to today).

    What SQM is predicting here is not a 15-20% boom in 2014 (in isolation), but a 26-32% boom over 2 years (if you work on the basis we see 10% growth this year & 15-20% next year). Likely? I don’t think so, but wouldn’t close my mind to the possibility. There is a precedent for this level of growth if we go back to the boom ending 2003. According to the ABS, Sydney houses increased by 35% over the 2 years leading to the peak (data doesn’t go back far enough to measure what preceded that boom).

  2. The “Bubble talk” is needed if only to apply a breaking force to otherwise rampant price rises.

    Much like the taper talk pantomime in the US is used to cool markets without actually doing anything.

    Buyer’s and seller’s move like sheep, once momentum is established it takes a huge event to stop it and no one wants to spook the flock.

    I’ve no problem with speculators buying at stupid prices. What I don’t like is being asked to bail them and their banks out when it all goes the way of the pear.

    • reusachtigeMEMBER

      We do not want any “breaking force” applied to this, at all. Let’s hope that 15-20% in Sydney ends up being 25! This will mean way more people locked out, saving them, and way more investor activity as they swap houses with each other. Oh so sweet!

      • I agree, the sooner this bubble reaches it’s climax the better, and it’s much better that real mums an dads with families don’t buy now and really burnt later.

      • Forrest GumpMEMBER

        Unfortunately Sheep vote for a political party. Particularly the one that will bail them out.

      • LOL.. Way to go with the wrong analogy..

        How come Coles never runs out of Lamb and mutton? I thought a herd of sheep was too big to slaughter..

        TBTF are the sheep dog (banksters) that herd all the sheep into the property pen.

    • “I’ve no problem with speculators buying at stupid prices. What I don’t like is being asked to bail them and their banks out when it all goes the way of the pear.”

      I don’t think they will get bailed out, just the banks.

      • Actually this has been floating around quite a bit. I suspect the banks will get bailed out but i would be interested in MB doing some analysis on this.

        I know it was done during the GFC. What would the cost be to the government (leave depositors out for the time) if the $1.3 trillion mortgage book had a 10% default rate? 15%?

  3. “If Andrew was indeed referring to us, then his claim is a lie. After some rather furious tweets written back in reply from yours truly”

    I imagine people who sell penis measuring implements must make a motza off real estate commentators.

    Fair dinkum. Nice insight.

  4. Keeping the OCR at sustained record lows in this climate shows all the sense of holding a New years eve fireworks display in the Dandenongs in a hot. howling, low humidity northerly.
    or welding next to a fuel tank

  5. That was an excellent article !

    The open and relaxed discussion of driving household debt to 160% of disposable income and beyond was refreshing and quite possibly reflects the mindset at the RBA. 148% – 160% might be enough to get the fascinating but elusive ‘rising prices attracts buyers of new homes’ effect functioning.

    The HUGE drop from 153% to 148% just shows what a powerful driver of deleveraging the GFC was down under. /sarc.

    One might suggest that a measure of a good response to the GFC would have been the extent to which the height above sea level of the household debt mountain had been reduced.

    But no luck on that front – too many interest rates doves and the bank protection league of extraordinary gentlemen.

    No slowly edging back from the cliff edge for that mob.

    It will be fun defusing 160% but by that time our aspirations may be 170%.

    Keeping pumping Ben, Mr Abe etc. People would freak if the ‘fake’ savings were removed and had to be replaced by real ones accumulated by real people.

    /rant

  6. Congrats, this is the FIRST TIME I’ve seen a commentator point put that the long term direction of interest rates is forever down due to the attitude of global central banks of avoiding recessions at all costs. I noticed this a long long time ago, but strangely never saw anybody else point it out. I’m also curious what the end game is, but for now property is a risk free investment because the RBA won’t let prices go down significantly. When we get to the point of QE prices will rise even more due to the inflationary effect of QE. How long that can last I have no idea.

    • reusachtigeMEMBER

      We have strong powers in this nation that will do everything they can to keep this going for a very very long time. It is like a war effort but even more intense and more well planned. Housing to forever keep this nation strong!

    • Yes – you forgot the bit about how they will come for your savings if it all goes pop – Cyprus style .

      They wont let savers ‘profit’ from a messy asset price deflation.

      A few inflammatory articles about ‘profiteering’ and the govt will have its paws out in no time or will simply ‘hair-cut’ them away.

    • “I’m also curious what the end game is, but for now property is a risk free investment because the RBA won’t let prices go down significantly.”

      Please describe in a paragraph why our central bank has superpowers that other central banks don’t.

      • reusachtigeMEMBER

        It goes WAY beyond our central bank, way beyond. The Politco-Housing complex in this nation has had 10 years to fine tune their bubble-strengthening skills where others failed before they got a hold on things.

      • Massive natural resource assets that we are willing to sell to any foreign buyer who happens to want them. Thus the RBA can continue to stimulate until we have finally sold them all…whenever that is.

        To make this residential RE thing really happen, and for us all to be really rich, we need to lay out a carefully planned programne of asset sales to foreigners, mines, farms, cheese factories, Ports etc. etc. so the foreigners can properly plan their savings programne to take over. That way we will achieve maximum benefit from the sales.

    • Countach, how can you be confident that property is a risk free investment if you’re also unsure about what the end-game for easy money is going to be?

      Borrowing money to buy a hyper-inflated house (by anyone’s measure) is potentially a 20-30 year prospect.

      Be imaginative and consider what can happen over that period when we’re seeing growing unease only 5 years out from what was the biggest economic collapse in history (according to Great Depression Scholar Bernanke).

      The Federal Reserve in the USA also ‘wanted’ certain outcomes prior to the 2007 sub-prime meltdown.

      Turns out they had absolutely no idea what they were doing OR absolutely no concern for the consequences of their actions.

      ABSOLUTELY NO IDEA or CONCERN.

      • “Borrowing money to buy a hyper-inflated house (by anyone’s measure) is potentially a 20-30 year prospect.”
        so FHB buys house and borrows 500k lets say they’re 95% LVR so the house is 525k. a pullback of 25% happens at some point (vs. the purchase price) so its now worth 393k basically this means they paid 12 years of principal and interest for nothing (time it takes for a compound loan of 500k at 7% to pay that much of principal down to a balance of 368k (+25k deposit = 393k) ). also 1. interest costs alot more than rent, 2. you pay for the maintenance, 3. you pay rates.
        unless we see a 50% rise in the next 5 years I can’t say its worth it for me.

      • @rob101 And the numbers prove you to be right. See the thread about RP Data pain and gain report from yesterday.

        By rough back of envelope calcs, > half investors you bought after post Jan 2008 and sold last quarter would have had a real loss.

        And I have been looking back at the past few pain and gain reports and this is true for perhaps anyone buying in the last 5-7 years.

        Edit: Yet the spriuk was on. The RP Data person quoted said, just goes to show that property is a long term investment and those holding for > 15 years doubled their money. He forgot to mention that we had a once in the lifetime set of circumstances in those 15 years.

      • Lol, you keep renting buddy, keep paying off someone else’s asset. In 10 years time, I will have a fully paid off house worth double than what I paid for it and you will still be paying rent, albeit a lot more of it.

      • In 10 years time, I will have a fully paid off house worth double than what I paid for it

        You seem to be able to see into the future, a remarkable ability! 🙄

        Just remember that Darwin said that “ignorance more frequently begets confidence than does knowledge”.

      • Trolls I hope you were being sarcastic or else show us your maths on that.
        However, everyone make no mistake here, this housing frenzy IS RBA policy. They said they’d do it to make up for the mining capex decline and they have. All their public utterances over these past months indicate they think they are right on target here.
        So, as per other comments there is nothing…repeat NOTHING that is too extreme in regard to policy to keep the RE bubble alive. Note pfh’s comments. They are destroying your savings in REAL terms and even more so in RAT terms. They will come after even your nominal amounts in the end. Your Super will go into this damned great black hole. It is a total bail-in with no other possible outcome.
        Note Countach’s comment re interest rates down forever. There is no other possible trend. If Yellen is confirmed as head of the FED you can take it as an official declaration by those who REALLY rule us that this is now set in stone. There will be an unlimited flow of USD forever. There is no end to it.
        This will all end with either very high inflation, or indeed hyper-inflation, as there is a final total loss of faith in our debt-laden fiat. What happens to debt in those circumstances? What is the sequence of events? It depends on which corner of this house of cards falls first?
        Pretty obviously, from a practical viewpoint, you take Marc Faber’s advice and only hold real assets. Have no paper denominated savings. Whether one ought load up on debt to buy real assets, in an environment where you can only fix rates for a 5 year term, might be moot. However every and any sensible attempt to seriously track through the probable responses of Govt and CB’s here suggests load up on debt and buy real assets.
        Just be ready to step damned quickly at some point but that might be decades away.

      • Actually bubbletrolls I am intending to fuck off to another country rather than paying birthday tax and buy a house there to live in rather than being treated as an udermench in my own country and having almost every workplace for the past 5 years decide they are not interested in capital works since there is no more money in it. Courtesy of yellen, divestment in anything productive coming to an organisation near you kthnxbye.

      • @Rob101
        I’m with you,
        After i finish this years rent i am taking my hard earned money to a country more appreciative of it, rather than this country which is trying to kill the FHOB.
        Since when was 30 years of debt enslavement the norm?
        I should invest in the pharma market that sells stress meds.

      • “I should invest in the pharma market that sells stress meds”

        Oh, that is a brilliant idea! Why did not I think about that myself before? HnH thinks now is a good time to buy equities because the US shutdown stuff provides a dip, so I may look into it…..

      • @bubbletrolls How is renting paying off someone else’s assets when in all likelihood they are losing money holding it.

        Show us the math! And stop trolling, your not contributing anything that remotely resembles intelligence to the discussion.

      • @FHB and rob101 With you guys. These people can’t do basic math and call themselves investors.

        Just signed off on a commercial property overseas returning 8.5% net with 5 year leases while paying 6.5% interest on the interest only loan (need to fix this).

        That is what investing should be about not hoping and praying that in 10 years time your house might be worth more in dollar terms than you paid for it today. Inflation, holding costs, what is that? 1+1 = 3.

      • Indeed FF I am not a hater of investment in this country by any means. The problem is, even if housing prices fall as FHOs and people on here hope, there will be no jobs or income or credit availability, and really even if all housing stock goes up you will still be paying a large (4-5 times household income) mortgage for 30 years (it is unlikely our massively uncompetitive wages will rise significantly in real terms in the next 5-10 years) that in my opinion is actually the best case, if this bubble burst it will cause quite a large economic downturn as our economy is so dependent on housing. There is no way to win. to quote a computer:
        “A strange game. The only winning move is not to play.”

    • Countach have you never heard of ‘The Greenspan Put’? The eternal practice of cutting interest rates to pump up the housing market and consumer spending has been de rigeur for the past 40 years. And they put old Bernie Madoff in gaol for operating a Ponzi scheme. Greenspan, Bernanke and Stevens should be his cellmates!

    • OT: countach isn’t the name of a fighting bull .. You are better off calling yourself Diablo or Murciélago (of housing) 😉

  7. SQM’s 2014 house price forecast trajectory is strikingly similar to AK’s clearance rate/house price forecast chart from the other night.

  8. TheRedEconomistMEMBER

    Chance of a rate cut in November, is increasingly looking unlikely

    30 Day Interbank Cash Rate was saying there was a 27% chance of a cut at the start of the month. Now chance of a cut is 17%

    Only a week ago the Main TV channels were talking about a Novemvber for Xmas.

    What bollocks!!!

    http://www.asx.com.au/prices/targetratetracker.htm

    Will be great when they add an extra column about the chance of an increase to 2.75%

    • Pity! We need lower rates. The sooner the better. I’m guessing they won’t cut in November but if lower rates are policy then let’s get on with it.

  9. General Disarray

    This is infuriating.

    It’s not like it requires a degree in economics to figure out that if you have a sector requiring extremely cheap money to grow it will get hammered when the cheap money is withdrawn.

    The RBA and regulators have done a terrible job. They’ve continually let the housing sector get out of control while claiming brilliant economic management. Now a return to normal monetary policy will likely give us a recession. These guys have had the benefit of lessons from overseas yet they still managed to cock it up.

    • “The RBA and regulators have done a terrible job”

      Don’t forget the malpractice of Drs Hockey, Swan and Costello et al, prescribing fiscal amphetamines to cure the housing hangover.

  10. “Where Stephen went wrong was underestimating the power and determination of both sides of politics plus board members of the RBA to stop a large scale house price crash – something which, when tested again in future, the same, active participants, will likely intervene again unless they have run out of resources to do so.”

    Let me fix that paragraph for SQM:

    Where Christopher went wrong was over-estimating the ability of the RBA and political ass napkins to prevent a housing crash – when the ability of central banks & unrepresentative swill to prevent a housing implosion, even in powerhouse US economy, was limited.

    In effect, the RBA and political chaff have insufficient resources (and intelligence) to prevent an eventual Ponzi-financed housing catastrophe, because asset prices are intimately linked to the second derivative of credit growth, and the lemmings (true demand in the way of FHB) are getting thin on the ground.

    • ” intimately linked to the second derivative of credit growth”

      wrong, try again, credit growth is pretty much at is lowest ever and very subdued, despite prices rising fast.
      head exploded.

      • Dam,

        your head just exploded because you don’t understand.

        Maybe you should get some calculus before you accuse others of being wrong.

        Magnus is not talking about credit growth (which you correctly state is low) but the second derivative of credit growth (credit impulse).

        Got a clue yet?

      • I know perfectly well bob, Keen made a fool of himself last year with the correlation rate of change/houseprice ( ask Mav 😉 )

      • Keen made a fool of himself last year with the correlation velocity/houseprice

        Dam, you fool. Keen was talking about debt acceleration. You can’t get your basic math right, At least get your basic physics right – Velocity and acceleration are two different things. Acceleration = rate of change in Velocity.

        BTW, you still haven’t told us how much you have in your Interest Only mega mortgage offset account (You can state it as % of your debt) 😉

      • I know Mav i changed it I was trying to make a reference of one of term Keen used, it did amuse me last year, but I dont remember the exact one.

      • My leverage increased a bit since I did some reno to my PPOR ( totally overcapitalized), i m still under 69%, I can buy a 4br cash) and if I do not buy this year it will drop under 60% pretty soon (especially if I get some free equity from this prices rise ( so far QLD is still a very good deal it has not moved too much)).I m not invested too heavily.

      • especially if I get some free equity from this prices rise

        dam, you know very well that I wasn’t asking about your LVR or equity or paper profits.

        You claimed that investors are going for Interest Only loan because they can put cash in the offset account.. just wondering if you are practicing what you claim or just bluffing.

  11. TheRedEconomistMEMBER

    http://www.smh.com.au/money/borrowing/bank-on-getting-a-foot-in-the-door-20131008-2v4ra.html

    The picture reminds me of myself 10 years ago.

    Yep 2003 was a great time to buy in the outer suburbs.

    “You better get in before you miss out!!!” … “You can’t loose on Bricks and Mortar!!”

    Well sorry… Costella’s tax cut to the rich, spiked inflation and interest rates sent most of the IP owners out west to the agents for a quick sale

    Higher interest rates led to plenty of places on the market, then prices dropped by 10-20%…

    90 minute commute to town each way ..got to much.. So I rented it out…..

    Then a nice tenant recommended by the agent lost his job and ended up doing a runner.

    I sold 5 year later for $30K loss… not even including the interest on loan over that time or agents fees.

    Can’t see Fairfax ringing me for my story.

    It was not until the Rudds doubling of the FHBG that things improved.

    • Is David Potts a registered financial advisor? If not then there should be laws against this!

      I know RE is not regulated but this is nonsense!

      • David Potts should be moved to the Domain/APM property section of Fairfax.

        PS: Gittins & Pascometer could join em there.. but at least produce one good article in a blue moon.

      • dumb_non_economistMEMBER

        FF,

        Don’t expect changes anytime soon, youse lot just wan to ruin it for us!

      • @DNE I don’t. Don’t worry they are doing a good enough job of screwing this up themselves.

  12. Its not rocket science to see how and possibly even when the ‘greatest property bubble of all time’ will collapse.

    The key to the current property market isn’t demand, supply or even foreign investors or tax. Its leverage and the price of credit. The property price cycle clearly follows the interest rate cycle.

    The current boom in prices is caused by the RBA putting the cash rate at historical lows. So what would it cause interest rates to rise?

    Lets clear our minds of the current hype and remember the RBA has a primary mandate of price stability. If inflation took off, so would rates and down would come the housing bubble. It almost happened in 2008 when the RBA moved the cash rate up to 7.25%. Property prices were flatlining and generally falling pretty fast. Then the ‘GFC’ happened and the RBA cut 100bps off in one sitting, applied a AAA guarantee to the debt issued by Australian banks and launched the AOFM RMBS bond-buying scheme to breath liquidity into the Australian RMBS market.

    The AUD rose as the US Fed slashed rates to head off their recession, while China launched a massive credit splurge which is now coming home to roost. The Chinese bought up Australia’s steel / iron ore / coal production (even while the AUD was rising) so Australia’s economy boomed while inflation was kept low due to the rising AUD (breaking parity, with the price of imports falling over 20% in this time).

    So again Australia was on the right side of the coin. Now the ‘mining boom is over’ (mainly because the build up phase of production is slowing and China is cooling its economy) so the RBA is hoping the housing market will ‘take up the slack’. Instead of leaning against the wind, the RBA is purposely pushing for a housing recovery with abnormally low rates (first time in history rates have been below 3% with unemployment below 6%!).

    So, what will cause the bubble to burst? Inflation. How will it happen? The US will start withdrawing its $85bn a month QE program in $10bn reductions starting around December / Jan ’14. It will gradually phase this out as unemployment comes back down to 6.5%. So maybe by as early as Feb ’14 the AUD will start falling again (remember it broke through parity when Bernanke started the Taper talk). It will drop a couple of big figures when Yellen actually tapers, and head back down to USD0.60 when US rate rises start sometime near end 2014.

    Given the impact of imports on Australian inflation, this will see the CPI start to rise sharply. The RBA will be forced to raise rates. Maybe by then debt/income levels will be well north of 170%.

    Remember here how the Aussie banks (all of them – the Big 4, the second tier BoQ/Suncorp/ME, the building societies) assess mortgage affordability. Its based on the borrow being able to withstand a 2.5% interest rate rise while affording to live off the Henderson poverty index (you can google the HPI, which is from the 1960’s and basically means eating beans on toast).

    So you have a bunch of maxed out borrowers (remembering Australia has the highest house price/income multiples and some of the lowest rent yields) entering into ‘severe’ mortgage stress. The arrears data doesn’t really show up in the RMBS SPIN numbers early on, as people forgo that extra pint at the pub to make the mortgage repayment. But for each rate rise more and more people fall behind. First in the most disadvantaged suburbs (when are greater % of income is devoted toward mortgage repayments) but then spreads to a general slow down in house price growth. The US is probably doing fine by now, with a structurally reduced fiscal deficit and a renewed economy through shale gas production etc. So the AUD remains low even though the RBA is raising rates and inflation remains elevated. Non-performing loan numbers start rising on Australian banks (first with the second tier lenders who have chased the bottom of the market, and the non-conforming RMBS market like Pepper, Liberty etc). The non-conforming market starts tapping on their LMI policies, which QBE (which holds around 80% of the LMI market) pays out without issue.

    But the arrears problem rises and gains momentum. The psychology toward the housing market has changed – investors are tapping out. Foreigners are dropping their land banked assets as they see where the economy and market is heading. Funding costs for the Aussie banks rise as bond holders and international lenders start worrying about their exposure to a property bubble. The RMBS market finds it harder to issue. The Aussie government sits on its hands to keep its flat fiscal position in check.

    QBE starts having some problems, having underwritten every single risky mortgage in the country. Unfortunately, every lender has insured or reinsured its risky mortgage with QBE, so if it folds the housing market collapses overnight. Maybe the government separates QBE LMI from its other activities, maybe it props it up.

    So the banks are finding it tough to issue, and pass this elevated funding costs on to borrowers, exacerbating the original problem. The Aussie market hits recession given the high value of wealth stored in housing or equities (with the big banks taking an unequal share of both).

    Not hard to see the market adjusting back down by 50%, but it will seem a lot worse than just a raw number – just ask Irish residents who are still experiencing a property price adjustment.

    So – the long and the short. Wait until the US recovers to see the AUD housing market bust.

    • I think you are mostly correct, though I am not quite sure about (1) what the RBA might do in the face of tanking AUD / rising inflation, (2) liability of QBE.

      I doubt the RBA will raise rates. Falling AUD will be desirable for our competitiveness. Of course, the bubble will still pop due to its own weight. After all, rising inflation means falling house prices in inflation adjusted terms.

      As for QBE, I thought it was its subsidiaries that were exposed? Once they go belly up, I thought that QBE’s liability was limited to what they had invested into these subsidiaries (which is peanuts for them)? But you are right in who will end up holding the goat (remember the counter party risk talks in 2008-2009?).