Real estate treasurer pops Aussie bubble in New York

By Leith van Onselen

Australia’s treasurer for the Property Council, Scott Morrison, has gone on a spruiking roadshow to American businesses and ratings agencies, playing down concerns about Australia’s world-beating household debt and a property bubble. From The AFR:

Mr Morrison told a lunch audience at Citibank in New York that… stable banks helped Australia survive international financial shocks and were the key channel for foreign capital to be pumped into the economy to cover a domestic savings shortfall, he said…

The Treasurer took the opportunity in New York to “put in context” the domestic housing market and current account deficit that, he said, funded “productive” investment and had been a feature of the economy for 150 years.

“The current account deficit is there because of the surplus of investment opportunities over domestic capital,” he said.

“It’s not going into speculative real estate development in overheated markets”…

Nice try Scott. Blind Freddy can see that Australia’s banks have borrowed huge sums from offshore, thus expanding Australia’s external debt:

ScreenHunter_15306 Oct. 06 12.32

And these offshore borrowings have been a key ingredient behind the banks’ growing loan books – mostly mortgages – which stood at a record 209.3% of GDP as at June 2016:

ScreenHunter_15183 Sep. 29 16.00

Which has also driven Australia’s mortgage and household debt to all-time highs, and the highest level in the world:

ScreenHunter_15305 Oct. 06 12.30

As for Morrison’s claim that Australia’s record debt is being used to fund “productive” investment, the data clearly suggests otherwise:

ScreenHunter_15307 Oct. 06 12.37 ScreenHunter_15308 Oct. 06 12.38

The key risk is that the banks’ ability to continue borrowing from offshore and supporting housing rests with foreigners’ willingness to continue extending them credit. This is why Scott Morrison is spruiking so loudly.

The Federal Budget, too, is now hostage to the banks’ offshore borrowing binge as it cannot borrow to spend on infrastructure or other initiatives for fear that Australia will lose its AAA credit rating, potentially leading to an unraveling of the private debt bubble created by Australia’s banks.

If Scott Morrison is so confident of the fundamental strength of the housing market, then why did he claim that Labor’s proposed minor changes to negative gearing and the capital gains tax discount would “crash” the economy:

“If you want to crash confidence in the economy, go and play around with the value of the family home, which is what Labor’s proposal, their housing tax proposal, does”…

“The problem is that household consumption is driving our economy… A big housing tax will undermine consumer confidence, undermine people’s own home values, and have all sorts of disruptive impacts on the economy”…

Hardly sounds like a ringing endorsement, does it?

The reality is that Morrison knows he is managing a bubble, not an economy. And this requires channelling even more of the nation’s resources into maintaining the ponzi, regardless of the longer-term costs economically, socially, and inter-generationally, as well as maintaining the confidence of (and funding from) foreign investors.

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Unconventional Economist
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  1. He might have had more credibility in a room of New York bankers, if he talked about the Sharks’ premiership.

    • He is playing by the rules for career minded minions when talking to their bosses: tell them what they want to hear.

    • This is what the bankers have been telling everyone about their lending practices (for productive purposes only and to rock solid borrowers), so nothing to see here folks…on message, much sagely nodding around the room. Well done Scotty, safe hands on the tiller.

  2. *Australia’s banks have borrowed huge sums from offshore, thus expanding Australia’s external debt*

    But not Australia’s net external liabilities, which is what matters. This is indeed due to the excess of investment over domestic savings, as Morrison said (read: as Treasury wrote in his speech).

  3. “he said, funded “productive” investment ”
    The picture of Alan Bond with hands raised, signalling the lifting of Aus II yacht to reveal its keel comes to mind. That’s a good picture to run alongside Scott headline. Except the debt tide goes out to show the debt hull.

  4. UrbanWastelandMEMBER

    The credibility is tenuous at best. I don’t understand how the AUD remains so high in this context… Can someone offer some insight?

  5. When you talk about Australian Banks borrowing large amount offshore you should at least recognise that the creation of AUD to run current account deficits results in the accumulation of AUD by foreigners who then either have to buy Australian goods, services or assets (such as bank bonds as well as corporate or government bonds) or the AUD ends up held by an Australian bank through either deposits or vostro accounts. Australian bank can create as much debt as they like out of nothing (subject to regulatory prudential requirements and capital) so it is not so much that they want or need to borrow from overseas but rather the system demands that they accept deposits of AUD including from foreigners who have earnt it and want to deposit it. If they deposit it in NY with Citibank then Citibank, if no one else borrows it direct or buys it, deposits in an Australian bank because that is how they get some interest on their residual AUD overnight. It’ a much more interconnected and interdependent process. It is not the fist step in making a loan, it is the residue of current account deficits.