Deutsche: Australian property to crash like Ireland

Via Deutsche’s new banking analyst Matthew Wilson:

At best, mortgage growth will continue to slow as deleveraging works its way through the economy constraining house prices and discretionary spend, but it’s unlikely to be beautiful.

At worst, we confront the Irish-like scenario.

However, we think it’s unlikely to reach the Irish heights of 25 per cent housing NPLs for a decade due to a more independent policy infrastructure.

However, a zombie-like mortgage book is possible.

It is not politically palatable nor logistically easy to foreclose on vast amounts of troubled mortgages.

Capital therefore may not be immediately available to deploy into productive recovery credit.

Wilson slashed his 2021 bank earnings outlook by 40% for CBA and WBC owing to their much heavier mortgage exposure:

Prima facie, the outcome today appears to be – unbalanced business mix, an over-cropped consumer and an underinvested franchise which is vulnerable to economic shock, disruption, obsolescence, litigation, and regulatory/political overreach.

The majors are far from broken, but they have sustained a severe self-inflicted flesh wound, requiring significant cultural attention.

Management must now muster the courage to change the mind-set and behaviour of boards, investors and employees in order to win back the trust of the customer.

…ANZ appears to be reading the industry trends best.

ANZ is a classic commercial bank that has always struggled to expand into the historically high return, high growth retail segment.

We think it could now be entering a more supportive environment that plays to ANZ’s natural franchise strengths.

The lost decade and a half appears to be closing as NAB has executed material structural change.

We now have a very simple Australian and New Zealand commercial bank, on essentially one platform, nearly match fit to relish a more dynamic corporate banking setting.

Now we are getting real.

Houses and Holes
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  1. So ANZ/NAB to fair better than WBC/CBA. Sounds about right. MQG looking increasingly ripe to me, exposed to a global slowdown AND Australian housing through their manic feasting on Big 4 scraps.

    • That comment about a zombie like mortgage book and the refs to WBC and CBA (more heavily exposed to Sydney in particular) are why i think if we do have a global end of financial cycle implosion then Australia will lose a big 4 bank (turned into a ‘bad bank’ so that all NPLs and dubious balance sheet assets from across the system can be swept into it) – and why i would look at WBC first.

      I dont think Australia can politically stomach a zombified banking system for long, it has to purge so that the system (that remaining) can show enough life to attract global capital. CBA will have political coverage that the others dont. ANZ and NAB are not appreciably better, but they were simply less good at being bad. If it is to be one of them which becomes a bad bank then they would get (Melbourne based) less support than either Sydney based bank. That would depend on a Melbourne real estate implosion being materially worse (and their exposure worse) than that of Sydney.

      A running chart of the big 4 (or5 or whatever) outlining their

      Net capital position
      Loan book
      RE implosion dynamics

      …would be handy

      • I’m expecting to see a huge expansion of PPP’s in the new year targetted at addressing Sydney’s Infrastructure woes. The required capital is likely to be sourced through our big 4 / 5 banks as a sort of backdoor bailout of their Mortgage book…the banks can show diversification of their loan book and Growth through PPP funding all with an implied Govt guarantee.
        Cashflow continues with these PPP’s taking over from the Mortgage machine for as long as it takes. Big $ bank Bond deals will continue to be made.
        It’s a stupid is as Stupid does solution but that doesn’t mean it wont happen.

      • Yep NPLs = Non Performing Loans

        Fisho ..

        I actually see something in this line too, but I think it will go much further than infrastructure PPPs.

        The step moving onto your radar right now is a globally coordinated (and supported by uber capital and the 1%) ‘investment’ into geo engineering in the face of global warming – dykes and dams, and canals, and desal plants, and trees, and making mountains out of spare tyres, maybe even digging of deep water ports, and things which move cold water about, and things which reflect light and things which send carbon underground and/or into space………

        …….all excruciatingly expensive, all back by government, all an ideal mechanism to replace a generations worth of mega government and private mega debt on the books of major global banks, and all ideal for leaving future generations on the hook (while giving them some infrastructure to be ‘thankful’ for)

        And all ultimately leaving us with a weird form of airconditioned world where might is right in terms of control of the demand and geo engineering assets or funding to build more.

      • @Gunna Damn, that’s all a bit dystopian
        I’d settle for a future generation that’s forced to sell of Aussie assets for zero income just so the plebs have jerbs (oh wait a minute we already do that with LNG)…so maybe you’re on the money
        What’s wrong with reverting to a place that deploys our labour force to make useful things and sell them to the rest of the world, or create software / systems that’s on everyone’s must have list (like Apple) or make content (movies youtubes vids, pharmaceuticals, games ….) So many possibilities for such a reasonably well educated, well connected / interconnected western country, yet despite this we do seem to be actively choosing the wrong direction with much higher frequency than would be suggested by simple probability.

      • @fisho

        Well i for one can hardly wait for the day the Chinese (or the Indians or the Brazilians or whoever) come to us and say ‘look we need the extra rain this year so you guys will need to go dry, or maybe run those (Chinese SOE owned) desal plants a touch harder (for a fee), or the day toothy business news presenters with American accents talk about Rain futures in Australia are being bought as Sunshine gets sold off, along with Air quality in Jakarta and Manila. T Boone Pickens says after a long dry spell The market is looking for rain on the Aussie plains…..

      • I think gunna is right on the money with that scenario. It’s in tune with the whole globalist economics model that has been running for 60 years and right in tune why this whole thing has been designed to run out of control.
        Fishos model will run in conjunction!!!
        It’s all good!

      • CBA and Westpac have exposure issues, NAB is questionable and ANZ has a huge amount of New Zealand (Auckland) mortgages which nobody has been talking about.

        MQG is shady as all hell and been sucking up questionable leftovers from the big 4.

        Bendigo bank is now saying its the 5th biggest bank in Aus. It owns –

        Adelaide Bank
        Alliance Bank
        AWA Alliance Bank
        BDCU Alliance Bank
        Circle Alliance Bank
        Community Sector Banking
        Delphi Bank
        Service One Alliance Bank
        – Most of these institutions I know next to nothing about but could be weak links.

        I really don’t feel that any of these banking entities, including the Big 4 are truly “safe as money in the bank”

        Is it just me or is this a common feeling?

      • 90% lower in a decade – false.

        Please stop posting – you’re far worse off your meds than Migtronic.

    • Mark
      You may be correct that 80/90% is extreme
      I’m talking 2030 around
      I’m taking into consideration that banks are non existint and if you can only get 10/15 year private mortgages and with digital disrupting AI and robotics with a new financial system around a share economy read J Rivkin or watch internet zero marginal cost society
      Ok 80/90% is extreme but purely on valuation now property is 50% over valued in every metric

      Re 10 years int only I do know and I’m not making that up

      I believe we are heading into the greatest debt crisis deflation reset depression into 2020s globally anyway and all the westpac 10 year int only expiry to 20 year p and i isn’t going to help – repayment doubles when ammortisation moves to 20 years p and i
      A pension crisis and sovereign debt default, throw in a $600 trillion global derivative market that needs to be unwound I think is going to be worse than 1931

      If you are unaware of some of these things then you really are I’ll informed and lack insight and really just looking at local property market, there are many more intrinsic long term things in play, and I haven’t even brought in astronomy etc

      If the moon can move tides and sun can keep as alive don’t you think it’s possible there are many external environmental factors that are at play

      You only need to look back through history and understand cycles constantly repeat themselves

      • I agree I see a 1920’s style crash coming… I think they postponed it in 2008 with all their economic voodoo but it was just a 10 year can kick.

      • I’ll opine this again – for better or worse, right or wrong! It IS a possible/probable scenario

        All this decline business is assumed in nominal values. If the US goes pear shaped at the same time we do and then throw in the ECB trying to rescue the EU as a whole, we are going to see ‘money printing’ on an unimagined scale. Rates here can be driven to zero or below if we go cashless.

        Today’s house prices might look really really cheap in the currency of 5 years time.

    • And to let you know mark, I have increased my meds recently.
      Take note of people who need to take meds they are some of the best visionaries
      Look up ADHD famous people on internet and there are a huge amount of very talented people who can see and do things that others can’t
      Musicians etc

  2. Deutsche to crash like Lehman

    I agree but a big diff btw Spain Ireland is they couldn’t devalue their currency = think yen went up in Japan’s crash

    Falling AUD will cushion somewhat but won’t stop the fall

    • You reckon the cost of all imported goods going up ( you know, those things needed for everyday living – oil, included) is going to help?
      There is no escape from the Hell that is coming; no magic cushion. It’s bad no matter which way one turns…

      • Hi Janet,
        What about a partial return to the gold std?
        Gold at $5-10,000 per oz on a monetary rest.
        Oz being the world’s biggest gold exporter may yet prove Straya is the lucky country.
        Not saying it’s likely, but ya never know.

    • devaluing might save us if we produce/manufacture lot of stuff. In our case devaluing will probably trigger inflation that will kill any benefits from the rate cuts RBA will throw at the masses.

      • Agree Nikola
        Don’t think devaluing will help us
        Falling AUD I don’t even think it will cause inflation this time.
        I think it will cause more selling of property from foreign buyers cutting losses
        No saving these falls

      • Yep. I once read a paper on the major influence on the recovery from a recession. It looked at multiple recessions across multiple economies and concluded that manufacturing was the key. Especially if the currency has a massive drop. And what did we sacrifice for short term gains and ideological slaughter, manufacturing. As HnH says, ours is the dumbest bubble ever.

        Sadly, I can’t find it now as it’d make a great weekend links read.

      • @Footsore and others – I have been posting Argentina’s two great recessions for some time – Australia is a 100% mirror image.

        Pushed their economy into a corner removing diversity, massive reliance on exports in limited sector, debt, huge imports – booming economy because of it, slight shift in world trade – total wipe out from worlds miracle economy to basket case – tried to fix it – interest rates and inflation consumed what was left.

        We are worse – we are not even manufacturing we are dirt….literally coal and iron ore – dirt.

        Go read up on it – its absolutely terrifying how similar we are to Argentina – its like a glitch in the matrix. Dejavu.

      • @MA
        I agree wrt Argentina.
        I think most economists under estimate the follow-on effects that arose from Capital flight (because the dynamics of this capital flow are not included in any traditional economic equilibrium models). This is exactly where the parallels are uncanny, both countries have economies that have evolved to need continual and constant inward capital flow. It’s the disruption (and sometime reversal) of this capital flow that wreaks havoc with the Argentinian economy.
        It’s certainly interesting to ponder why Australia has thus far avoided Argentina’s fate, when there are so many similarities, it all seems to come down to the trust that foreign lenders have in our banks and our implied gov’t guarantees. If that’s all that really separates us than it’s no wonder that we enact so many policies aimed at calming the nerves of foreign lenders at the cost of equitable outcomes for Aussies.

      • @ fisho – Yep!!!
        Just the same I suspect we underestimate the determination of the bunch of myopic idiots who run the CB’s and their determination to try to keep the current system afloat.
        What a mess!

  3. & Mark Antony – the 25% is actually talking about “non performing loans” ( NPL) not house price falls so to speak . 25% NPL”S and it’s big time game over.

  4. DefinitelyNotTheHorribleScottMorrisonPM

    “Capital therefore may not be immediately available to deploy into productive recovery credit.” This proves the guy knows nothing about economics. Had he worked for the property council, he’d have learned that capital is for PROPERTY INVESTMENT.

  5. Can I add pls that really Blind Freddy can see a 40% fall now we are moving into 2019
    How many were calling in 15/16/17

    Ps I’m hearing that there are a huge amount of private funds trying to soak up where banks are getting out

    The new boom in private shadow banking in AUST

    • I can see it now, it’s an ownership play. Buy deeply disconnected mortgages off the banks, kick people out when they default and ultimately get the asset for cents in the dollar. Rich definitely getting richer.

      • C.M.BurnsMEMBER

        that’s a different play Bauer. That is the blackrock play in the US in the post-GFC years.

        If I’ve read it correctly, this is private (ie non-ADI) lending to directly fund mortgages at current house-price levels. So the only asset these private lenders will own is the title on the property that has declined in value. So assuming these are smart people, what’s their play ?
        Charging significantly higher interest rates so their return in the short/medium term is high(er) and compensates for the losses they expect to make from having title over assets that are declining in value ?

    • When people need to convince other people of their absolute rubbish they PUT IT IN CAPITALS TO MAKE IT SEEM MORE TRUTHIER !!!

      You are claiming many big names, many big funds – name 10.


  6. I agree wholeheartedly with Matthew Wilson’s analysis, except this:

    “The majors are far from broken, but they have sustained a severe self-inflicted flesh wound, requiring significant cultural attention.”

    Sorely underestimates the destruction of bank capital when, say, a third of loans are demonstrably fraudulent and cannot be repaid. The banks have a dozen wheezes to hide NPLs on-balance sheet and feed stock into the market in an orderly manner, even in a falling market. Their capacity to write the duds off capital is finite and all will need government equity.

    Major land price falls are baked in. Anyone who isn’t already out is in big trouble; anyone intending to HODL is about to learn a very hard lesson.

    Everyone’s suddenly broke.

    Don’t Buy Now!

  7. For me the interesting take away is that Bank earnings are tipped to fall by 40%.
    Now if 15% of Sydney’s workforce works in Finance (where earnings will fall by 40%) and at least 10% work in Residential construction, with at least another 10% in Real Estate and related industries. We have something like 35% to 40% of our workforce that works in industries which will be severely impacted by a downturn in house prices.
    If companies involved just right-size their workforce we could be looking at close to 15% unemployment …maybe even 20% unemployment with a little flow through to Retail.
    There’s no way that any government Lab or Lib can / could ignore this unwinding possibility, so logically they wont ignore it … MN says prepare yourselves for some “unnatural acts” probably even gravity defying attempts by anyone and everyone with a lever to pull or push.

    • +100
      Plus, the ones that will stay employed in those industries will experience massive drop in earnings.. no sales bonuses/commissions, no over time..

    • Damn straight. That’s the primary message with neon lights flashing all around it. In today’s world every man and his dog is using financial leverage, so a hit to the foundation (primary income) will be magnified into more damage than expected.

      Popcorn and schadenfreude at the ready.

  8. I also heard westpac holds a huge amount of 10 year int only home loans that were originated in 2010/11/12/13/14 then they stopped and went to 5 years max end of 15/early 16
    Those dousies expire in 2020/21/22/23
    Repayment goes up 90%

    I still think there is ONE last rally in banks into early mid 20 as Australian interest rates go to zero or close to and then QE
    Think the collapse is 2021/22/23 around
    Too early yet and players are getting to bearish too early on the bourse
    Not enough people are long ASX and there’s very little leverage in ASX
    He might be right about big fall in earning but not yet
    As Buffett says, things just take a little longer than you think
    When it does go caput, there is no return

    • This scenario has to assume some kind of significant rally in house prices; a complete reversal from what are currently double digit paced falls and a return to negligent lending.

      Everyones Super is invested long the ASX.

      Rates to zero and QE will only come once we’re in recession and the crisis is underway; see unemployment climbing as a leading indicator.

      It also assumes that we’re not going to be buffeted by global events. The sheer fact that the Fed is already sounding ‘dovish’ tones, or the mere hint that they’re cognizant of a future slowdown in tightening, says to me that the gentle tightening has become a distinct choking sensation. Who would’ve thought, after a decade of zero percent rates, that we’d only reach a 2 handle before crashing.

    • Yup could be 20,21,22,23,24,25,26 there are some loans 05,06,09,11,12 and some stuff.

      You just make stuff up.

  9. How vulnerable are the Australian and New Zealand Banks to class action suits for irresponsible high multiple and therefore unconscionable lending ?

    What lessons about responsible lending did the Australian and New Zealand Banks and Regulators learn from the GFC ?
    In 2007 the average unweighted Median Multiple across the major Irish metros was 4.7, which in subsequent years slumped to 2.8 … sending all its Banks to the wall and requiring about 70 billion euros of bailouts (from in the main German institutions looking after their own interests).

    Currently, the unweighted Median Multiples across the major metros of Australia and New Zealand are 5.9 and 5.8 respectively …

    Demographia International Housing Affordability Survey: All Editions
    Remarkably … Chris Joye noted within a recent article (partially republished behind paywall at MB) that

    Chris Joye climbs aboard the Big Australian Short – MacroBusiness Australia
    … behind paywall …

    … extract …

    … In our due diligence, we told mortgage brokers and bank managers that we required a 95% loan-to-value mortgage at 10x our gross household income to buy our dream house, and we were consistently told it was not a problem at all. All we needed were two payslips and mortgage insurance. We asked if the bank would call our employer, and both reputable and disreputable brokers said banks rarely verified payslips. Also, “most of the people checking documents are in Indian call centres.” Furthermore, we were told that as long as the payslips had the right Australian Business Number (ABN) and the business checked out, that was enough. … … read more via hyperlink above…
    How much could it cost the Banks if the Courts in due course reset mortgages from ‘unconscionable levels’ to ‘normal levels’ … as the housing markets continues to collapse … driving massive numbers of households underwater ?

    In normal markets, housing does not exceed 3.0 times gross annual household incomes … requiring sensible mortgages of about 2.5 times.

    Some years ago the Bank of England imposed a general mortgage cap of 4.5 times and the Central Bank of Ireland soon after with 3.5 times.

    Refer below … this provides access to foundation research. The Central Bank of Ireland found high income multiple lending a much greater problem than high loan to value lending …

    Mortgage Measures | Central Bank of Ireland

  10. Time to buy lol

    Once Labor gets in a new mining boom in WA will be getting legs, save the economy. Same shit repeated from last time they were in.