Hard Evidence Australia is Heading for Trouble

We have written extensively before about the knock-on effect of Australia’s slowing and falling property market on the broader economy.  That this is coinciding with the slowing Chinese economy, being the other thing keeping the Aussie economy turning over, delivers a double whammy that is presenting in very real hard data.

Freshest off the press is the news that growing mortgage defaults are triggering limits on repayments on some Suncorp residential mortgage backed securitised bonds.  From MSN:

“The unusual trigger is the earliest signal of the impact the country's sharpest property downturn in a generation is having on the country's A$1.8 trillion ($1.27 trillion) mortgage pool. Ratings agency S&P Global has warned that weaker economic conditions will put pressure on arrears and repayment rates.”

Yesterday we also heard the NSW Treasury state: "There are signs that deteriorating conditions in the housing market are having a stronger-than-expected negative impact on consumer spending and dwelling approvals,"  

Treasury, in downgrading the growth forecast for the state by 25 basis points, premised such growth on a move away from housing related business.  From the AFR:

“To maintain growth, the state economy will have to rely more on businesses buying new machinery and selling products overseas and less on people buying houses, apartments and things to put inside them.”

So how is this shift away from relying on housing going…?  Well yesterday we also saw both the Commonwealth Bank of Australia Services Business Activity Index and the CBA Composite Output Index plunge into the red (contraction) for the first time since they started the survey.  

In Saturday’s AFR, Matt Barrie, technology entrepreneur and CEO of  Freelancer, didn’t hold back when asked his view of “How confident are you about the economic outlook both domestically and overseas”:

"The global economy is troubled. It's low growth everywhere. It's questionable if we ever exited the GFC. In Australia every indicator is blinking red. It's a house of cards. We're highly dependent on China (we're on par with the Congo for how reliant we are) and they are in a trade war. We have the housing market falling off a cliff, and this is happening from Vancouver to Auckland too. The royal commission will be a catalyst for the collapse of the Australian housing market, with the other catalyst being China coming off the boil and regulations to stop the flow of capital out of China. We should never have let the property bubble get this big. People can't afford the homes and wages haven't kept up. I worry the next government will launch populist policies and we'll be on the way to being the next Argentina. The bright spark is iron ore ... but if that comes off the boil we're in a world of hurt."

Yesterday the RBA held our interest rates at 1.5%, unchanged for the 27th consecutive month.  However there is clear nervousnous.  In their own words:

"The main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities,"

And yet again they are betting on a change:

"A pick-up in growth in household income is nonetheless expected to support household spending over the next year."

Hope, it seems, is the RBA’s strategy and there is a growing concensus amongst analysts that the next move of the rate will be down as the Aussie economy continues to limp along.

A lower rate would inevitably see a lower AUD and that is music to holders of gold and silver bullion.  Less growth also portends lower share prices and again highlights the benefit of a diversified portfolio including uncorrelated, non financial, hard assets.

Let us leave you with the words of former Coalition advisor John Adams in an interview with news.com.au this week:

“Across the world, evidence is mounting that the world is drenched in debt and that more and more people, companies and governments are struggling to service these debts given slowing economic growth,” he said.

“The IMF rang the alarm bells last week when it stated that Australia faced significant macrofinancial risks resulting from high property prices and household debt levels. These risks make Australia extremely vulnerable to a catastrophic economic crisis.

“The economy will no doubt continue to worsen in 2019 and 2020. Many Australians will see their so-called wealth evaporate and many will suffer significant financial losses. The day of reckoning resulting from the biggest debt bubble in Australian history is fast approaching.”

Finally, if you havent yet watched the Nuggets News video Australia’s Coming Financial Crisis you really should by clicking here.