A recent report by Denise Braily, the President of Australian BFCSA (Banking & Finance Consumers Support Association), to a Royal Commission on banking provided a worrying picture of banking in Australia.
Her research and findings on the dark arts of some debt sales Down Under reverberated more widely for a reason; it can happen in parts of banking in a hot market. How widespread, however, is uncertain.
Business development managers can train front line debt sellers to act as agents of the bank, tasked with selling as much debt as possible.
Incentivised by sales targets and fast money to be made, signed forms can get filled in, unsighted back at the office with bogus data, serviceability engines that calculate capacity to pay debt can be tricked, buffer loans can be sold so that shortfalls in monthly income can be fed by other debt and parental and personal guarantees wrap it all up in a neat bow.
Courts can buy the legal defence from banks that borrowers knew what they were doing, that they lied and that dodgy selling agents acted for borrowers thus letting banks off the hook for alleged asset stripping.
Here in Ireland, if banks hadn’t been caught stripping tracker rates off borrowers they could have escaped smelling of roses. There has been no investigation of the alleged miss-selling of debt.
What may have helped banks is that the State became the biggest shareholder, that it defanged Irish Insolvency legislation to give bank vetos over settlements while the moral hazard argument won the public debate because of the horror show that was the ballooning national debt and personal taxes.
Braily claims that in 70% of her cases borrowers were unaware they’d been sold an interest only mortgage until nasty letters started to arrive.
Back in 1993 during the Irish Endowment Mortgage scandal when half of all new mortgages were being sold on an interest only basis, the same gulf in information was the most frequent complaint I recorded.
Fast forward, in 2019 over 40% of Australia’s big bank home loan book is out on interest only deals. Despite Government attempts to rebalance the market in favour of home buyers and the likelihood of a new Government adding further measures, the worry is that it may be too late.
The worst case scenario is that Australia could be the location of the next impact crater for the IMF to fret over and the first since Cyprus 2012 to experience haircuts on deposits. The best case scenario is that Australia becomes a textbook example of controlled deflation of a housing bubble.
Last month global financial markets flashed a strong warning that all is not well; the US bond market curve inverted. That meant that long term rates fell below short term, turning the normal curve upside down.
This is almost always a harbinger of a recession to come later this year or next. What happens in the USA impacts Australia as much as it does Europe but the economy Down Under is also bound at the hip to Chinese Construction demand for commodities like iron ore.
Chinese household debt has now risen to half of its GDP much earlier along the pathway to prosperity taken by South Korea and Japan and 40% of its loan book is real estate. Half of new debt is residential in a country that is sitting on at least 60 million empty dwellings.
Credit growth is collapsing to zero this year in Australia according to UBS forecasts. Homeloan demand has shrunk, foreign buyers are pulling out, there is a clamp down on fresh interest only mortgages and First Time Buyer sales have tanked to lows not seen for 17 years.
So far, at -9.2% the average market value fall isn't yet scary but it is a pup at just 18 months old. Moody's forecast of another -9.3% to come is adding to deflation expectations because it is three times bigger than the rating agency’s January forecast.
Moody's downgrades on property forecasts. Likely Sydney and Melbourne drops 15% over 12 months. 2019. Moodys started 3% in Jan, now changing to 7% drop in house prices,📉— Denise Brailey #SacktheRegulators (@DeniseBrailey) April 9, 2019
Ireland took 69 months to fall 55%, the USA 63 months to fall 32% and Spain 78 months to fall 37%. According to Economist Leith van Onselen, formerly of the Australian Treasury and Goldman Sachs, the slope of the Australian decline to date is not as steep as Irelands, but it is steeper than the USA and Spain.
Whether this morphs into a systemic crisis, an “Economic Armeggedon” flagged this month by independent economist John Adams, is not yet clear but some of the spill over effects are startling.
On-line retail sales fell -3.4% in February, Car Sales, White Goods and other discretionary spending is falling, credit growth and stamp duty are in decline, the number of houses for sale is rising and the time to sell is slowing dramatically.
Unless you’ve been through one, it is very hard to grasp the psychology of a bubble burst. Rising deafness accompanies the journey to the tipping point, fear changes to panic only when price falls don’t plateau and the emotional virus released infects everything.
Consumer expectations of further price falls becomes a self fulfilling prophesy, until rock bottom is reached, meanwhile discretionary spending evaporates and banks can'tgive away credit at any price.
The Reserve Bank of Australia may try to move ahead and cut rates but if the deflation expectation has set in, the act of cutting could spook the market further and with the base rate at 1.5%, the RBA hasn’t the space it once had. Still I expect the RBA to cut.
It is reasonable, in light of the prevailing evidence, to ask if we are watching the early signs of an Australian debt asteroid strike. No one knows for sure, on its own the AUD $2 trillion held by foreign creditors indicates the potential fallout field but these things don’t happen in isolation and debt is elevated elsewhere. That is why Australia matters.
Lets hope they don’t do a full Irish.
- Eddie Hobbs is a financial advisor and writer