heads up ( or maybe heads down ) on Australian economy ...
from
(snip)"Those looking for bad news can find plenty of it in Australia, which in my opinion is soon headed for recession and rate cuts.
Near-Record Corporate Bankruptcies
Please consider Rising rents, cautious consumers behind rise in insolvencies
The number of companies entering insolvency in March reached a near-record high of just under 1,500, according to the corporate regulator, with cautious consumers and rising rents believed to be behind the worrying result.
Figures from the Australian Securities and Investments Commission show the number of company collapses reached 1,491 in March, versus 1,299 in February and 640 in January.
The 1,491 figure is one of the highest ever figures released by ASIC since the late 1990s, and a significant rise on March 2010′s figure of 1,313.
Small Business Council of Australia chief Peter Strong warns we might not have seen the worst yet, with the impact of the flooding and Cyclone Yasi in summer not yet reflected in the numbers.
Record Low Property Transactions
The Sunday Times reports WA suffers record low property transactions
THE State Government has confirmed that WA’s declining property market has hit rock bottom, with property activity last month falling to 16-year lows.
“The low April figure came on the back of March which was the worst for 14 years, and January and February which saw the lowest activity for nearly two decades,” he said.
Rock Bottom?
What makes anyone think this is the bottom?
Employment Unexpectedly Falls Most Since 2009
Bloomberg reports Australian Employment Unexpectedly Falls Most Since 2009, Currency Weakens
Australian employers unexpectedly cut workers in April by the most since 2009 as hiring weakens in states less affected by the nation’s mining boom, sending the local currency tumbling and stocks lower.
The number of full-time jobs declined by 49,100 in April, the most since February 2009, and part-time employment rose by 26,900, today’s report showed. Australia’s participation rate, which measures the labor force as a percentage of the population over 15 years old, fell to 65.6 percent in April from 65.8 percent a month earlier, it showed.
Last month’s decline in jobs brings to 26,300 the number of net new positions created in the first four months of the year, the weakest January-through-April period of employment growth number since 1999.
Economists in a Bloomberg News survey forecast a 17,000 increase in April, according to the median of 21 estimates. The jobless rate held at 4.9 percent.
The RBA said in its May 6 quarterly policy statement that “most leading indicators point to further growth in employment over the months ahead, although at a slower pace than in 2010.” It also predicted the jobless rate would fall to 4.25 percent by December 2013.
RBA Calls For Unemployment Rate to Drop
What the hell is it that the RBA sees that I don’t? The property bust is underway and going to accelerate, retailers are going under, and consumers are tapped out.
How exactly does that translate to lower unemployment rate?’
I certainly have to laugh at the economists in that Bloomberg survey because the employment report came out after the reported rise in corporate bankruptcies.
Here is one more piece of the puzzle to consider.
Rise in Bad Home Loans
The Age reports a Rise in CBA bad home loans
Commonwealth Bank’s decision to aggressively grow its mortgage market share at the height of the financial crisis is starting to cause indigestion after it revealed an increase in the number of housing loans starting to turn bad.
Further stress in the housing market could emerge with CBA chief executive Ralph Norris predicting the Reserve Bank could issue as many as two interest rate increases by October.
”We’re obviously expecting the Reserve Bank to increase rates and there’s possibly one or two rises to come in the next six months,” Mr Norris told an investor briefing.
Mr Norris was speaking as CBA confirmed it was on track for a record profit result after it reported third-quarter earnings of $1.7 billion.
Even with demand for credit expected to remain subdued until after next month, the latest performance so far should see the bank deliver cash earnings of $6.8 billion.
This will comfortably beat last year’s profit result of $6.04 billion.
But CBA’s experience with an 11 per cent jump in the number of missed payments on housing loans in the March quarter follows a similar run-up in arrears by ANZ and Westpac.
Usually such a sudden increase in lending arrears would be a cause for concern in the banking sector given their large exposure to mortgages. But Mr Norris pointed to natural disasters such as Queensland’s floods causing stress among some homeowners.
Norris Way to Optimistic
I disagree with the CBA chief executive Ralph Norris on nearly every point.
•I highly doubt the RBA hikes twice more.
•I expect cuts as the Australian economy slumps into a big recession.
•I expect delinquencies to rise further.
•I expect profits at CBA have peaked or will soon do so.
Except for my economist friend Steve Keen, I have to ask: Has anyone down under learned anything from the property bust in the US?"(snip)
While the Dollar Den tends to cover a lot of issues related to the US economy, we DO have a lot of Australian readers who should be aware of these potential economic developments.
Where Australia's economy is concerned, the 'gold foil hat' crowd would tell you that the driving force is actually Australia's natural resource industries acting as a 'colonial' supplier to China. As China's wage rate inflation problems plus world market commodity price increases cause an economic slowdown in China, this in turn has a concentrated negative effect on the Australian economy. And of course Australia is not without its own version of 'subprime' mortgages ... which up until now have not been problematic due to the low unemployment rate and relatively high pay rates that Australian natural resource industries made possible.
The 'gold foil hat' crowd would also point out that, to some degree at least, other natural resources based economy countries like Canada may see some degree of similar negative effects.
Re: heads up ( or maybe heads down ) on Australian economy ...
FWIW, WA is not where all the property action happens, and everyone knows the big banks have a lot of mortgage exposure. I worry that lots of people who could barely afford historically low interest rates bought into property 2 years ago, but I imagine the banks would have hedged somehow. No idea about the broader economy - I just work here ;)
Re: heads up ( or maybe heads down ) on Australian economy ...
indeed Australian banks are more 'hedged' than their US counterparts in regard to recovery of delinquent mortgage debt ... from
(snip)"Record prices have brought on record debt levels, sounding alarms of a property price bubble and stirring concerns about Australia's top four banks, which own 80 percent of mortgages.
Fitch said in September so many of its clients are worried about Australian mortgages, it is stress testing the market.
For a special report on Australia's economy:
HOW EXPOSED ARE BANKS TO THE PROPERTY MARKET?
Mortgages drive overall loan growth at National Australia Bank (NAB.AX), Commonwealth Bank of Australia (CBA.AX), Westpac (WBC.AX) and Australia and New Zealand Banking Group (ANZ.AX).
Between them, they have lent A$1.1 trillion worth of home loans, the equivalent of 60 percent of their loan books. This compares with about 15 percent among U.S. and UK banks, but that is an understated exposure as it excludes securitised mortgages.
Australian banks call mortgages their best asset. Arrears at 0.7 percent are among the lowest in the developed world and banks say their average mortgage exposure is worth less than 50 percent of present home values. So prices can drop over 50 percent before banks start fretting about surging loan losses.
And unlike their U.S. peers, Australian banks are better protected if borrowers default. They can seize all of a borrower's assets including savings and future earnings, whereas U.S. banks can only seize the unpaid home."(snip)
Thus Australian law allows banks holding delinquent mortgages to not only foreclose and liquidate the mortgaged property, but also to sieze personal bank accounts, sieze and liquidate other personal assets, and even garnish future wages, in satisfaction of delinquent mortgage debt. In the event of a 'serious' crash in Australian real estate values, this has the potential to create an 'indentured servant' situation for any mortgaged homeowners who do default.
In other words in a scenario where a homeowner had purchased a mortgaged house 2 years ago at say a $200,000 price level that is today worth only $100,000, in the US that homeowner could simply 'walk away' from $200,000 worth of mortgage debt without losing anything except the house and their credit rating. But in Australia, that homeowner would still be responsible for repaying the $100,000 shortfall between home purchase price and foreclosure liquidation value ... out of personal savings, other personal assets, or future earnings !
Thus logically speaking the Australian gov't / national bank cannot afford to raise interest rates as this would add to downward pressure on real estate valuations as well as adding to the mortgage debt burden of individuals and businesses paying on variable interest rate loans. This in turn will result in a major drop in the Aus dollar's exchange rate as 'hot money' international investors start rotating out of the Aus dollar. This in turn will cause Aus dollar priced food and energy costs to increase even faster than they already are. In other words, all of the major ingredients for a serious Australian 'recession'.
~
Re: heads up ( or maybe heads down ) on Australian economy ...
The homes-as-collateral thing feels almost like portfolio-insurance to me, though. Say people get poorer and start defaulting/stop buying. Then property prices fall and the properties which are now the banks' assets are worth less, and they have to make a distressed sale, rinse and repeat...
Not sure about the bank being able to seize assets and future earnings - I should look into that
Re: heads up ( or maybe heads down ) on Australian economy ...
Quote:
Not sure about the bank being able to seize assets and future earnings - I should look into that
Yup !!! I doubt that Reuters would have released such an announcement if it weren't in fact true. And if it IS true, it makes your scenario even scarier ... because the lower market prices for homes falls and the less the banks are able to recover via distressed sales, the MORE 'shortfall' dollars the banks will come looking to collect from (former) homeowner's savings, investments, and/or future paychecks.
Re: heads up ( or maybe heads down ) on Australian economy ...
"Thus Australian law allows banks holding delinquent mortgages to not only foreclose and liquidate the mortgaged property, but also to sieze personal bank accounts, sieze and liquidate other personal assets, and even garnish future wages, in satisfaction of delinquent mortgage debt."
That is true for most states in the US. Only:
- Alaska (AK)
- Arizona (AZ)
- California (CA)
- Connecticut (CT)
- Idaho (ID)
- Minnesota (MN)
- North Carolina (NC)
- North Dakota (ND)
- Oregon (OR)
- Texas (TX)
- Utah (UT) and
- Washington State (WA)
are non-recourse states. In addition, some states offer banks the option of non-judicial foreclosure, a simplified procedure, that denies full recourse. There seems to be no correlation between non-recourse and recourse in terms of the housing crash though.
Z
Re: heads up ( or maybe heads down ) on Australian economy ...
My sources tell me yes this is the case in AU (depending on stuff).