Just when you had doubts about the property bubble...

Introducing a recent addition to the $100 million house club...

Australia's most significant property listing does not officially hit the market until late January, but already the international marketing campaign has begun.

The Fairfax family's decision to sell the historic Victorian mansion Elaine was announced in September and has dominated talk in the prestige real estate market since, with agents speculating on how to value the trophy property.

There is no official price guide on the Point Piper estate but experts say it could sell for $100 million. Only a handful of Australians could afford to buy the property, let alone maintain it.

That's the Fairfax mansion at Sydney's exclusive Point Piper (link here).

Meanwhile across town there is nothing like the shine of a new landmark building project coming to life in a falling market:

THE Sydney skyline is set to be transformed across the next three years with a host of office buildings planned, but some in the industry warn that an oversupply looms as these developments enter a tough leasing market.

An analysis by one of Australia's leading property consulting firms LPC Australia has suggested that the spike in developments could lead to 355,000sq m being released between next year and 2017: between five and seven years of supply.

Sydney already has about 437,000sq m of unlet office space, about 9 per cent of the market, as the city has struggled with the contraction of the banking sector since the global financial crisis (here).

More farewells to manufacturing and jobs...

The future of more than 500 people in Orange who work for Australia's last refrigerator manufacturing plant may be decided on Thursday night (AEST) at a company boardroom in Stockholm.
A spokesman for Electrolux which employs 544 workers at the Orange plant said its future was ''high up on the agenda'' for discussion at the board meeting in Sweden. It is expected the board will decide whether to close the plant which injects an estimated $33 million into the local economy each year.
(here).

But not to worry there's more froth to be added to the housing bubble with keen rival MacBank ready to crash the party (Macquarie eyes a slice of Australian banks' home mortgage pie).  At a time when teenagers and toddlers are having houses and apartments bought for them in panic !

Households teetering on the edge?

So Ozzie's personal finances show a high level of debt, but not to worry as it's being reduced and it's backed by investments in...housing?!

AUSTRALIAN household debt is still high by world standards, but it is not affecting the stability of the financial system. 

In 2012, the mean average debt level for Australian households was $151,488, a report from the Melbourne Institute showed. 

Commonwealth Bank senior economist Michael Workman says there are a number of factors why the high level of debt is not necessarily a problem."Some commentary on Australian household balance sheet positions conveys the impression that household debt levels are too high, leaving many households with unmanageable debt servicing commitments. 

...Australia's average debt-to-disposable income ratio, was at 147 per cent in 2012, a 28 per cent increase from 10 years earlier, the Melbourne Institute's 2012 Household Income and Labour Dynamics in Australia (HILDA) report showed.However, the average debt-to-assets ratio was a respectable 17.6 per cent, showing that most of that borrowing was high value assets like owner-occupied or investment housing (here)

Ozzie banks vulnerable

Business press seized on comments from Moody's as to overexposure of Australia's banks to a housing crash:

According to the Financial Review, Australia’s biggest banks have been fighting over the mortgage market for too long and if property prices fall too far, we could be in for a US-style banking collapse.
With the exception of ANZ (ASX: ANZ), our top four banks are not exciting from an investing perspective and are too heavily leveraged on growth through their mortgage books. If Australia were to experience an unemployment boom, loans would struggle to get paid, leading to more defaults and eventually lower housing prices.
This would paint an ugly picture for our biggest mortgage writers like Commonwealth Bank (ASX: CBA) and Westpac (ASX: CBA) (here)

And worringly this is structutal - a function of the market and simply how the banks are:

Banks in Australia have the highest concentration of residential mortgages than any other type of institution in the world, making them vulnerable to a possible house price correction according to the analysis of a leading credit market economist.
Moody's Analytics managing director Tony Hughes says that house prices in Australia were overvalued which could pose a major concentration risk for banks.  The high exposure to residential mortgage represents a valid risk for banks and the Australian economy. (here)

Nothing like being so exposed in one asset that you become the market (when it plummets):

Australia’s banks have the highest exposure to residential mortgages of any financial institutions in the world, leaving them vulnerable to a “looming” house price correction, a leading credit market economist has warned.(here)

Jim Rickards on the RBA - "foolish"

And its policy will lead to inflation not growth.

Fresh from releasing his bestseller introducing the world to the ongoing Currency Wars, Jim Rickards interviewed on ABC's Business program (see link here) and was really on point on the current dynamics driving monetary policy in China and the US and impacts for Australia.

While not the first to identify infrastructure overkill in China, Rickards was emphatic and went into detail about what is wrong with Australia's policy settings and likely outcomes.

Oh and in case you missed it the RBA has joined the Currency Wars!  This Blog has advocated this as somewhat inevitable (although there are ways to implement and Rickards is correct that the Brazil example is not a good one to follow - hence the criticism to the extent which Australia has followed although not sure if this is accurate).

Rickards' proposed solutions of 12 months ago are unorthodox although it is now an academic question as to whether they would have been successful.

Watch out Australia!

Killing the golden goose

Ominous for Australia is the fact its biggest earner, iron ore, is on the wane.

One year ago it was dubbed the second-best business on earth behind the production of Apple iPads, but now Rio Tinto is cutting scores of senior staff from its West Australian iron ore division.

About 50 people were told late on Wednesday that their roles were no longer needed within the division, which ranks as the most profitable business in Australia's most lucrative export industry. It also is Rio's flagship, contributing close to 80 per cent of earnings.

But that exalted status has not saved it from the sort of job cuts that have swept the rest of the Australian economy in recent years (here).

Another sign of worse to come. 

Big risks come home to roost

So you thought China was simply a customer for Ozzie raw materials?  Well yes but there's a whole lot more.  Some infrastructure financing apparently:

Roads such as the F3-M2 and WestConnex will be partly paid for by Chinese immigrants under a state government plan to snap up Treasurer Mike Baird's previously poorly subscribed Waratah Bonds.
Desperate to sell Waratah Bonds to pay for roads and rail, the state government found a solution - joining forces with the federal government to get Chinese immigrants to invest in them (here).

But more significantly China contagion presents an ugly prospect for Australia: 

Today, the home of shadow banking is China. Rating agency Moody’s estimates that shadow banking is equal to 55 per cent of China’s GDP, or $US4.74 trillion....If returns on capital in China are in the high teens but credit is restricted by regulators, then borrowers and lenders will find an informal way to interact so that each party can make the high returns available. The result has been an explosion in shadow credit which Chinese regulators have battled to control.... 

...The RBA is keeping an eye on China’s shadow banks and sees a twofold problem. One is that the shadow banking sector collapses and creates a credit crisis in China with knock-on effects for Australia. The other is that as Chinese regulators rein in the shadow banks, Australia will find out just how much of a role informal credit has played in our own growth story (here).

And as forecast journeyman Ross Garnaut explains we are at the end of the line for the Kangaroo bounce:

The prosperity of the past two decades has been a wonderful thing. Since the recession of 1990-91, Australians have had the longest period of economic expansion unbroken by recession of any developed country.
The China resources boom has passed its highest point and will soon end. Export prices are falling. Resources investment is about to decline. We will be left with an extraordinarily high exchange rate, forcing contraction of trade-exposed industries essential for the expansion of employment and output as the boom recedes (here).

And the adjustment is happening right now:

Running out of cash, Australian miners get creative to survive (here)Construction hit by $1 billion slump (here)

Aussie bank bubble...

...is getting plenty of attention.  Here's some of the commentary:

It seems analysts are finally catching on to what we here at the Motley Fool have been saying for some time now. Share prices of the major banks have been inflated well past any measure of relative value.(here)

...and via the FT, via UBS:

 The Aussie banks are very good companies. They are profitable, resilient, well capitalised, well managed, shareholder focused and have a very strong industry and regulatory structure. However, following the significant leveraging of the Australian & NZ households over the last thirty years they are now low growth and remain heavily exposed to housing, funding markets & unemployment risk (here).

John Collet at the Sydney Morning Herald cared to disagree however:

Investors believe that lower interest rates are here to stay and the big bank profits add to their confidence....For Shane Oliver, chief economist at AMP Capital Investors, there is a risk of its becoming a bubble but "we are not there yet".
The banks are well managed and increasing their profits. One risk would be if interest rates were to rise. But markets are expecting the next move in interest rates to be down. (here)

The key phrase there being "well managed" - that will remain to be seen!

Australian property in a dismal state

According to the Australian newspaper - note the level of distressed sales and big problems in the Sunshine state of Queensland.

...Nationally, most receiver sales were in regional areas, with the highest number of distressed listings during the quarter in the agricultural sector. Residential property was next highest.
LandMark White found that almost 23 per cent of properties advertised in Australia during the quarter were listed by a mortgagee, receiver or liquidator....(here).

The only bright spot is sales to enriched Chinese officials (alledgedly) noticeable at the top end of the market (here).

Follow the Yellow Brick Road...

Serial innovator Mark Bouris is back launching a new venture, a Macquarie-backed mortgage lender to rival the banks called Yellow Brick Road:

...Although the two companies' share of the $1.1 trillion mortgage market is tiny, Mr Bouris argued YBR, which he chairs, could grab a meaningful share of the flow of new home loans within a year....Mr Bouris said that to force banks to change their mortgage pricing strategies, YBR needed to settle about $350 million worth of new loans a month - roughly 5 per cent of the value of loans sold through bank branches....

...Helped by lower funding costs and an aggressive rollout of its branches, YBR would be able to hit this level within a year, he said....(here).

This blog condones more competition in the Ozzie banking sector so welcomes Mark's foray.  Let's hope the market doesn't tank before then!

Will Australia rebalance? Has any economy rebalanced?

No and no.  Not in the short term anyway.  Whenever you read about politicians and/or bureaucrats having to engineer a rebalancing or engineer a soft landing, you know they will not succeed.  An excellent FT article paints the picture: 


...many forecasters are still worried. They do not believe business investment will be a major driver of growth and argue the Australian economy will have to rely even more heavily on housing construction to meet the RBA’s 2013 GDP growth forecast of 2.5 per cent....As such, they reckon the central bank, which has lowered its benchmark cash rate by 175 basis points since November 2011, will be forced to cut again to stimulate demand....

....“I think we are more of a quarry than what we were 50 years ago and that worries me. The strong mining cycle can’t last forever, that’s inevitable,” Bob Every, the chairman of retail and resources conglomerate Wesfarmers, told a gathering of business leaders in Sydney earlier this month. (here)

Black gold to go to storage?

Rather than the Beijing residents, a few journos have noticed that the real victims of Beijing's smog or "airpocalypse" may in fact be Australian exporters as Chinese authorities look to clamp down on coal use.

....The first sign of change came last week when China’s State Council set a total primary energy consumption target (including renewable energy and transport fuel) ...[which] translates to annual growth in energy consumption of about 3.5 per cent over the next three years, down from 6.6 per cent a year in the five years to 2010...  Jiang Kejun, leader of the modelling team that advised the State Council on energy use ... said. “there’s no market for further development of energy-intensive industry.” If Jiang is right that will affect growth in our iron ore exports because steel making is energy intensive (here).

..."Within the (Chinese) thermal power sector there will be a greater reliance on natural gas," Prof Garnaut said....However huge reserves of gas in China and the US mean Australia will face more competition selling to China. (here)

Brokers/Analysts misreading the market?!

There may be an equity upturn, but any new year flush is likely to lose steam and there are too many big questions of fundamentals which are going to weight down any momentum for lift off.  Same for bond crash predictions - money may be moving into equity, but doesn't make it smart or sustainable...

This piece is typical of false positives...

....Many analysts are quietly confident as the recovery in global markets gathers steam,...
...In the past quarter the ASX 200 index has risen 12 per cent in lockstep with the surge in global sharemarkets. In the US, Wall Street is just 5 per cent off an all-time high and in Europe equity markets have also risen as the ''rotation'' from bonds to equities gathers steam. Price-to-earnings ratios have jumped from 10.6 a year ago to 13.7 and volumes going through the market have almost doubled.....(here).

Australia in denial about currency war...

...THE entry of Japan into the global currency war -- a kind of echo of its bombing of Pearl Harbour in December 1941 to enter World War II -- presents a fresh challenge for policymakers everywhere, but especially in Australia......But it's against the Australian dollar that the yen has fallen the most. The Aussie has appreciated 19 per cent against the yen since October but only 3 per cent against the US dollar...(here).



...Australia's economy requires "active management" this year to offset the slowing mining boom and the high value of the Australian dollar, said a board member of the Reserve Bank of Australia, or RBA, in an interview Wednesday.... Heather Ridout, one of nine policy setters on the RBA's board was speaking ahead of the first meeting of the central bank this year scheduled for Feb. 5, when concerns over the persistent strength of the Aussie dollar above parity with the U.S. greenback will again be in focus. Some 1.75 percentage points of rate cuts since November 2011 have failed to ease ...(here).

Fuse is Lit

Great piece by Greg Canavan - highlighting the risks to Australia for 2013.  Don't be deceived by benign daily news...!

Video here.