The downturn in Australia’s Sydney-Melbourne-dominated housing market is suddenly very serious. Due to the major banks’ exposure to mortgage lending, an Australian housing crash inevitably means a banking crash.
Citizens Electoral Council of Australia
Media Release Wednesday, 17 October 2018
Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Housing bust demands urgent solutions
The downturn in Australia’s Sydney-Melbourne-dominated housing market is suddenly very serious. Due to the major banks’ exposure to mortgage lending, an Australian housing crash inevitably means a banking crash. The need for solutions is not academic: either we achieve a Glass-Steagall banking separation to protect savings and the real economy, or the bank regulator APRA will use its powers to “bail in” the public’s deposits to prop up banks, but that won’t be enough to save their system.
There’s a sense of déjà vu about the current situation in the housing market. In 2007-08, the Citizens Electoral Council headquarters in Melbourne received countless anecdotal reports from all over Australia that pointed to a brewing housing crisis. Very little of the turmoil being reported to the CEC was covered in the mass media. We now know, however, that plunging prices had alarmed policy makers at the time, and as part of its 12 October 2008 rescue package for the banks, the Rudd government intervened to prop up and actually push up the housing market by tripling the first homebuyers grant, which kicked off a new expansion of the housing bubble that only stopped this year.
The bubble hasn’t just stopped expanding; it’s tanking, and nerves are fraying. Less than a month after economist Stephen Koukoulas challenged Digital Finance Analytics’ Martin North to a bet that North’s scenario of a 45 per cent fall in house prices wouldn’t happen, he said to Sky News on 15 October, in response to a question about the collapse in weekend auction clearance rates in Sydney, “I’m getting worried.”
Koukoulas is not alone. Australia’s biggest superannuation fund, AustralianSuper, is actively preparing for a housing plunge. On 9 October AustralianSuper announced a rule change to come into effect by mid-November that “in exceptional circumstances in response to a market stress event” it will freeze withdrawals and contributions to its property investment funds for up to two years. “If the market experiences a stress event which causes lots of investors to sell property assets at the same time, or makes it more difficult for investors to finance transactions, we may not be able to find willing buyers at reasonable prices”, AustralianSuper explained to the 40,000 of its members who have flocked to its popular property funds, 4,000 of whom have parked more than 70 per cent of their entire super balance in these funds.
The 11 October Australian Financial Review reported that investment bank Morgan Stanley had informed its clients that “tighter credit and overbuilding had worsened its house outlook on property prices”. It is now forecasting the deepest “correction” to house prices since the early 1980s. Sydney property consultant Edwin Almeida has long warned of oversupply, but he told DFA on 14 October that even he is surprised at how quickly prices are starting to fall. Like before 2008, the CEC is again getting anecdotal reports of 20-plus per cent falls in prices in Sydney and Melbourne in less than a year—much higher than the official figures. MacroBusiness on 16 October reported a Roy Morgan Research survey which showed that households with no equity in their homes, many of whom would now have negative equity (i.e. owe more than their homes are worth), has risen more than 11 per cent this year. On 11 October MacroBusiness showed how far prices can fall, with a list of mining towns in Queensland and Western Australia where prices have plunged by up to 84 per cent from their peaks in the mining boom in 2011. While Sydney and Melbourne aren’t affected by mining, with 40 per cent of all economic activity in Australia related to housing in some way—banking, real estate businesses, construction, regulation, surveying, infrastructure—a fall in prices will set off a vicious downward spiral more devastating than the end of the mining boom in those towns.
The situation is that stark. A bust is inevitable—we must win banking separation, or expect bail-in.
What you can do
Right now, the most important thing you can do is make a submission to the banking royal commission by the deadline of 5:00 PM 26 October to:
1. Tell Commissioner Kenneth Hayne the only way to fix the banks is to break them up through a Glass-Steagall separation of traditional commercial banks with deposits, from all other financial services. Click here to read the CEC’s release on Hayne’s interim report in which he seeks submissions on structural change and cites Glass-Steagall to show that structural separation is not “novel”.
2. Ask Commissioner Hayne to investigate APRA’s bail-in powers, and the banks’ ability to change the terms and conditions of deposit accounts without notice to allow APRA to order a bail-in of deposits. A Treasury official told a concerned citizen last week that this should be taken up with the royal commission, so ask Mr Hayne to investigate the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 and the banks’ powers to arbitrarily change their terms and conditions. Click here to read the CEC’s release on the new evidence of bail-in uncovered by Digital Finance Analytics’ Martin North and economist John Adams.
* You have nine days to make a submission; click here for the online submission form: https://royalcommissioninterimreportwebform.lawinorder.com.au/#/
Click here to order a free copy of the CEC’s new banking handbook, The Next Financial Crash is Certain! End the BoE-BIS-APRA Bankers’ Dictatorship: Time for Glass-Steagall Banking Separation and a National Bank.