Australian Bubbles?

Business Money
1

[quote=“GuyInTaiwan”]HH: A while back, one of my friends (who is massively into investing) was looking into shorting certain Australian banks, namely Westpac. He thinks it’s going to get very ugly there. If the wheels come off China, then Australia is going to be completely fucked. I think a lot of people in Australia had a bit of a chuckle about “dumb, greedy Americans” but will be laughing on the other sides of their faces in short order.

In terms of Taiwan, I would be extremely interested to see figures (broken down by age) on things like personal debt, savings rates, and so on. I know, obviously, that young people have much different income and spending patterns, but I have a whiff of there being quite a generational change here with respect to how people handle money.[/quote]

Mod- maybe we can bud this off as a new thread?

I’ve been reading a bit about it and the consensus seems to be that the Australian big four banks will be in big trouble as they borrow most of their capital from overseas rather than domestically. The banks in Australia were supposed to be better regulated than other Western countries but I have also noticed the pattern there of 100% mortgages, interest free loans, get in now before it’s too late, build an extension and put in a renter, buy with your mates, kids straight out of college wanting to buy and being encouraged by their parents. It’s very Ireland early 2000s.

As for shorting the banks, the problem as always is timing. My experience from the Irish bust and the American one is that takes 1-2 years to really take off…first the market freezes, there is optimism that it is a ‘soft-landing’ and a lot of commentators and the government will promote that view, then there will be talk that is unpatriotic to talk of a bust and hard landing…then it happens anyway. So if one is to short they might have to have a timeline of 1 year or more.

The problem in Australia, as far as I can see, is that apart from resource extraction and a bit of tourism and agriculture there is not a lot going on as the Aussie dollar climbed so high that export industry and local industry has been uncompetitive.
So when the bust comes in Australia the banks there will be hit with a double whammy, the property bust will cause a lot of lay offs in services, banks, real estate and finance which means many debtors will not be able to pay back their loans. At the same time the Aussie dollar will devalue meaning public debt will explode and the ability of the banks to pay their foreign lenders will be lessened.

Australia is theoretically in a better position than most countries with it’s ‘money sitting in the ground’ but how much of this money is already counted into the governments revenue calculations for the next 5-10 years? What happens if that is reduced?

In addition how much of the Aussie government revenue is dependent on property stamp duty, income taxes and VAT on services. A similar thing happened in Ireland when the government was caught in a vice because it had inflated revenue expectations from the good times and became dependent on the above taxes to maintain inflated government expenditure. When the property market crashed in Ireland the government had no extra revenue to alleviate the general economic crash and had to beg to the ECB and was given a terrible deal…it was broke. So in relation to Taiwan I would say it is not a great deal to buy property now but at least the general economy can withstand a crash but if you were talking about Australia I’d say take your deposit money and do a 3 year round the world trip and come back then and you’ll be smiling.

Here is a graph showing Australia’s revenue source and expenditure areas.
aph.gov.au/budget/2010-11/co … iew_37.htm

Australia is vulnerable especially in the income tax part (2 times mining revenue) , excise and sales tax. So although mining revenue is often talked about the other sources of vulnerable taxation are about 3-4X higher, if they take a 20% that is almost equal to the mining sector getting wiped out. Then factor in that commodity pricing is itself at historical highs AND Asian property prices, low interest rates and associated capital inflow into Australia have been at historic highs… the risk to government finances in Australia look very serious. The resource sector should stop a complete economic wipe-out but it won’t be pretty for a while.

2

[quote=“headhonchoII”][quote=“GuyInTaiwan”]HH: A while back, one of my friends (who is massively into investing) was looking into shorting certain Australian banks, namely Westpac. He thinks it’s going to get very ugly there. If the wheels come off China, then Australia is going to be completely fucked. I think a lot of people in Australia had a bit of a chuckle about “dumb, greedy Americans” but will be laughing on the other sides of their faces in short order.

In terms of Taiwan, I would be extremely interested to see figures (broken down by age) on things like personal debt, savings rates, and so on. I know, obviously, that young people have much different income and spending patterns, but I have a whiff of there being quite a generational change here with respect to how people handle money.[/quote]

Mod- maybe we can bud this off as a new thread?

I’ve been reading a bit about it and the consensus seems to be that the Australian big four banks will be in big trouble as they borrow most of their capital from overseas rather than domestically. The banks in Australia were supposed to be better regulated than other Western countries but I have also noticed the pattern there of 100% mortgages, interest free loans, get in now before it’s too late, build an extension and put in a renter, buy with your mates, kids straight out of college wanting to buy and being encouraged by their parents. It’s very Ireland early 2000s.

As for shorting the banks, the problem as always is timing. My experience from the Irish bust and the American one is that takes 1-2 years to really take off…first the market freezes, there is optimism that it is a ‘soft-landing’ and a lot of commentators and the government will promote that view, then there will be talk that is unpatriotic to talk of a bust and hard landing…then it happens anyway. So if one is to short they might have to have a timeline of 1 year or more.

The problem in Australia, as far as I can see, is that apart from resource extraction and a bit of tourism and agriculture there is not a lot going on as the Aussie dollar climbed so high that export industry and local industry has been uncompetitive.
So when the bust comes in Australia the banks there will be hit with a double whammy, the property bust will cause a lot of lay offs in services, banks, real estate and finance which means many debtors will not be able to pay back their loans. At the same time the Aussie dollar will devalue meaning public debt will explode and the ability of the banks to pay their foreign lenders will be lessened.

Australia is theoretically in a better position than most countries with it’s ‘money sitting in the ground’ but how much of this money is already counted into the governments revenue calculations for the next 5-10 years? What happens if that is reduced?

In addition how much of the Aussie government revenue is dependent on property stamp duty, income taxes and VAT on services. A similar thing happened in Ireland when the government was caught in a vice because it had inflated revenue expectations from the good times and became dependent on the above taxes to maintain inflated government expenditure. When the property market crashed in Ireland the government had no extra revenue to alleviate the general economic crash and had to beg to the ECB and was given a terrible deal…it was broke. So in relation to Taiwan I would say it is not a great deal to buy property now but at least the general economy can withstand a crash but if you were talking about Australia I’d say take your deposit money and do a 3 year round the world trip and come back then and you’ll be smiling.

Here is a graph showing Australia’s revenue source and expenditure areas.
aph.gov.au/budget/2010-11/co … iew_37.htm

Australia is vulnerable especially in the income tax part (2 times mining revenue) , excise and sales tax. So although mining revenue is often talked about the other sources of vulnerable taxation are about 3-4X higher, if they take a 20% that is almost equal to the mining sector getting wiped out. Then factor in that commodity pricing is itself at historical highs AND Asian property prices, low interest rates and associated capital inflow into Australia have been at historic highs… the risk to government finances in Australia look very serious. The resource sector should stop a complete economic wipe-out but it won’t be pretty for a while.[/quote]

There may be a property bubble burst coming soon in Australia but to say that the AUD might devalue? LOL.

I think the USD may have a higher chance of being devalued first. Last I heard, the EU, China, Brazil and Russia have a major vested interest in choking the life out of the USD, if not knocking it off the podium of being the world’s #1 international trading currency.

There is a whole lot more going on behind the scenes in determining the value of a country’s currency than just mere economic GDPs. Who knows what might happen if the whole world gang up on the USD and short-sell it completely causing a near zero valuation of the USD aka Gorge Soros

3

Well I agree the USD is risky but I’d also say the Euro and other highly valued currencies like AUD are the ones that seem to be most risky right now. Most Western currencies are devaluing to try and remain competitive and inflate debts away, it’s an overdue rebalancing with Asian currencies.

4

I read this yesterday, but I haven’t had time for a proper reply. I’ll try to get around to it this weekend. I’m a bit flat out today and can’t really just peel off a quick reply.

5

He’s not going to short the banks for two reasons. Firstly, by his own admission, he’s too chicken to short. That’s because, secondly, the market can often remain irrational longer than you can remain solvent.

Yes, I’m not exactly sure what Australia does anymore and where people are really getting their money from. No one I know or knew actually worked for a company that actually made anything. They were all working in domestic service industry jobs or shuffling bits of paper from one company that didn’t make anything to another company that didn’t make anything.

That’s the big thing. Australia is really pinning its hopes on China growing at its current rate for at least the next few decades and Australia being the banana (iron ore?) republic supplying the raw materials for that growth. Yet how realistic is that? What if the wheels do come off China?

[quote]In addition how much of the Aussie government revenue is dependent on property stamp duty, income taxes and VAT on services. A similar thing happened in Ireland when the government was caught in a vice because it had inflated revenue expectations from the good times and became dependent on the above taxes to maintain inflated government expenditure. When the property market crashed in Ireland the government had no extra revenue to alleviate the general economic crash and had to beg to the ECB and was given a terrible deal…it was broke. So in relation to Taiwan I would say it is not a great deal to buy property now but at least the general economy can withstand a crash but if you were talking about Australia I’d say take your deposit money and do a 3 year round the world trip and come back then and you’ll be smiling.

Here is a graph showing Australia’s revenue source and expenditure areas.
aph.gov.au/budget/2010-11/co … iew_37.htm

Australia is vulnerable especially in the income tax part (2 times mining revenue) , excise and sales tax. So although mining revenue is often talked about the other sources of vulnerable taxation are about 3-4X higher, if they take a 20% that is almost equal to the mining sector getting wiped out. Then factor in that commodity pricing is itself at historical highs AND Asian property prices, low interest rates and associated capital inflow into Australia have been at historic highs… the risk to government finances in Australia look very serious. The resource sector should stop a complete economic wipe-out but it won’t be pretty for a while.[/quote]

When I look at those figures, they look extremely worrying. Here’s why:

  1. The Australian government is spending more than it gets in revenue. That in and of itself isn’t necessarily a bad thing, depending upon where it’s getting the money and what it’s spending it on, but even aside from my concerns below, I’m not particularly happy with the notion of the government essentially spending 110% of what it makes. A household running its personal finances like that would be on a road to ruin.

  2. It’s getting 21% of its revenue from companies, but it doesn’t break it down as to how much of that actually comes from the mining and petroleum sectors. Again, what happens if that contracts? There’s going to be major carnage. Australia is turning itself into a banana republic, but what happens if people stop eating bananas?

  3. A whopping 84% of income tax essentially goes towards social security and welfare. Eighty-four fucking per cent! Jesus H. Fucking Christ, how many people are out there getting a handout from the government?! Cut that in half and the country would be in surplus. Fuck 'em, they can go out and work for a living like everyone else.

That, plus health and education account for almost 1.5 times the revenue from income tax. The most basic services that people consider necessary/an entitlement are in no way, shape or form being paid for by people themselves. The government needs to seriously sort that out. Indeed, what happens if/when the crash comes and income tax contracts? There will surely be massive austerity measures there and people are going to be extremely unhappy.

This whole thing reads like a disaster waiting to happen.

6

I really don’t see what is different about Australia vs Ireland, Greece, Iceland etc. They just seem to be lucky enough to have some natural mining resources that are propping up the same mistakes that every other small country has made. I don’t think we have seen the last of the financial dominoes toppling yet.

7

Denmark recently banned Vegemite. If this dominoes Australia’s economy is fucked!!! Unless the inbred ex-cons can steal some more booty from the Aboriginals.

8

Maybe Australia is due a massive crash sometime soon but here is my recent experience of the Australian economy. I left in December last year.

If there is one economy in the world that I wish to be a part of it is the Australian one. I was just a lowly backpacker and I met many others whose mileage varied enormously.

My own experience was being able to earn over $AUD1000 per week simply by washing cars at the local airport for a car hire firm. That is over $4000USD per month for what was a very easy life. Sometimes I think to myself “WTF am I doing in Taiwan where it takes me nearly 1 month to earn 1 weeks Australian salary”.

I knew girls working as receptionists earning over $30AUD per hour and people working at KFC/ McDonalds earning close to $AUD900 per week.

But then again in Sydney I met some other guys who were happy to work for $AUD10p/h cash in hand labouring. I also met a young Mexican illegal immigrant who was working for $8 an hour waitressing and an old Kiwi guy who was getting close to $40p/h washing dishes on a Friday night at a Swanky resteraunt. Its a big country so as I said - mileage varys.

It will be a great shame if/when the wheels come off because it was great to be a part of it. Obviously with economic prosperity comes increased prices locally but this was more than made up by the high currency, low unemployment and general feeling of optimism amongst the population. It reminded me of the UK before the 2008 recession struck.

I also don’t believe that the Australian people deserve to suffer a recession as I never met a nicer race of people. Long may they prosper.

9

Milkybar: It probably is an awesome place to earn some great cash as a backpacker. However, the cost of living (especially housing) is really bad there, not to mention the tax rate (much of which evidently gets spent on welfare based upon the link HH provided).

It’s not a matter of deserving a recession or not deserving a recession per se. It’s about people using debt in unsustainable ways and living well beyond their means. On the surface, it all looks good, but if you look a little deeper, it’s pretty ugly and it will get really ugly if times get tough. I wouldn’t like to be in that position, personally, so I’d be trying to cushion the impact of the inevitable bad times. Not enough people think there will inevitably be a bad time from this, and that’s the whole problem.

10

I spent a year backpacking in Australia but it was over 10 years ago when the economy wasn’t so hot, there were jobs available but they were mostly hard labouring, mining or farming jobs then. You name it I did it and I saw a lot of the country. They had a maximum 3 month rule in any job and it was really quite tough at times. All the service jobs Milkybar kid describes are due to the inflated economy, I saw the same thing in Ireland too. They will disappear in a puff of smoke if housing market and general economy crashes.

As for Aussies being great, yeah there are a lot of great people in Oz, but there are a lot of racists too, a bit like Taiwanese, they wear their racism on their sleeve as a badge of honour. Their solution for a few refugees who arrive by boat is to stick them on an island prison in the Pacific. The worst part is the way they treat the aborigines and they didn’t give back the land they stole. I worked in Queensland for a time so I know the attitude well there but similar attitudes were very prevalent in Sydney, often the older immigrants were the worst!
Good place to live though…helps if the economy is going well of course.

11

About three weeks ago I sold nearly all my shares in Australia thinking that there is no way up for the stock market there. The banks which drive most of the market are about to be seriously hit by falling house prices and increased borrowing costs. I think they will start cannibalizing one another. It had to come at one time. 18 years of mega growth for the banks is a very long cycle.

12

Fox: Probably a good call. If you don’t mind me asking, are you just staying in cash, or have you invested in a different market (or do you plan to)?

13

I’m just going to stay in cash and get my 6% for a few months. It’s not like the share market is going to return that at this stage and then probably buy in again at the end of the year.

14

How much of an effect is a pop of the bubble likely to have on the Aussie dollar? (Also, Fox, if you don’t mind me asking, what are you doing with your cash to get 6%?)

15

You just leave it in the bank to get 6%, Aussie interest rates are among the highest in the world for depositors.

16

Fox: So basically, you’re predicting the bubble to pop enough that the banks are going to drag the whole market down with them within the next six months? Interesting.

17

It’s already happening. There was a house listed in Brisbane (not a flood area) for 700,000 and it has been discounted now down to 400,000 and still hasn’t sold. In Queensland, the clearance rate at auction is 20%. Banks make their money not just from the amount of loans they can write but also from the amount they can lend. Banks have been booming not just because they can write more loans but because the average price of a house in Australia has quadrupled in 20 years.

10 most discounted houses in Australia:

1 49 Caroline St East Gosford, NSW $3,000,000 $1,290,000 57%
2 17 Wilma Cr Russell Island, QLD $750,000 $449,000 40%
3 4 Haase Place Bellbowrie, QLD $1,300,000 $790,000 39%
4 4 Peace St Lamb Island, QLD $295,000 $179,500 39%
5 12 Mcclure Road Upper Caboolture $1,600,000 $999,500 38%
6 128/151 Adelaide Terrace East Perth, WA $1,250,000 $799,000 36%
7 510/503 The Entrance Rd The Entrance, NSW $289,000 $185,000 36%
8 3 Boolari Rd Gosford West, NSW $990,000 $650,000 34%
9 174 Wattle St Malvern, SA $3,800,000 $2,500,000 34%
10 510/3 Evans St Hobart, TAS $1,500,000 $990,000 34%

18

Sweet baby Jesus!

I read an article a while back where they were talking about the market softening, but shit! That was only a couple of months ago.

Hobart, a million bucks? Tell him he’s dreamin’!

19

[quote=“GuyInTaiwan”]Sweet baby Jesus!

I read an article a while back where they were talking about the market softening, but shit! That was only a couple of months ago.

Hobart, a million bucks? Tell him he’s dreamin’![/quote]

A lot of those houses are at the top end, but there are a few in the middle being discounted too. This is the top 10 but it’s a strong sign of over valuation and downward pressure. I read today how some broker is asking for the first home buyers grant to be upped. That is a true sign of desperation and has always been a direct wealth transfer to sellers and banks. Up the first home buyers grant and it is just like adding that money on top of what you pay (depending on elasticity in demad, but that has always been high anyway). I’m not certain that the banks are going to collapse but I’m confident they are not going to skyrocket. They’ll probably just more sideways and flounder. That’s not good for me. I’m going back to Australia permanently in the next couple of months.

20

Hmm.

So you’re going to move to Caroline St?

Well, I suppose that if you played your cards right, you could pick up quite a little bargain before too long, if you were in the market for a house.

What are you going to do for work when you go back? Did I read somewhere recently that you were going to do further EFL study, or that you’d already done it? The question is, surely, that if property and the stock market tank, will there be some sort of recession in Australia? People would presumbably find simultaneously that money is a lot harder/more expensive to borrow, and also that their giant ATM (i.e. their house) was suddenly out of cash. Wouldn’t that mean less money to splash around in the economy generally? How would that potentially affect any line of work you would be looking to get into?