Australia’s big four banks are among the largest and most profitable financial institutions in the world. Despite this, it is mathematically impossible that these banks, primarily focused on domestic retail operations, could be as big and profitable as they currently are without one of the following taking place:
- either each of these banks, in their individual capacity, has solved (at the same time, in the same country, and as a first in the history of banking) the ultimate recipe for infinitely profiting from an exponentially-growing stock of private debt; or
- they are all engaged in activity which is incredibly risky.
Looking at the balance sheets of these four banking leviathans they have clearly taken on abnormal sums of risk to invest in a single, all-in, one-way bet on the housing market.
As my colleague Philip Soos and I told the House of Representatives’ economics committee inquiry into home ownership last week, the evidence suggests that on the back of irrational exuberance, Australia is experiencing what can only be described as a classic debt-financed speculative housing bubble with every metric that evidenced the bubble in the US and Ireland present within our economic system today.
Between 2002 and 2015, the mortgage books of National Australia Bank, ANZ, Commonwealth Bank and Westpac grew by 388%, 435%, 475% and 554% respectively. Put another way, the big four’s mortgage books escalated from a combined $242bn to a whopping $1.13tn, surging at such a consistent rate it would make Bernie Madoff proud.
What the Australian banking system has developed is an uninterrupted growth model which shares a similar risk profile as a Ponzi or pyramid scheme by lending ever-larger sums of debt to homebuyers and property investors year after year. If this growth model is interrupted, however, and banks cannot expand their mortgage books further, housing price inflation halts and will then plunge.
Lending an exponentially increasing stock of credit to the public creates a distorted asset market by artificially driving up demand needlessly. In Australia’s case, the target for this debt splurge is the housing market, easily one of the most overvalued and unaffordable in the western world.
The next time you’re watching an auction in Sydney or Melbourne, wondering where all these buyers managed to muster up so much cash, chances are they have a domestic retail bank prepared to lend them a colossal sum of debt using new equity in their existing property portfolio as collateral that didn’t exist just 12 months ago.
Despite some notable exceptions, Australia’s mainstream economists and policymakers have either failed to identify, or have chosen to ignore the unmistakable link between the rapid rise in house prices and the eye-watering sum of mortgage debt Australian households have now accumulated.
On the rare occasion when one challenges the perceived fundamentals of the Australian housing and mortgage markets, the view is often brushed aside and considered a “lazy analysis” versus the mainstream view that high house prices in Australia are a rational outcome of efficient markets, superior risk management and falling nominal interest rates.
That’s precisely what the Americans, Irish and Spaniards were thinking before hell froze over their property markets and banking systems.
Government, Treasury, the central bank (RBA) and the prudential regulator (Apra) do not seem overly concerned about booming mortgage debt. By cutting the cash rate to the lowest point in a long time, the RBA has simply furthered the Ponzi scheme running rampant in Sydney and Melbourne, which dominates Australia’s housing market in terms of size and value.
If either of these two major housing markets hits a brick wall, it will burst the national housing bubble. Policymakers and the public, unfortunately, will come to realise there never was a dwelling shortage – rather, a radical oversupply of mortgage debt being the real culprit for abnormally-high housing prices.
Australia’s economists have not learnt the lessons made obvious by the global housing bubble, especially in the US. While claiming dwelling shortages justified sky-high prices, none except a small number of American economists were competent enough to realise that more than enough dwellings were constructed to house the flow of new households formed over the course of the price boom, and any such shortage would’ve been evidenced by a strong surge in rents (steady yields).
At Apra, their recent and impotent response has been to implement weak macroprudential regulations. Formed in 1998, they have remained complacent, observing from the sidelines while Australia has built up a mountain of unconsolidated household debt, currently at 119.3% of GDP. And as of early 2015, ranking third place behind Switzerland and Denmark.
The housing market is sure to follow the path of the mining industry. Policymakers believed the mining boom would last for decades, boosting the economy. With the mining sector now collapsing, the public will inevitably realise rising housing prices cannot last forever. The imposition of grossly inefficient neoliberal financial economics has plagued many nations recently with asset bubbles – Australia is no different.