The Analyst Who Cried Crash

Aussie property is under attack at the moment.

Last month, data from CoreLogic showed a 1.1% decrease in Aussie house prices. Ever since then there’s been an onslaught of negative press.

I’m sure you’ve read it. The mainstream have prattled on about a potential housing correction. Asking rhetorical questions like, ‘Perhaps the property crash is here?’

If the mainstream is declaring the property bubble is about to burst, it’s not.

In fact, three months ago I said in a meeting that if I can open a Fairfax newspaper and find them blathering on about a property bubble, then we aren’t in a bubble.

I have no doubt that when Aussie property prices collapse, it will be a specular fall.

But right now, I can’t see that happening for a few more years yet.

My colleague Phil Anderson has this big idea that ridiculously high house prices are all part of a cycle, and we are only midway through it. Phil’s research goes back over 200 years, and he’s yet to be wrong. Click here to see what I mean.

Nonetheless, how much it costs to buy a bunch of bricks and cladding in Australia is a hot topic internationally. After all, there was housing subprime mess in the US. UK property prices fell by 16.2% in 2008, which was a record drop. And Vancouver, Canada has seen property prices fall nearly by 20% since introducing tighter foreign investors rules.

Which leaves most of the analysts in the word wondering when our property prices will crash and take our economy with it. Here’s my insider tip for the day: Our economy is already tanking. It just hasn’t shown up in official ‘numbers’ yet.

And it’s these very high and never-falling property prices that copped the blame for the latest downgrade from a ratings agency.

Overnight, credit ratings firm Moody’s downgraded a total of 12 Australian banks, such as Members Equity Bank Limited, Credit Union Australia, and Bendigo bank. In a surprising move however, Moody’s also downgraded the ‘big four’ Aussie banks from Aa2 to Aa3.

The rating’s mob foresees ‘elevated’ risks within our household sector, saying:

In Moody’s view, elevated risks within the household sector heighten the sensitivity of Australia banks’ credit profiles to an adverse shock, not withstanding improvements in their capital and liquidity in recent years’.

‘In Moody’s assessment, risks associated with the housing market have risen sharply in recent years. Latent risks in the housing market have been rising in recent years, because of significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness. The rise in household indebtedness comes against the back drop of low wage growth and structural changes in the labour market, which have led to rising levels of underemployment.

Whilst mortgage affordability for most borrowers remains good at current interest rates, the reduction in the savings rate, the rise in household leverage and the rising prevalence of interest only and investment loans are all indicators of rising risks.’

Ah yes. It makes perfect sense, doesn’t it? All that gobbledegook is Moody’s telling you that while they don’t like the look of the housing sector, the banks are probably OK. Later in the statement Moody’s add that a sharp housing downturn isn’t a ‘core scenario’, but of course an investor should consider the risks when assessing the banks.

Joke’s on you, Moody’s. Ask any Australian what props our banking sector up, and they’ll tell you it’s overdrawn fees and mortgage debt.

However Moody’s is just joining in on the lower-the-ratings party. Last month, another ratings agency, Standard & Poor’s, downgraded all 23 small banks in Australia. As with Moody’s, Standard & Poor’s say property prices are a ‘concern’.

In an odd move though, S&P’s didn’t lower the ratings on the big banks and Macquarie. Why you ask? Because this rating agency feels that the big four plus Macquarie would have a ‘very high’ likelihood of receiving government support if needed.

There you go. You heard it here first folks. An international ratings agency inadvertently says don’t worry, your government’s got your four pillar banking system if it falls apart.

Don’t be surprised if there’s a big song and dance about the downgrade. Ultimately, it will push up wholesale (international markets) funding costs for the big banks by 0.10–0.15%.

At the moment about a third of funding is estimated to come from the wholesale markets.

Of course, consumers will be the ones to pay at the end of the day. The ever so slightly riskier rating will raise the cost of banking a smidge.

The real problem here is that both ratings agencies are calling out our banks too soon.

These rating companies are the ones that missed out on the subprime mortgage crisis almost 10 years ago. At the time, every bad loan in the US still had a fairly decent credit rating from all the ratings folks. It was the outsiders pointing out where the problems were. Not giant rating agencies.

The point is, all these credit risk rating companies ended up with egg on their face a decade ago for missing the problems. This time, to avoid the humiliation of not calling out the next crisis, everything is branded a ‘potential’ problem.

The ratings agency aren’t the only ones doing this. Everyone in the mainstream is so hell bent on predicting when the next crisis is coming, every little possible problem is labelled a possible ‘trigger’.

Rather than the boy who cried wolf, it’s the analysts crying ‘crash’.

It ain’t gonna happen.

The fact is, crises happen in tiny pockets of markets where no one is looking. And if we are all looking at the housing sector as the ‘trigger’ for an Australian banking crisis, then we’re all wrong.

Ignore the rating agencies.

Sure Aussies know we have a property problem. But that’s not going to crash our banking system today.

Kind regards,

Shae Russell,
Editor, Strategic Intelligence


Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.


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