By Lindsay David, Australia, author of Print: The Central Bankers Bubble, founder of LF Economics. Originally published at Wolf Street.
Australia, you have officially run out of luck.
While leveraged property investors in Sydney and Melbourne are desperately hunting for a senseless “net-yield” that makes the yield on a German 2-year bund look rewarding, the Australian mining sector is screaming towards what may be one of the greatest and colossal economic breakdowns in modern Western history.
As iron ore illustrates, this is not a downturn; this is a spectacular crash in the spot price of a commodity. And the sad news is, there is no new demand scenarios (unless China builds more apartments than its population) to suggest that more supply is needed to fulfil the demand of the global economy.
Australia made two bets.
The first bet was that China would willingly consume every ounce of iron ore Australian miners could dig from the ground and pay a premium.
Unfortunately, Australia has built an (incredibly sophisticated and streamlined) iron ore production operation so big that the world may never be able to consume all that it can supply. Our treasury, RBA, Miners and politicians assumed that China would forever grow. But they failed to calculate over the long-term that if China continues to consume all the iron ore dug from Australia’s underground, the world’s most populous nation would literally need to build a national subway network, literally an airport every 22 kilometres apart from each other and literally more dwellings than people.
I truly wonder, how many decent Australians lost their job challenging their employer, whether it be in the mining industry, or at government level for doing the maths and saying something is simply not adding up.
And from the looks of it, as I strongly argued in my recent book “Print: The Central Bankers Bubble,” as a signal to the end of the Chinese property boom, if their stock markets were to surge, it meant that property investors are pulling out of the ‘no-yield’ real estate market and pumping their funds into Chinese stocks. My gauge on this seems to be spot on.
The second bet this nation made was to leverage Australian households through the roof and create an economic model that shares the same risk profile as a Ponzi scheme in order to assure that house prices only rise creating never-ending capital gain to those who took the most abnormal sums of risk to invest in a zero-sum game.
House prices have already ‘crashed’…yes ‘crashed’, across a plethora of our mining towns. These real estate markets were ‘property bubbles’, yes ‘property bubbles’ that have already ‘burst’. So for anyone to suggest there are no housing bubbles in Australia is nonsense.
Outside of Sydney and Melbourne, property prices have ‘stalled’. Not because these markets are taking (as the real estate pundits would say) a short breather, it’s because you probably have first time homebuyers in Adelaide thinking to themselves, ‘why the heck should I leverage my life away to live in this expensive shit-hole?’
I don’t care whether we are talking about Adelaide, Hobart, Alice Springs, Sydney or Melbourne. These property markets are as ridiculously expensive as they are today because they were fuelled by excessive sums of available credit which created an artificial sum of buyers in an Irish-style bubble myopia frenzy. And unless there is a ‘miracle’… it’s by all mathematical accounts, downhill from here.
I stand by my prediction that I made in my book ‘Australia: Boom to Bust’that the spot price of iron ore will touch $20 with three of the five largest iron ore producers in Australia going bust; that property prices across Australia will fall back to their long-term median house price to income ratios; and that at least one of the big four banks will either go bust, be bailed out, or nationalized before the end of 2017. And based on the recent data points, I’d say this prediction is looking pretty good! But this prediction will be a truly heartbreaking result for a good nation, where good people will unfortunately lose everything they have spent their lives working for.
Just when Australia’s resource boom has collapsed, and manufacturing too – though at least the housing bubble is still going strong in some places – attention turns to the banks. Read… No Major Country Is More Exposed to Banks than Australia