The Reserve Bank could be pressured to step in with a $300 billion bailout program to rescue Australia’s banks if the housing credit score crunch accelerates right into a “doom loop” that causes property prices crash by 50 per cent, plunging the nation into recession.
That’s in line with Saxo Bank’s latest “Outrageous Predictions” report, which outlines a collection of “unlikely but underappreciated events” that could ship shockwaves throughout monetary markets in the event that they have been to happen.
“This is not an official forecast, it’s an outrageous forecast that could happen if certain factors were to fall into line, but something we put maybe a 1 per cent probability on,” stated Sydney-based Saxo Bank market strategist Eleanor Creagh.
It’s the primary time Australia has featured in the Danish funding financial institution’s annual record, which this yr consists of situations like Apple snapping up Tesla for $US520 per share or a photo voltaic flare putting earth, wiping out satellites and inflicting $US2 trillion value of injury.
“The ‘Australian Dream’ was financed through an epic accumulation of debt as interest rates collapsed, with household debt standing at 189 per cent of disposable income,” Ms Creagh writes in the report.
“The Great Financial Crisis was answerable for deflating housing bubbles in different superior economies, however not in Australia. In a bid to stave off the disaster’ results, Canberra’s ‘economic security package’ additional fuelled the spectacular run-up in leverage, kicking the proverbial can down the street.
“In 2019, the curtains shut on Australia’s property binge in a catastrophic shutdown pushed most prominently by plummeting credit score progress.
“In the aftermath of the Royal Commission, all that’s left of the banks is a frozen lending business and an overleveraged, overvalued mortgage-backed property ledger and banks are pressured to additional tighten the screws on lending.
“The confluence of dramatic restrictions in credit score progress, oversupply, authorities filibusters and a slowdown in international progress cement the doom loop; property prices crashing by 50 per cent.
“Australia falls into recession for the primary time in 27 years because the plunge in property prices destroys family wealth and shopper spending. The bust additionally contributes to a pointy decline in residential funding. GDP tumbles.
“The blowout in dangerous debt squeezes margins and craters income. The banks’ publicity is just too nice for them to cowl independently and to skirt the danger of insolvencies and collapse, the RBA strikes in to buy securitised mortgages and fund the federal government’s recapitalisation of its main banks with a whopping $300 billion QE/TARP programme.
“The grand irony is that Governor Lowe’s hand is pressured towards unconventional financial coverage and he implements QE1 Down Under.
“With the banks on the forefront of monetary stability they’re deemed ‘too big to fail’, not least as a result of Australia’s Baby Boomers and superannuation funding swimming pools rely closely on the banks’ constant dividend yields.”
Ms Creagh stated a repeat of the US Federal Reserve’s first spherical of quantitative easing referred to as QE1, unleashed in the course of the 2008 monetary disaster, and the $US700 billion financial institution bailout dubbed the Troubled Asset Relief Program, can be “ironic”.
“Governor Lowe has never been a proponent of low interest rate policies,” she stated. “He’s made it quite clear he will only cut rates in the worst-case scenario and a lot of his academic work is on the need for higher interest rates to deflate asset bubbles.”
Ms Creagh stated the current decline in house prices was “orderly” however her scenario concerned extra stringent lending requirements after the banking royal fee’s remaining report in February, mixed with an “exogenous growth shock” resembling a slowdown in China.
“That would spread and cause contagion effects,” she stated.
“In that scenario we could see a negative feedback loop that would build on itself, whereby the banks have tightened lending conditions and unemployment increases, particularly in the construction industry as prices fall and the market starts to weaken.”
Soon the overall financial system falls off. “You get people defaulting on loans, forced sales push prices down, a self-perpetuating loop,” she stated. “This is when you get the dramatic drop in residential investment, a plunge in house prices, that depresses spending and destroys consumer and business confidence.”
Stressing the report was “not an official forecast”, Ms Creagh stated it was not about fearmongering. “These predictions are (intended) to spur debate and increase awareness about potential problems that might be lurking in the background,” she stated.
“It’s very important to understand the risks out there in the economy if you are investing and trying to build wealth and a portfolio, it’s reasonable to consider every outcome that may occur.”
Saxo Bank chief economist Steen Jakobsen stated the theme of this yr’s report was “enough is enough”. “A world running on empty will have to wake up and start creating reforms, not because it wants to but because it has to,” he stated in a press release.
“The signs are everywhere. We think 2019 will mark a profound pivot away from this mentality as we are reaching the end of the road in piling on new debt and next year will see us all beginning to pay the piper for our errant ways.”
Mr Jakobsen stated the “great credit cycle” was already displaying indicators of pressure and would “rip through developed markets next year as central banks are sent back to the drawing board”.
“After all, their money printing efforts since 2008 have only dug a deeper debt hole, and it has now grown beyond their mandate to manage,” he stated.
If a few of the report’s predictions come true, “we might finally see a healthy shift toward a less leveraged society, with less focus on short-term gains and growth, and a new focus on productivity”.
Mr Jakobsen added, “On the negative side, we could see considerable worsening of central bank independence, a credit crunch, and big losses in the asset where everyone is too long: real estate.”