There are some serious kinks in Australia’s economic chain By Lindsay David, Australia, founder of LF Economics:
Regardless of what side of the economic fence you sit on, there is no doubt Australia faces some serious economic challenges coming into 2016. From the auto industry, to the predictable crash of the spot price of iron ore, to the most overvalued housing market in the world, there are some serious kinks in Australia’s economic chain.
From my point of view, we will begin to see a significant shift in media attention towards the first pillar of the Australian economy, the financial services sector.
And when I say shift, I mean a deeper dive into the risk profile of our highly leveraged banking system and its dependent relationship with the housing market and vice versa…not to mention bank and insurance regulator APRA and the Reserve Bank of Australia going through more scrutiny as the great Australian Credit & Property Bubble starts to burst and debt in the international wholesale lending market starts to become discriminately scarce for Australian financial institutions.
It has taken far too long for Australia as a whole to realize that house prices in Australia were never rising due to the common supply v. demand theory. This is due to the artificial sums of debt our banking system sloshed to home buyers year after year, and the party is nearing an end.
There is no such thing as a housing shortage and 3% rental returns in the same housing market. This will be realized by most Australians when its unfortunately too late. When it comes to the housing market, Australians got fooled, and unfortunately, will get burned.
Australia has built too many homes for its population, and the risk of emigration and default on the back of increasing job losses is high. Remember, all those residential construction workers need a constant flow of new housing developments to keep their jobs. And from the looks of the movements in the housing market today, there is little evidence there will be any incentive for the residential construction industry to pump out more unneeded housing stock.
The mining sector will continue to struggle into 2016. And unless there is some miracle, we can expect several Iron ore miners to begin to throw the white flag up in the air (alongside increased private jet movements between Canberra and Perth).
China has simply overbuilt, and there is no other country in human history that built as much housing and infrastructure over the last 15 years as China has. This incredible construction binge seems on track to hit rock bottom as we move into 2017. If it happens earlier, this will drive the spot price of Iron Ore to below $20 a metric ton as there will still be too many large players in the iron ore market struggling to stay afloat.