Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
OP 2019: Australian central bank launches QE on housing bust Down Under
Summary: Binge no more – 2019 sees the "Australian Dream" implode in spectacular fashion afters decades of galloping house price inflation.
For the full list of Saxo's 2019 Outrageous Predictions, click here.
The debt-fuelled surge in Aussie house prices has led to one the longest rallies in the
world, with prices gaining a monstrous 6,556% (373% after adjusting for inflation) since
1961. The “Australian Dream” was financed through an epic accumulation of debt as
interest rates collapsed, with household debt standing at 189% of disposable income.
The Great Financial Crisis was responsible for deflating housing bubbles in other
advanced economies, but not in Australia. In a bid to stave off the crisis’ effects,
Canberra’s “economic security package” further fuelled the spectacular run-up in
leverage, kicking the proverbial can down the road.
In 2019, the curtains close on Australia’s property binge in a catastrophic shutdown
driven most prominently by plummeting credit growth. In the aftermath of the Royal
Commission, all that is left of the banks is a frozen lending business and an overleveraged,
overvalued mortgage-backed property ledger and banks are forced to further
tighten the screws on lending.
The confluence of dramatic restrictions in credit growth, oversupply, government
filibusters and a slowdown in global growth cement the doom loop ; property prices
Down Under crashing by 50%.
Australia falls into recession for the first time in 27 years as the plunge in property
prices destroys household wealth and consumer spending. The bust also contributes to
a sharp decline in residential investment. GDP tumbles.
The blowout in bad debt squeezes margins and craters profits. Th e banks’ exposure is
too great for them to cover independently and to skirt the risk of insolvencies and
collapse, the RBA moves in to purchase securitised mortgages and fund the government’s
recapitalisation of its major banks with a whopping AUD 300 billion QE/TARP programme.
The grand irony is that Governor Lowe’s hand is forced toward unconventional
monetary policy and he implements QE1 Down Under. With the banks at the forefront
of financial stability they are deemed “too big to fail”, not least because Australia’s baby
boomers and superannuation investment pools rely heavily on the banks’ consistent
dividend yields.
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