We took a break from the share market yesterday to cruise through the latest issue of the Reserve Bank's Financial Stability Review. It's a page turner. But it was the pretty pictures that got our attention.
For example, take the picture below. It shows how the global credit binge fuelled house price booms in Spain, France, the UK, the US, and Australia. It also shows house prices cliff diving in the U.K. and the U.S. They are not cliff diving in Australia, yet. Hmmn.
The good news, as you know, is that Aussie banks don't own heaps of the toxic mortgage-backed debt that's brought down Wall Street's investment banking model. It looks like NAB might even qualify to offload nearly $1 billion of the illiquid assets it actually does have exposure to.
The bad news is that it's still a bear market in credit. You can see from the chart below that lending to business has fallen off a cliff in Australia. Household borrowing is down too. Our worry is that it's going to be much harder for companies to fund future risk taking with the credit markets still locked up. But that's what happens when capital is misallocated. Bad projects eat capital while good ones go unfunded.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Fast Ben on 28 September 2008:
Subprime is contained. The USA economy is sound.It's a Goldilocks economy. Budget deficits don't matter. Bail outs are a moral hazard. Australia is decoupled from the USA. House prices never go down.
Comment by Coffee Addict on 29 September 2008:
Lack of business credit equates to the certainty of a very major recession.
I don't know that I understand the chart. What does "six month ended annualised percentage change" mean?
Resource revenues, existing credit arrangements and corrupt local government practices (restricting supply) are temporarily propping up Aussie house values. A long term credit squeeze will make a 30% (or more) fall in Aussie house values inevitable. Prices have to drop to what is affordable. At the moment, new landlords can't generally get a reasonable return on investment (based on what tenants can afford to pay).