Australia in recession… again

Australia in recession… again

Before we dig into Australia’s latest shocking economic statistic, consider this fun fact from the other side of the world.

Bloomberg reports that in Denmark, borrowers can get a 30-year fixed mortgage with 1.5% interest.

Yes, 30 years fixed, 1.5% interest.

The world has gone mad.

But for today, let’s pretend Australia is different.

That rational rules still apply. And economic data still makes sense.

Australia hasn’t had a recession for almost three decades, right?

Err, sort of. But not really…

The immigration cover-up

As I explained to readers in 2013, Australia did have a recession on a per capita basis back in 2008. And it just went into recession again by the same measure.

But what does ‘a per capita recession’ even mean?

Well, economic growth has two variables. Population and productivity. You can have more people making more stuff. Or you can have the same amount of people making more stuff by working more efficiently.

Obviously, you get combinations of the two as well. And these days, you can get falling populations too.

Let’s use Japan as an example to make all this easy to understand.

Japan’s workforce has been shrinking. So its GDP has barely grown.
There are less people to make stuff. So obviously, it’s hard to make more stuff overall, generate more GDP.

But that doesn’t mean the typical Japanese person is poorer. Per person, or per capita, Japan is getting wealthier. And per capita GDP has been growing just fine. Because productivity rose.

These days the Japanese use robots guided by bedridden people to serve as waiters. They squeeze productivity gains wherever they can.

Anyway, Japan highlights the difference between per capita measures and totals.

Back to Australia. Australia’s population growth is very strong, because people like me and my extended family get sick of Europe on a very regular basis. Especially during bad economic times.

Which means that immigration to Australia surges during rough economic times. And that influx helps boost Aussie GDP just when the country needs it. Total GDP goes up because more people are making and buying more stuff in Australia.

I call it the immigration cover-up. Why cover-up?

Because of what happens to the average Aussie. Their share of the GDP pie can still fall while the country’s total pie is growing.

And that’s precisely what happened the last two quarters in Australia. A per capita recession. Again.

A message from your future mortgage broker

But what does a per capita recession mean for you? Probably not much.

Within the population and nation, there’s still a huge amount of divergence. Different areas and industries can grow and crash.

But there is something that has changed dramatically for Australia this time. It happened in Britain after the financial crisis. So I feel like I’m emailing you from your future — a desk here in London.

Yesterday I passed my local exam to become a financial advisor in the UK. I’ll shortly be compliant in both Australia and here. The differences in regulation were fascinating.

I’m also considering buying a home here in London. Put all this together and I’ve discovered some insights worth sharing with you.

First of all, in 2013, the UK tightened its mortgage lending standards in the way Australia is about to. Their version of the royal commission was called the Retail Distribution Review (RDR).

These days, I can only get a mortgage five times my income in the UK.

And it’s stress tested to 7% interest rates — more than nine times the Bank of England’s current rates.

The trouble is, with two-year fixed rates well below 2%, mortgage costs are well below rental yields.

In fact, it’d cost me about 25% less per month to buy than rent the equivalent place during the fixed period.

On an interest only mortgage — a fairer comparison to renting, the cost is 75% less during the fixed period.

Now there’s no way I’m staying in London for the long term.

In fact, buying a UK house is my attempt to trade the collapsing Aussie dollar and the revival of Britain (with or without Brexit).

I expect to shuffle over to Australia as soon as house prices there hit rock bottom.

But here’s the thing. I can’t get the mortgage I need.

House prices are miles above five times my income, despite a deposit size that leaves the bankers with next to no risk.

Why house prices will fall lower than they need to

Why are lending standards so tight? Because of the government’s reaction to the financial crisis.

The RDR triggered rules that tightened lending so much it made purchasing a house with a large deposit and affordable income impossible (in London).

An arbitrary rule that locks decent borrowers out, despite decent affordability.

Now my sob story might not seem relevant to you. But remember, this is the future of Australia too. Where even decent borrowers can’t bid up to the asking price.

That’s what causes house prices to fall so far so fast. Tighter lending standards the moment house prices begin to fall.

What does a housing bubble’s over correction have to do with per capita GDP?

The answer is simple.

Debt doesn’t behave like GDP.

It’s a stock, not a flow.

And that creates a dangerous mismatch.

As Japan’s population shrunk, dragging down GDP growth, the debt pile kept growing. It’s the same for Australia’s mortgage borrowers.

Their ability to earn money is falling per person alongside GDP. But their debt burden remains high. It’s growing as a proportion of their share of the GDP pie.

Combine that with falling house prices, and you get mortgage defaults just when people can’t get mortgages to buy houses.


Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia