The Definitive Guide To The Australian Housing Bubble And Coming Financial Crisis

steve keen

Economist Steve Keen has warned for years of an Australian housing crash comparable to the U.S. subprime crisis.

Today Keen published a must-read essay full of charts on the housing bubble and how it propped up bank stocks.

He concludes: “It’s great fun while it lasts, but all Ponzi Schemes end for the simple reason that they must: they aren’t ‘making money’, but simply shuffling it—and growing debt. When new entrants can’t be enticed to join the game, the shuffling stops and the Scheme collapses under the weight of accumulated debt. There are very good odds that, when this Ponzi Scheme collapses and house prices fall, bank shares will go down with them.

Real house prices have more than doubled since 1997. Bank shares have doubled too, beating the rest of the market

Since 1987, banks have moved more and more into real estate loans

Mortgages account for a record 57 per cent of banks' loan books

They account for a record 37% of bank assets

Compared to America, real estate loans are a higher share of bank assets, and they increased in significance more quickly

THE BUST BEGINS: Impaired assets have surged to 25% of Tier 1 capital, even while home prices increase

Real estate loans are worth 700% of Tier 1 capital. An increase in non-performing loans would cause grave damage

DEBT PRESSURE: Australians already pay 50% more than the U.S. in mortgage interest

HISTORY: High debt to GDP led to a deleverage-driven slump in the 1890s, 1930s and briefly in the 70s and 80s

Pre-WW2 credit growth was highly volatile and slightly positive

Post-WW2 credit growth was less volatile but significantly more positive

WARNING: This time the housing crash is oc curing in a period of low inflation, which resembles the severe pre-WW2 crashes

Bank shares tracked home prices in the 1890s crash

Bank shares tracked home prices in the 1930s

Bank shares tracked home prices in the 1970s

The 1987 stock crash marked the end of an era

Banks weathered a real estate crash in the early 90s and have been rising ever since

Mortgage debt exploded to almost 90% of GDP

The latest bubble started with the highest debt level and has lasted longest

Only the 1920s bubble is comparable in debt growth

The rise in house prices has been unprecedented

Banks have soared like never before -- and have a long ways to fall

According to the Economist, Australia has the most overpriced housing market anywhere

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