Irish financial guru Eddie Hobbs has declared that Australia is in an economic “trap”, fuelled by a huge speculative property bubble.
Hobbs, writing in the Irish Examiner, says there are disturbing economic parallels between what happened in Ireland before its property crash and what is going on in Australia today.
“Housing values are already down 10 to 15 per cent on average, credit growth is cooling rapidly and early warnings like falling recruitment advertising, white goods and car sales are flashing red as employers and consumers rein in spending as the negative wealth effect takes a grip,” he says.
“Ireland and Australia have different economies that’s for sure, but not different people. Why Irish data matters is because the Australian mortgage book looks to have much higher risk than Ireland before its crisis.
“Forty per cent of all Australian mortgages are on capital repayment holidays, serviced on interest-only terms. This is a huge number,” he writes.
“The total loan book is also heavily skewed towards buy-to-lets at 34 per cent of which 80 per cent are interest only. These nose bleeding numbers compare to Ireland where 15 per cent of mortgages were buy-to-lets, half of them, interest only. The great bulk of Irish housing mortgages, 85 per cent were owner occupiers spilt even between first-timers and those switching home or mortgage. So, have Australian Banks been more carefully lending than Irish Banks? No.”
The Irish economist said he can not see a way out for Australia without ‘a lot of pain’.
“Despite its AAA status, high per capita wealth and low joblessness, Australia is in a trap. Heaven help them because it is hard to see a way out that doesn’t involve taking a lot of pain. The economy is sitting on a huge speculative bubble. If [the economic doomsayers] are right, Australia is staring into a full-blown systemic crisis for banks, for mortgage insurers and for sovereign debt as loses get socialised.
“Cutting rates, loosening credit rules to reignite credit growth or adopting emergency fiscal policies to provide market supports, could delay and temporarily inflate the bubble further but it cannot be magicked away. When the public is fed reckless Government, regulatory and banking policies for long enough, the results are always the same.”