Royal commission shatters housing bubble facade

Over the last six months or so, any remaining illusions that Australia’s housing bubble and banking system are somehow fundamentally different or ‘exceptional’ to the long and painful history of credit-fuelled asset bubbles – and the associated mathematical certainties of economic and financial imbalance – have all but evaporated. The banking royal commission currently underway has in record time shattered what was left of our housing bubble facade – the pretence that despite the downturn already underway and years of blindingly obvious warning signs, we are somehow in for a ‘soft landing’ owing to our good lending standards, our prudent and stable major banks, and our resilient financial system.

I’ve argued for years that all credit-fuelled asset bubbles inevitably require ever greater amounts of financial engineering, government intervention, regulatory capture, and fraudulent lending to keep inflating. And that inevitably these forces must reach a natural limit after which no amount of fraud and manipulation can keep the Ponzi scheme from collapsing, though it may certainly cling on for longer than most anticipate – a fact that should inspire acute discomfort, but which is instead celebrated as good governance or provenance by Australia’s army of twisted housing commentators.

Despite years of denial by the politico-housing complex, the banking royal commission has immediately uncovered the tip of the iceberg in poor lending standards and fraudulent practices in our multi-trillion dollar mortgage market. Quell surprise!

How frustrating to be accused of being a ‘doomsayer’ for so many years, to now find out that we indeed have a lot to worry about. Like the misunderstood ‘Boy Who Cried Wolf’ in my last article, the stalking wolf of bubble collapse is indeed ready to rip apart the mortgaged flock, and any remaining chance for the villagers to heed the shepherd boy’s pleading has been lost to blind dismissal. The royal commission’s uncovering of systematic mortgage fraud and poor lending practices is the wolf’s bloodthirsty howl as it finally emerges from the dark forest.

Of the many staggering revelations to come out of the testimony so far, ANZ’s admission that they don’t bother assessing mortgage customers’ credit-worthiness about sums up where our banking sector is at:

“You don’t do anything to verify what the broker tells you about the customer’s expenses, you don’t do anything to check that that information accurately represents the customer’s expenses?” Ms Orr then asked.

“Their general living expenses, no,” Mr Ranken responded.

“So when the customer’s expenses are inconsistent with bank statements that ANZ holds, you don’t think that it’s necessary to take further steps to deal with that inconsistency?” Ms Orr continued.

“No, not necessarily,” Mr Ranken responded.

“Our processes are we do nothing. There are transactions on those statements that are inconsistent with the statement of position and we don’t do anything,” he told the commission.

“Do you think that’s satisfactory Mr Ranken?” Ms Orr asked.

“I personally do, yes,” Mr Ranken replied.”

Combined with the reality of slowing and falling prices across Australia now setting in, the myth-busting is now widespread and terminal:

• Gone is the myth that Australian has good mortgage lending standards.
• Gone is the myth that Australia does not have sub-prime / liar loans.
• Gone is the myth that Australian banks and subsidiaries are not systemically engaged in fraudulent and imprudent lending practices.
• Gone is the myth that Australia has a strong banking system and thus a resilient financial system.
• Gone is the myth that Australia does not have a massive rolling stock of rate-resetting mortgages (in our case interest-only loans).
• Gone is the myth that our banks can continue to loosen lending standards ad-infinitum.
• Gone is the myth that Australia is not suffering from widespread mortgage stress.
• Gone is the myth that interest rates will never rise, as international interest rates, banks’ funding costs and regulatory pressures are now on the march higher.
• Gone is the myth that the government or regulators “will never let prices fall”, with current macroprudential rules working, and more likely to follow.
• Gone is the myth that foreign speculators are going to save us, who are reportedly deserting in droves following higher restrictions and taxes.
• Gone is the myth that population growth is going to save us, as prices are already slowing and falling despite record population growth.
• Gone is the myth that there is a physical undersupply of housing, with record-low rental growth, and property developers desperately trying to offload devalued stock.
• Gone is the myth that Australian housing is high quality, with flammable cladding only the latest debacle to hit the construction sector.
• Gone is the myth that our economy is exceptional and booming wages will ensure ever higher prices, with stagnation setting in and real wages falling.
• Gone is the myth that younger generations will just keep leveraging up to their eyeballs for the privilege of being the greater fools, instead of leaving our extortionate cities and their deteriorating liveability for greener pastures.
• Gone is the myth that house prices are determined by anything other than how much a bank can (and will) lend against it, with Australians about to discover that house price inflation is inversely correlated to the cost of mortgage credit and constraints on its availability, both of which will be structurally increasing for the foreseeable future.
• Gone is the myth that property prices never fall.
• Gone is the myth that Australia is different to any other country that ever had or has a housing bubble.

Last year I described in detail the fairy tales that we have chosen to believe in, against all historical and comparative comparisons, and the turning of forces that were only ever temporary in nature, not permanent qualities of our economy and housing market:

“King Canute fails to turn the tide because of universal laws that even he, the most powerful man in the land, cannot break. He may be able to pretend for a time that those rules do not exist, or claim to be excepted from them, but when tested, he must ultimately abide by the laws just as his subjects must. The rise and fall of the tide perfectly reflects the rise and fall of economic forces, the ebbs and flows of economic, market, political and other external fortunes and factors which for better or worse, invariably change course in the fullness of time.

We made the crucial mistake of assuming that cyclical (temporary) economic, financial and political circumstances were structural (permanent) in nature. Like every bubble that came before ours, we took a set of favourable market conditions, based on some fundamental but limited economic truth, and hypothecated them into a future of limitless speculative gains.

The tidal forces now rising around the ankles of our bubble sponsors are fatal and many, and were always inevitable:

• Mortgage interest rates have likely bottomed, and continue to march higher
• Banks tighten lending criteria across the board, and begin to abandon riskier loan products
• Rental growth has fallen to the lowest on record
• Population growth, while still strong, is quickly losing political support
• The oversupply of apartments in major cities is finally showing
• Apartment prices are now falling in Melbourne and Brisbane as a result
• Foreign investors are deserting the housing market
• Our largest external bubble ‘sponsor’, China, heads towards its own debt calamity and bubble-destroying reforms
• Wage growth is the lowest on record, and set to worsen
• Underemployment becomes the new “unemployment” crisis
• Recessionary forces stalk the country, with mining, commodities, manufacturing and construction facing massive headwinds”

Just six months later, with the reversal of each of those temporary circumstances advancing further and beginning to sink into the cultural psyche, it’s now plain for all to see that the fairy tales are over, and the tide is coming in.

How did we come to believe so fervently in our own exceptionalism? How did we come to believe that the real laws of economic and financial history do not apply to Australia?

The easy and utterly dismaying answer, as the long history of human bubble psychology shows, is that the persistent ignorance of fundamental imbalances in asset prices, requires and facilitates a form of collective psychosis (mania) on behalf of the apparent beneficiaries.

The mounting historical, empirical, and economic evidence that conflicts with the world view that prices are justified by ‘fundamentals’ and that the debt-backed housing wealth is real, is ironically interpreted as evidence of the opposite. The now overwhelming evidential challenge to such mania leads the bubble-participants to dig their heels in yet further, and convince themselves that housing bubbles only happen in places that aren’t Australia, or that even if we have one, for the first time in history we will not have to face the consequences.

This bubble psychosis is very much a case of stubborn confirmation bias, or more specifically ‘Belief Perseverance‘:

And being a form of psychosis, a belief in unreality, it persists until the bubble has burst, and the pain is very real, visible, and sadly unavoidable.

With the royal commission putting paid to the illusion that Australia’s 1.7 trillion dollar mortgage behemoth is ‘safe as houses’, that Australians can still say ‘it’s different here’, it appears that the housing bubble facade has finally been shattered.

What now of our blessed happy ending?