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Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan, Spain, Iceland, Australia – (update 6)

Posted by Adrian on July 31, 2008

Australia is poised to enter a ‘sharp’ stagflation recession. This is no surprise, as the extraordinary over leveraged Australian consumer’s property values will decline rapidly, from Bloomberg:

Household debt has almost doubled since 1999 to around 160 percent of incomes, a higher ratio than in the U.S. and U.K., according to AMP Capital Investors. The median national house price soared about 140 percent in the same period.

“By every metric I can think of, Australian houses are too expensive,” Minack said, costing an average of six years’ earnings, double what Americans paid before their property market started falling in 2006.

Prices in the property market — described by the International Monetary Fund in April as one of the world’s most “overvalued” — will fall 30 percent by 2010, according to Gerard Minack, senior economist at Morgan Stanley in Sydney. Prices dropped in all of Australia’s major cities last month for the first time since just before the Great Depression.

“I panicked” when the figures came in, said John Edwards, chief executive officer of Residex Ltd., a Sydney company that tracks property prices. “We’ve been doing this for 20 years and have data that goes as far back as 1865, and it’s really abnormal.”

The Australia stock market has been one of the poor performers of last 7mths. Collapsed banking stocks have dragged the index well into Bear territory.

Although the Australian banks, similar to the Spanish banks have not leveraged as much as the US banks; Australian banks, like European banks have invested heavily into the US mortgage securities market – hence the recent disclosures of losses and write downs (both in Australia and Europe). This should be noted that major Australian banks have put aside provisions for domestic losses, so the banks are showing vulnerability to both domestic and overseas markets. More problematic for Australian banks is a sharp domestic downturn in property, that will tip Australia into a sharp recession.

in conclusion,

“The Washington-based IMF says Australian house prices were overvalued by almost 25 percent in the decade through 2007 when compared with household income and ability to pay debt. Only Ireland, the Netherlands and the U.K. were higher.

A crash would “result in a significant negative wealth shock” for Australians, whose spending accounts for about 60 percent of the economy, Minack said. While growth is expected to continue for a 17th straight year in 2008, the Reserve Bank of Australia forecasts it will slow to 2.25 percent from 3.9 percent in 2007.”


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