Soy sauced

Little wonder many US farmers are feeling the pinch of Trump’s trade war with China.

Figures from data service Knoema show the value of US soybean exports to China have collapsed. In 2017, US farmers sold $US12.22 billion of soybeans to China; last year that slumped to just $US3.12 billion. This followed the Chinese Government’s decision to drastically reduce US soybean imports in retaliation for Trump’s move to impose tariffs on Chinese goods.

To fill the void, US farmers have had to search for markets further afield, cultivating and expanding markets in Argentina, Egypt and (ironically enough) Iran, among others (see below).

US Agricultural Exports to China Falling, Farmers Seek New Markets

The pain felt by US producers is not just limited to soybean farmers either. Across the spectrum, agricultural exports to China are down – frozen fish, shrimp, pigs, wheat.

The US Government has provided a $12 billion aid package for farmers hurt by the trade battle, more than $7 billion of which has gone to soybean farmers.

So, thanks to Trump, American taxpayers and consumers are copping it both ways – paying more for consumer goods from China, and handing out even more money to farmers hurt by Trump’s own policies.

Then there is the little matter of exacerbating the risk of recession…

 

 

 

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Morrison’s half-hearted climate ploy won’t cut it

Scott Morrison and his government still don’t get it.

A day before arriving at the 50th Pacific Islands Forum Leaders’ meeting in Tuvalu, the Australian Prime Minister announced $500 million to help Pacific nations invest in renewable energy and prepare for the effects of climate change.

Pacific leaders have been building up the pressure on Australia to take their climate change concerns seriously and the Morrison Government is obviously hoping that the package will take some of the heat out of the issue at the PIF meeting.

While it might buy Australia some temporary relief, the announcement is unlikely to work for long, for a number of reasons.

For one thing, it does nothing to address regional concerns about the depth of Australia’s commitment to tackling climate change. By giving money to other countries to do something about their energy usage and disaster preparations, Australia is inadvertently reinforcing the criticism that it is doing all-too little itself.

When Tony Abbott whipped Australia out of the Paris Climate Change Agreement he made the country instantly more vulnerable to criticisms that it does not take climate change seriously and shirks from taking meaningful action to curb its own contribution to the problem.

From the viewpoint of small island Pacific countries who see themselves as on the frontline of the effects of climate change, Australia’s position as one of the world’s largest exporters of coal is increasingly morally and politically indefensible, and a $500 million handout won’t change that.

There is also a bigger story here that goes to the heart of Australia’s national interest.

The Morrison Government has significantly increased the policy focus on the Pacific. The tempo of ministerial visits to the region has surged, accompanied by attention-grabbing announcements like the electrification of rural PNG, the construction of a high-speed data cable between Sydney, Port Moresby and Honiara and the establishment of a joint Australia-PNG-US naval base on Manus.

The cause of Australia’s intensified interest is China’s growing presence and heft in the Pacific as an investor and a provider of development projects, funding and finance.

Australia is rightly wary of what China’s plans and intentions are in the Pacific. At the very least, it spells the end of 70 years of unchallenged hegemony for the US in the region.

There is a well of good will toward Australia in the Pacific region.

But it has gradually been draining away over the years as Australian governments have waxed and waned on the region.

Australia’s influence and diplomacy in the region has had several high points under the stewardship of dedicated ministers like Bob McMullen and Gordon Bilney, and Australia’s leadership of the RAMSI intervention to restore order in the Solomon Islands.

But often its engagement has been tepid, fitful and, in recent times, marked by curious decisions and disdainful remarks that have undermined Australia’s standing, like the penny-pinching move to axe the ABC’s shortwave service to the region and Peter Dutton’s dismissive comments about Pacific Islanders under threat from rising sea levels.

This is the context in which Morrison’s $500 million pledge should be viewed.

The fact that it is being funded at the expense of other areas of Australia’s development program will not go unnoticed.

The ability of Pacific nations to absorb significant amounts of aid is limited. Thin reservoirs of expertise and fragile systems of governance mean the risk of funds being misused or misspent is considerable.

But diverting funds from programs tackling family and sexual violence, building roads or supporting schools and hospitals to boost action on climate change sends a curious signal about Australia’s priorities in the region.

Under President Xi, China is shifting the bias in its foreign policy increasingly toward hard power, particularly through the rapid expansion of its navy and an increasingly nationalist and belligerent posture on the international stage.

The leaves an opening for Australia to augment its soft power in the region. Rugby league is a prime example. PNG, for example, virtually shuts down when the NSW-Queensland State of Origin matches are on.

Australia’s labour mobility programs in the Pacific are another example. Already several thousand workers from Samoa, Tonga and Kiribati are sending welcome funds home from jobs on Australian farms, in our hotels, our nursing homes and other workplaces. PNG, which suffers from high rates of unemployment, particularly among its young people, promises to a particularly rich source of labour for Australian employers. For their part, workers who have had a good experience will extol the virtues of PNG’s near-southern neighbour.

Australia has a head-start in the race for hearts and minds in the Pacific, but it will only maintain its position by treating its Pacific neighbours with understanding and respect.

Half-hearted, penny-pinching climate change policies won’t cut it.

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Is China really the currency manipulator Trump says it is?

A great analysis of Trump’s accusation that China is a currency manipulator has just been published by the Timothy Taylor (aka the Conversable Economist: http://conversableeconomist.blogspot.com/2019/08/china-and-currency-manipulation.html).

He shows how changes in China’s currency vs US dollar do not match up with rises and falls in China’s trade surplus with the US, which is at the core of Trump’s accusation.

The chart below, which maps the yuan/US dollar exchange rate over the past 30 years, tells much of the story.

china exchange rate

As Taylor explains, up to around 1995, the Chinese Government set an official exchange rate. The value of the yuan plunged that year when the official rate was unified with the much weaker market-set rate.

Between 1996 and 2005, the exchange rate barely budged because the Bank of China held it fixed.

From mid-2005 the yuan gradually strengthened, from about 8.2 yuan to the dollar to reach 6.8 yuan to the dollar by mid-2008.

Since then it has been held within the 6 to 7 yuan/dollar band by the Chinese central bank.

Match this up against China’s trade balance.

Chinese exports surged in the early 2000s after the country joined the World Trade Organisation in 2001 (see chart below). China’s trade surplus reached a high of 10 per cent of GDP in 2007 before declining to less than 2 per cent by 2011 and less than 1 per cent last year.

china trade balance

Note how, in the early 2000s, will China’s trade surplus surged, the yuan/dollar exchange rate did not budge, and has stayed within the 6 to 7 yuan/dollar band for the past decade, even as the trade surplus has plunged.

As Taylor argues, especially since 2011 there is no evidence to no support Trump’s complaint that China has been using a weak exchange rate to power its trade surpluses.

In fact, China’s trade is close to balance at the moment. The IMF reckons it had a surplus of just 0.4 per cent in 2018, and thinks it is headed to a trade deficit in the next few years.

Given Trump’s “America First” (read, ‘bugger the rest of you’) focus, it is unsurprising that US Treasury’s gripe is primarily that, regardless of its overall trade balance, China is running a hefty trade surplus with the US.

But this has little to do with the currency and almost everything to do with the American consumer who has, like much of the rest of the world, become addicted to the flood of cheap clothes, toys, footwear, electronics and other goods coming out of China.

By hiking the tariffs on Chinese imports, Trump is imposing a tax on American households by increasing the cost of the Made in China goods they purchase.

He is also distorting global production chains.

Neither will necessarily be very good for the American economy, which is already slowing under the pressure.

Own goals don’t come much bigger.

 

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Interest rates Australia: the outlook for 2019

This post was first published in In The Black on 8 March 2019 at https://www.intheblack.com/articles/2019/03/08/interest-rates-australia-outlook-2019

When the Reserve Bank of Australia (RBA) last changed interest rates Malcolm Turnbull was still prime minister, Donald Trump had yet to seize the White House, the UK had just voted for Brexit and house prices were booming.

During all the subsequent turbulence locally and abroad, the RBA cash rate has been a rare constant. In two and a half years it has not budged from a record-low 1.5 per cent.

However, markets and economists increasingly believe this period of policy stability is coming to an end, though views diverge sharply on whether the next move will be down or up.

The Reserve Bank recently indicated that it has shifted from a bias towards increasing interest rates to a more neutral stance. Governor Philip Lowe said in a recent speech that “over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”

Unemployment falling

CommSec senior economist Ryan Felsman.

Some, such as CommSec senior economist Ryan Felsman (left) and ANZ’s co-head of Australian economics, Cherelle Murphy, think the time is coming when the RBA will be able to raise interest rates.

Despite weakening house prices, the employment rate was steady at 5.1 per cent in January, supported by strong participation in the labour force, according to the Australian Bureau of Statistics. The trend ratio of employment to population rose to a 10-year high of 62.4 per cent.

Felsman says the central bank will look past the continued slide in house prices and unexpectedly soft growth in the September quarter to developments in employment.

“The labour market is the key indicator going forward as far as interest rates are concerned,” he says.

Demand for workers has been building – about 284,000 jobs were created in 2018 and the unemployment rate has dipped to 5 per cent – and Felsman expects this pressure to gradually force wages higher and enable households to increase their spending.

Eventually, he expects wages growth to reach 3.5 per cent, which would be consistent with an inflation rate of about 2.5 per cent – the mid-point of the Reserve Bank’s 2 to 3 per cent target band – “which the RBA has previously identified as a level they would like to get to before they lift interest rates”.

Interest rates to rise in November?

ANZ’s co-head of Australian economics, Cherelle Murphy.

 

Felsman thinks this point will most likely be reached in November, convincing the central bank to lift the cash rate to 1.75 per cent.

Murphy (right) shares Felsman’s upbeat outlook for the economy but foresees a more gradual improvement.

She does not expect the RBA to lift the cash rate until August next year, followed by another increase in November 2020 to take the cash rate to 2 per cent.

Murphy says national income is holding up. Businesses are being buoyed by good profits, encouraging them to invest and hire, and feeding more company taxes into government coffers.

Just as important, tighter credit conditions are working to cool the once-rampant property market without triggering widespread mortgage defaults.

While homeowners may see a peak-to-trough fall of 20 per cent in house values before the market stabilises, Murphy says the fact that mortgage rates are stable means few are being forced to sell.

“This helps explain why consumer confidence has not fallen in a hole, and instead has stayed at pretty high levels,” she says, along with the strong jobs growth.

Given the importance of private consumption for economic activity (accounting for almost 60 per cent of GDP), this is an important plus for growth.

Further interest rate cuts

AMP Capital Markets chief economist Shane Oliver.

 

AMP Capital Markets chief economist Shane Oliver (left) and Market Economics principal Stephen Koukoulas are much gloomier about the economic outlook and believe tepid growth, elevated global risks and inflation that is stubbornly below target will leave the Reserve Bank board with no choice but to cut official interest rates in 2019. Oliver tips the rate to drop to 1 per cent by the end of this year; Koukoulas reckons it will hit a record low 0.75 per cent.

Both forecasts are more aggressive than financial market estimates which, which nonetheless have fully priced in a rate cut to 1.25 per cent by the end of the year.

Concerns about growth, falling house prices, stagnant wages and soft household spending have been underlined by the release of figures showing underlying inflation has been below the RBA’s 2 to 3 per cent target range for most of the past four years.

China’s slowing economy

Internationally, China – Australia’s largest export market – has slowed. In the 12 months to the December quarter it expanded by 6.4 per cent, its weakest pace in almost three decades as consumers eased the pedal on major purchases such as cars. The unresolved US-China trade war has deepened concerns about Chinese growth.

Against this, the Chinese Government has pledged to support the economy and is expected to unveil tax cuts and relax bank cash reserve requirements.

Nonetheless, the International Monetary Fund (IMF) expects the US economy to soften in the next two years as the effects of the Trump tax cuts fade, recent Federal Reserve rate hikes bear down on activity and the trade war with China rumbles on.

These developments are buffeting other economies. In Europe, the IMF expects Germany to be hit particularly hard. The euro zone’s largest economy is heavily reliant on exports to the US and China, and the Fund has sharply downgraded its growth prospects, forecasting it will expand by just 1.7 per cent this year.

Slowing European growth

Add to this mix the Brexit fiasco, and the IMF thinks the euro area as whole will struggle to grow by just 1.9 per cent in 2019 – and that is assuming Britain and the EU reach agreement on an orderly exit.

While these issues have been on the Reserve Bank board’s radar for some time, Oliver says the way they have evolved in the last few weeks will have it worried.

“I think they would be feeling more nervous about things than they were in December when they last met,” he says. “We have seen another round of volatility in markets, and a lot of the issues around that haven’t been resolved. Locally, the housing downturn has worsened, [and there are] more concerns about tight credit conditions.”

Despite this, Oliver does not expect the central bank to be in a rush to cut the cash rate and will instead want to see spending measures in the April Federal Budget and the promises made by both the major parties in the lead-up to the federal election before moving.

Amidst such uncertainty, the RBA and its counterparts around the world appear poised to act meeting to meeting, examining data in forensic detail for the faintest hints of how key aspects of the economy are faring.

As Felsman says, “Every policy meeting is now live.”

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Attack of the zombies

This post first appeared in In The Black, 5 Dec, 2017 https://www.intheblack.com/articles/2017/12/05/zombie-firms

Zombie firms – dud businesses that refuse to die despite not being commercially viable – are not only surviving but multiplying, and acting as deadweight on productivity and growth.

In the hit American schlock-horror show The Walking Dead, the sweaty heroes make killing off zombies look sickening but easy, casually shooting, bludgeoning and slashing their way through swarms of mindless goons to get out of trouble.

Alas, that is not how it is proving to be in the real world.

Across the globe, zombie firms live on, creating a headache for competitors and governments.

Here come the zombies

In well-functioning competitive markets, firms are under constant pressure to perform or lose market share and eventually go out of business.

Contradicting that notion, researchers at the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) have identified a disturbing trend for chronically under-performing companies to survive.

The OECD study found that between 2003 and 2013 the proportion of all European firms that were zombies (defined as older enterprises chronically unable to meet interest payments) almost doubled from 3 to 5 per cent.

Much of this increase has occurred since the global financial crisis (GFC), and the OECD researchers think they know why.

Usually recessions have a cleansing effect, brutally killing off enterprises which are no longer viable so that only the robust survive.

OECD researchers, however, say that the nature of the GFC and the policy responses to it has blunted this process. Thanks to persistent ultra-low interest rates, carrying high levels of debt is no longer the death sentence it once was. In addition, banks are showing greater forbearance in dealing with debtors, and governments have increased business support to protect jobs.

Zombie firms globally

Zombie firms are not just a European problem. The IMF warns that the Chinese economy is also being weighed down by zombie firms.

In its most recent assessment, the IMF found that China could increase productivity by making better use of resources that are going to zombie firms as well as to industries with overcapacity and state-owned enterprises (SOEs).

It is urging the Chinese government to intensify its efforts to reform the economy, including allowing underperforming firms to fail, reform SOEs and reduce over-capacity.

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Low productivity growth

Economists have puzzled over why productivity growth in recent years has been so lacklustre, and particularly why the practices of the most productive firms are not disseminating through industry in the way that they used to.

The OECD researchers believe that zombie firms are a large part of the problem.

By surviving despite using outdated equipment, processes and practices, zombie firms not only drag down aggregate productivity, they also make it harder for new entrants into the market and hinder the efficient allocation of jobs and investment.

Businesses trying to crack markets congested by zombie firms are forced to clear a much higher productivity threshold to compensate for the lower profits they are able to earn because of the inflated wages and lower prices driven by their zombie rivals.

The researchers estimate that investment in productive enterprises would have been 2 per cent higher in Europe in 2013 had there not been an increase in the number of zombie firms.

An IMF working paper on China estimates that getting rid of zombie firms could generate significant gains of 0.7-1.2 percentage points in long-term growth per year.

It says the Chinese government has made zombie firms a key priority in its strategy to address corporate debt vulnerabilities and improve resource allocation, but finds zombie numbers have increased since 2011.

“Implicit guarantees and the government’s desire to support growth encourage these firms to invest excessively, raising already-high leverage while weakening performance on profitability and debt service capacity,” says the paper.

Zombie firms and Australia’s car industry

When the final car rolled off the Holden assembly line in Adelaide in October 2017, it marked the end of a decades-long effort by successive Australian governments to foster a viable local automobile industry, initially using high tariff walls and later by providing billions of dollars of taxpayer assistance.

Professor Roy Green.

For Professor Roy Green (pictured right) University of Technology Sydney innovation adviser, Australia’s car industry offers a cautionary tale of how zombie-like firms can soak up attention and resources at the expense of much more promising opportunities for growth.

The big car-makers, he says, never had a real interest in transforming their Australian subsidiaries into viable, globally competitive operations.

“These companies were controlled by global headquarters which had no particular interest in creating an export-oriented business in Australia,” Green says.

The tragedy of it is that the big car-makers dominated the policy agenda for so long, to the neglect of the potentially much more viable and vibrant components sector.

“If we gave as much attention to them as to the car assemblers, our car industry would be in a much healthier situation,” he says.

Killing off zombie firms in the real world is much more difficult than annihilating fictional ones in the movies, but the experience in Australia, China and Europe shows that allowing them to continue can perpetuate the pain to economies.

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Australian households ‘world-beating borrowers’

When Atlassian co-founder Mike Cannon-Brookes reportedly paid close to $100 million for the Fairfax family home in Point Piper this past week, it helped confirm that housing in Sydney and Melbourne has become seriously expensive.

The world’s longest property upswing (55 years and counting according to the Bank for International Settlements[1]) and a surge of more than 60 per cent in the past five years (notwithstanding a modest downturn in the last 12 months) will do that.

housing-prices.gif

But just how expensive has Australian property become?

One way to look at it is how much buyers have to borrow to be able to afford a home in Australia, and on this front recently-released figures compiled by the International Monetary Fund[2] provide an intriguing insight.

They show that, when it comes to going all-in to buy a house, no-one comes close to Australian borrowers.

In the three months to June, almost two-thirds of all loans (by value) in Australia were mortgages, which is far higher than any other nation for which the IMF has published figures.

Of the 79 other countries, including 23 advanced economies, that provided financial data to the IMF for the June quarter, none had a home-to-total-loan ratio above 46.3 per cent – a figured dwarfed by Australia’s 63.7 per cent.

The huge share of loans that are for mortgages isn’t being driven by more people borrowing. In fact, the number of owner occupiers taking out loans has been remarkably stable over time. In July 2005, there were 55,123 such borrowers. Twelve years later, in July 2017, there were 54,881.

But over that same period, the proportion (by value) of all loans that were for housing jumped from 56.3 to 63.75 per cent. Some of this growth was surely down to more investors getting into the property market. But the biggest driver was likely to be the surge in house prices over that time.

The preparedness of homebuyers to borrow so heavily to buy housing indicates a number of things:

  • a belief that a mismatch between supply in demand in key city markets will persist;
  • that this mismatch will drive house values up in the longer term;
  • that a mixture of fear and greed is at play – fear of being permanently priced out of the property market, and strong desire to grab a share of housing capital growth; and
  • that residential property will deliver better returns than other asset classes (noting that many are exposed to the sharemarket through their superannuation accounts).

The heavy borrowing required to compete in the recent property market has, of course, made households heavily indebted.

Household debt as a proportion of gross domestic product was at 104.9 per cent in the middle of the year, according to the IMF (Trading Economics/Bank for International Settlements reported it was 122.2 per cent)

australia-households-debt-to-gdp.png

Current low interest rates have until now helped households carry this burden without too much distress, and less than 1 per cent of loans are ‘non-performing’. This is a world away from the situation in European countries hit hardest by the GFC, who are still climbing out from under their debt mountains. In Italy, for instance, more than 14 per cent of loans are still considered non-performing, and in Greece the ratio is a disastrous 45.6 per cent.

But the Reserve Bank of Australia, for one, sees, the level of household debt as a risk for the economy.

As a proportion of disposable income, the central bank warns it is high. The slowdown in wealth accumulation from the cooling property market, along with stagnant wages, has the RBA concerned that household consumption – a key driver of economic growth – could be weaker than it expects.

Moreover, others warn that a significant proportion of borrowers will struggle financially as interest only-loans transition into standard principle-and-interest mortgages in the coming year or so.

Against this, the jobs market is tightening, and there are nascent signs that wages are finally picking up.

The RBA’s core scenario is for above-trend growth driven by solid business investment and a gradual improvement in household consumption, which is underpinned by bigger pay packets, more jobs and low interest rates.

But the not-insignificant risks to this outlook posed by high household debt mean the current period of monetary policy stability – the RBA’s cash rate of 1.5 per cent hasn’t changed in more than two years – is set top continue for a while yet.

 

 

[1] https://www.smh.com.au/business/banking-and-finance/bis-says-australias-55year-house-price-upswing-the-longest-in-the-world-20171016-gz1kdc.html

[2] http://data.imf.org/regular.aspx?key=61404589

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Outlook for property prices: lower for longer?

By Adrian Rollins (this story was first posted by intheblack.com on 7 August 2018, at: https://www.intheblack.com/articles/2018/08/07/outlook-property-prices)

What is the outlook for Australian property prices now that the property market has passed its peak? Will house prices continue to deflate in key markets?

For a country used to ever-rising property prices – they have soared more than 370 per cent in the past 30 years – a new reality of shrinking property values and is taking shape.

Since the market peaked in September 2017, the home value index compiled by property market analyst CoreLogic has slid 1.3 per cent, including a 0.2 per cent decline in June 2018.

The searingly hot Sydney market has been hardest hit. House prices there have tumbled 4.6 per cent since the peak.

Nevertheless, so far the damage to balance sheets has been limited. Nationally, longer-term homeowners have held on to virtually all of their capital gains – prices are still 32.4 per cent higher than they were five years ago.

The property market is deflating, but with a gentle hiss rather than a cacophonous bang.

Nervous mortgage holders and aspiring homebuyers nonetheless wonder how long this decline will last, and how ugly it might get.

Applying the brakes to property prices

Part of the answer lies in understanding what pushed prices so high in the first place, and why they have since turned down.

CoreLogic research director Tim Lawless says easy credit and eager investors underpinned much of the increase in recent years. Buoyed by low interest rates and strong capital gains, investors piled into the property market.

By early 2015, the value of mortgages taken out by investors outstripped those to owner-occupiers, many of them riskier interest-only loans.

At one point, almost half of all loans being written were interest-only.

However, the downturn in house prices has not been driven by higher interest rates or borrowers getting into financial distress. Instead, it has been engineered by regulators, says property analyst Pete Wargent of WargentAdvisory.

Worried by the surge in investor borrowing, financial regulator the Australian Prudential Regulation Authority (APRA) in 2014 placed a 10 per cent speed limit on the growth of loans to investors. Three years later the regulator clamped down on interest-only lending, which had been growing rapidly, imposing a 30 per cent cap on the proportion of new mortgages that could be interest-only.

Listen to the podcast: CPA Changemakers: a discussion on housing affordability

Taken together these measures, says Wargent, were “pretty unique” – and effective.

Within a few months of the investor loan cap, borrowing slumped, dropping by almost a third through 2015, and it has continued to decline.

By April this year investors accounted for just 42 per cent of home loans, the lowest proportion since 2012, and growth in investor lending had dropped below 5 per cent, down from a high above 10 per cent.

Interest-only borrowing, too, has wilted. It accounted for more than 40 per cent of loans approved in 2015; by early this year the ratio was less than 20 per cent.

The regulation-driven credit squeeze has dampened housing markets. Auction clearance rates have slumped to less than 57 per cent nationwide, and are the lowest they have been since 2012, according to CoreLogic figures.

APRA released the brakes on investor lending in April but has no intention of relaxing the pressure on lenders, demanding they limit new lending at very high debt-to-income levels, and set debt-to-income levels for borrowers.

Australia: headed for a property crash?

However, the risks already built up in the system are not going away in a hurry.

The Organisation for Economic Cooperation and Development (OECD) has flagged household indebtedness as the economy’s biggest risk. The ratio of total household debt to income has jumped almost 30 percentage points in the past five years to reach 189 per cent in December 2018, and mortgage debt alone was 139 per cent of income.

Although wealth has grown even faster, some who have borrowed heavily may be vulnerable.

University of New South Wales Business School Professor of Economics Richard Holden puts the chances of a house price crash at 30 per cent, most probably triggered by widespread defaults on interest-only loans.

Although Holden says it is most likely that the property market will avoid a collapse, the risks created by more than A$100 billion of interest-only loans are “non-trivial” and cannot be ignored.

The Reserve Bank of Australia (RBA) estimates that each year until 2021, about A$120 billion of such mortgages will convert to traditional principal and interest loans, forcing up repayments by between 30 and 40 per cent.

The RBA thinks most households have enough of a financial buffer to absorb the increase. However, Holden warns that if even just 10 per cent struggle to make their repayments and are forced to sell, that could be sufficient to trigger a crash.

“I’m not really worried about what happens in Point Piper, Double Bay or Toorak,” he says. “I’m worried about what could happen in the western suburbs of Sydney and Melbourne. If there are big forced sales there, then great damage is going to happen to people who can afford it least.”

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Interest rates: the price of money

A sudden jump in interest rates is another risk.

Few expect the official cash rate to budge from its current record low of 1.5 per cent before late 2019 at the earliest.

However, this doesn’t mean borrowers won’t feel some financial pinch.

Wholesale funding costs on international markets are increasing, and already some smaller lenders are responding by pushing up interest rates on selected mortgages.

Lenders including Macquarie, the Bank of Queensland and Auswide Bank have increased rates on variable interest mortgages by an average of between 0.08 per cent and 0.27 per cent, and Lawless expects larger banks will eventually have to follow suit.

Still some life left in the market

Even if the country avoids a default-induced property crash, economists expect that tighter credit standards and the chilling effect of the banking Royal Commission on lenders will force house prices down for some time yet.

Fifteen economists polled by comparison website Finder.com.au tipped that prices in Sydney and Brisbane could drop by as much as 6 per cent by the end of the year, 4 per cent in Melbourne and Hobart, and 2 per cent in Perth, Adelaide and Darwin.

ANZ Banking Group is even more bearish. It predicts prices nationally could fall by 6 per cent from September 2017’s peak to a trough in 2019, including a plunge of up to 10 per cent in Sydney – a view shared by Macquarie Securities. AMP Capital warns they could drop by as much as 15 per cent by 2020.

However, Australia’s status as a destination of choice for migrants may limit the extent of any decline.

The country, particularly its biggest cities Sydney and Melbourne, has been a magnet for immigrants and Australia’s population is growing close to the fastest among developed countries.

Professor Holden says it is on track to expand by 1.6 per cent this year, and all these people have to live somewhere.

With the supply of dwellings set to tighten – building and home loan approvals nationally have both dipped recently – pressure on home prices could again build.

Australia’s seemingly tireless property market might have more life in it yet.

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