Citizens Electoral Council of Australia

Media Release Tuesday, 16 June 2015

Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://cec.cecaust.com.au

Without orderly reorganisation housing bubble will destroy national economy

The recent flood of high-level acknowledgements that Australia has a housing bubble puts the onus on the government to comprehensively reorganise the financial system before the bubble bursts.

Treasury Secretary John Fraser’s 1 May testimony to the Senate Economics References Committee that “when you look at the housing price bubble evidence, it’s unequivocally the case in Sydney … [and] certainly I think that’s the case in the higher priced areas of Melbourne”, Australian Security and Investments Commission (ASIC) chairman Greg Medcraft’s similar (if more cautious) warning two weeks earlier, and Reserve Bank of Australia (RBA) Governor Glenn Stevens’ message to a gathering of economists on 10 June that he was “very concerned about Sydney … some of what’s happening is crazy”, all indicate that there is no longer any serious denial in federal administrative circles that a bubble exists.

Having acknowledged this, those officials, and the government, must now admit a basic fact of both finance and physics: all bubbles burst. Therefore, rather than waiting for a devastating bust such as occurred in the US, UK, Ireland, Spain, and other nations in 2008, the government must avert such a crisis through an orderly reorganisation of the mortgage market. Effectively, home values must be lowered, as well as the debt on those homes by an equivalent amount, to bring housing costs back into line with the historical average of 3.5 times annual household income (currently Melbourne property is over 8 times, and Sydney over 9 times). Otherwise, as things presently stand, the bursting of this bubble will bring down the entire banking sector and the national economy along with it.

The idea that the fallout from a collapse of the Sydney and/or Melbourne markets would somehow not spread throughout the country, as some economists have suggested, is ludicrous, because Sydney and Melbourne between them comprise almost 40 per cent of the Australian population, and well over half of the nation’s real estate “value” (especially since Sydney prices rose more than 12 per cent in 2014) is concentrated in the two cities; to all intents and purposes, they are the property market.

Moreover, a crash of the Sydney and Melbourne markets would be enough to bring down the banks, devastating the entire national economy. All of Australia’s banks (and a growing number of ‘non-bank lenders’, to boot) are hopelessly over-exposed to mortgages, but the too-big-to-fail ‘big four’ are the deepest in the hole because under the “internal ratings-based” risk-weighting system that APRA permits them to use, they reportedly hold as little as 1.3 per cent capital against residential mortgages; that is, $1.30 in capital against every $100 loaned out. Our largest banks have become addicted to gambling on mortgages, which gambling is at the core of their ballooning derivatives speculation. Since the 2008 GFC, the total combined off-balance-sheet derivatives obligations of Australia’s banks has exploded, effectively doubling from almost $14 trillion to almost $28 trillion, all on the back of the property bubble. Their mortgages therefore constitute the bulk of their assets, and even a small market “correction” of far less than the typical result of a bursting bubble would make their assets worth less than their liabilities, rendering them all insolvent.

The housing market reorganisation that the CEC proposes is the only action that can avert an economic breakdown; however, it will require the government to take special measures to protect the financial system, so as to quarantine essential financial services from the upheaval that this action will trigger in the derivatives market. The necessary action is a full Glass-Steagall separation of retail banking from investment banking, such as protected the US banking system for 66 years until its corrupt repeal in 1999. This must be combined with a new national bank that can properly regulate the nation’s finances and keep the private banks in line, as the Commonwealth Bank did in WWII.

The CEC has long advocated these measures—when the bubble bursts they will be Australia’s only hope. Join us to fight for them.

Click here for a free copy of both of the CEC submissions to the 2014 Financial System Inquiry, including “The Great Australian Mortgage Bubble” and “Australia needs a new financial system, based on Glass-Steagall and a national bank”.

Click here to join the CEC as a member.

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