Moody’s & Reserve Bank of Australia Warn of Increasing Mortgage Arrears and Looming Apartment Defaults

Western Australia benefited most from the mining boom and has been suffering a bust considered to be the worst in living memory now for many months:

When Barnett came to office in 2008, net debt sat at $3.6 billion. Now it sits at $27 billion and is forecast to reach $40 billion by 2019. The state has sunk to a record $2 billion deficit… Perth’s median house price has collapsed 10.4 per cent since its December 2014 peak, according to CoreLogic. In Port Hedland – the mining towns at the epicentre of the iron boom – house prices have sunk 66 per cent in the past four years.The commercial vacancy rate in the Perth CBD is at its highest level since 1995. About 500 people a month are leaving WA for the other states and territories. Wages are falling. One in five of the city’s Uber drivers was either previously working resources or engineering, or still is but working less hours.

Those previously highly paid resources or engineering workers now need to service their McMansion mega mortgage with an Uber wage and with each month that passes their equity continues to fall:

They then go on to warn of the risks to the Australian Banks:

Overall, these estimates suggest that, by value, banks are most exposed to inner-city housing markets through their mortgage lending rather than via their development lending. The data suggest that around 2–5 per cent of banks’ total outstanding mortgage lending is to inner-city Brisbane, Melbourne and Sydney, and this share is likely to grow as the apartments currently under construction are completed. At around $20–30 billion, mortgage exposures are estimated to be larger in Sydney, reflecting Sydney’s higher apartment prices and greater number of mortgaged dwellings, than in Brisbane and Melbourne where mortgage exposures are estimated at around $10–20 billion in each inner-city area.

You could argue that the banks have designed their business to be able to take strain like this and I would agree that they should have. What they aren’t prepared for though is a perfect storm of high impact risks which are likely to occur simultaneously in the next 6-24 months, such as:

• Massive job losses from the government’s decision to let the car industry close it’s doors meaning more delinquency rate increases baked in
• Huge dividends that won’t be possible to maintain
• Tightening lending standards
• The reliance of the Australian banks for off shore funding
• Downgrades from ratings agencies
• Possible end of business cycle shock (like the GFC)

The government, regulators, media and vested interests are all captured and will tell you all is well, but the global hedge funds and institutional investors are clear about what they expect to happen. They are placing bigger and bigger bets that the Australian Banks aren’t prepared.
In May this year Jonathan Tepper made worldwide news with his analysis of the Australian bubble, short positions on the bank shot up to $9 billion Australian dollars, a record at the time. Since then without any major news coverage, short positions have increased by %17.
The Commonwealth Bank of Australia is one of the most exposed to a housing downturn. In the last GFC it fell sharply to $AU24 before the Australian Government came to the rescue and China unleashed the mother of all stimulus packages.