Could this cause Australia's economic apocalypse? US analysts warn of the triple threat that could plunge the country into depression
A prominent US geopolitical analyst has warned Australia has a housing debt bubble “four to five times worse” than the US one that caused the global financial crisis.
Peter Zeihan, who has written four books on geopolitics, made the dire prediction in a newsletter released last week, arguing that Australia faces three major challenges that could culminate in a harsh economic reality check.
The three hurdles are Australia's export dependence on China, Australia's inability to develop value-added industries and the creation of a 'subprime bubble' of bad housing debt.
US geopolitical analyst Peter Zeihan has predicted that Australia is facing a harsh economic reality
Subprime lending, i.e. loans where mortgage holders have a high risk of default, triggered the 2007 to 2008 global financial crisis, with US credit foreclosures leading to bank failures and a deep recession.
Mr Zeihan said that unlike America, where bad debts were at least partially canceled during the financial crisis, Australia had not tackled the growing problem.
“The problem is they never solved it, they just guaranteed everyone's loans, and so everything has just deepened and festered over the last 15 years,” he said.
“So when that finally breaks through … they will have something at least a factor of five worse than what the United States has experienced with subprime.”
What could cause this is Australia's dependence on the Chinese market for its exports, which Mr Zeihan predicted was heading for a rocky end.
“Of all the Western countries, Australia is definitely the one that has entered the deepest economic ties with the Chinese as a producer of raw materials,” he said.
Mr Zeihan has argued that Australia has taken in huge amounts of risky home loans (photo Rose Bay and Point Piper in Sydney)
Mr Zeihan said when China's insatiable appetite for Australian mineral and agricultural products dries up it will be a “harsh adjustment”.
“It's not that the market is going to collapse completely, but this price-insensitive expansion that they've seen in most of their sectors over the last few decades is just not going to continue,” he said.
Mr Zeihan said this was particularly a problem for Australia, which had little secondary industry.
“Australians have never moved up the value-add scale in the resources industry, they have always been a supplier of raw materials,” he said.
Unfortunately, Australia should have developed its industry and processing capacity “decades ago”, Mr Zeihan said.
That left Australia burdened with risky housing debt and little industrial capacity to catch up if China starts to falter.
“These things will probably affect all of them, unfortunately At the same time, it's not like Australia is looking at a recession,” Zeihan said.
Analysts have predicted that Australian house prices are likely to fall this year (see a sign for a house auction in Sydney's Beacon Hill)
“It's that they're looking at a depression that will probably last half a decade, and that will be terrible.”
However, according to Mr Zeihan, it was not all doom and gloom as Australia's long-term commitment to the US alliance would be rewarded.
Even though Mr. Zeihan believed the US was retreating from its role as protector of the global “rules-based order,” the country would still be closely tied to the countries that served its interests and “stood behind it.”
'Very, very, very at the top of that list is Australia, above Japan, above Singapore, above Canada, above Britain.
“Australia comes first, so no matter what shape the world takes when globalization comes to an end, Aussies know we will have their backs because we know they have ours.”
He also predicted that Australia's wealth of natural resources would come to the rescue, along with some Aussie ingenuity.
“They have stuff that the world needs, they have stuff that we need, and I have no doubt that an ally as creative and capable as Australia will be able to apply that capacity and that creativity to their own economic restructuring.
Reserve Bank Governor Michele Bullock believes good credit conditions have kept household balance sheets in a 'pretty good position'
“The question is whether they will start that process before the bottom falls out.”
Zeihan's view that Australia is piling up risky home loans is not shared by Reserve Bank Governor Michele Bullock.
Ms. Bullock told a high-level conference of central bankers late last year that despite interest rates at a 12-year high following 13 rate hikes in a 19-month period, corporate and household balance sheets were in “reasonably good” position'.
“Through the pandemic, they've built up big buffers, big savings buffers, and they're still largely intact,” Ms. Bullock said.
'There were also very cautious lending standards during this period, so high debt-to-income loans are a very small part of lending, as is high loan-to-value ratio lending.
'An interest rate buffer of about 3 percent was imposed, so a debt repayment buffer, if you like, of 3 percent.
'There is therefore good, cautious lending here, and this is evident from the low payment arrears to date.
“And those who have very low fixed rate mortgages are doing quite well, and all indications from the banks, and all we're hearing from the banks is that these households are doing well.”