This morning (in part via the AFR), banks and the market have a heads up from the IMF that the APRA and RBA-driven harsh curbs on mortgage credit supply (and most of all for investors) is the primary driver of a “weakening economy” over the June 2019 half year.
This fast changing IMF view will be spelled out in more detail later this week, the growth outlook for the economy being revised down in synch with fast rising home loan arrears, animated wealth effects thanks to the elevated debt burden and hot-headed political rows over credit availability and many related tax matters.
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May this cocktail, following a low impact sixth budget last week from Scott Morrison’s Coalition cabinet, produce a better appreciation of the interventionist options ahead for the Reserve Bank, APRA and any incoming Labor government.
In its splash this morning, The Australian Financial Review reports that “the IMF will release forecasts in the coming week for Australia that incorporate the effects of a ‘stronger contraction in residential investment relative to what we had’ at its last outlook, which was based on the state of the economy in December.”
In an interview with Thomas Helbling, the IMF’s lead economist for Australia, the AFR’s Washington correspondent draws out an endorsement for last week’s federal budget forecasts recognising the “weaker outlook” and even a nod to the Morrison government’s “use of sober commodity price forecasts.”
The accelerating property market downturn “will be among factors driving a likely downgrade in the IMF’s latest forecast for the Australian economy,” the AFR reports based on their chat with Helbling.
This downbeat view will be published as part of the IMF’s latest World Economic Outlook ahead of the fund’s annual spring meetings in Washington that kick off on Friday this week.
Paired with an off-message IMF staff paper released overnight, the IMF, as supplier of the only recent “official” thinking on Australia’s outlook, are today openly advertising their newly-minted and more negative views – opinions that, for now anyway, are ritually buttressed by an assurance from Helbling that “the IMF’s baseline forecast remains of an economy that ‘absorbs the housing market downturn’”.
Except the data-heavy IMF staff analysis released last night can only encourage thinking that this polite caveat in the AFR interview is hogwash, and worth replacing with Macrobusiness-style pessimism.
If anything, this latest IMF intervention only serves to elevate – to a well-earned position at centre stage of monetary policy decision making – the relevance of the ever faster unfolding “wealth effects” that weigh so heavily on consumer confidence and must in short order curb the upturn business investment in Australia that’s supposedly underway.
More to the point, and startling, are the local statistician’s most recent data of these recent wealth affects in Australia.
In the Finance and Wealth variant of the national accounts (from 11 days ago), the Australian Bureau of Statistics put the detonation of mortgage wealth across the household sector over calendar year 2018 at a whopping A$475 billion.
That number is roughly equal to 30 per cent of the entire supply of mortgage credit from the banking system.
The same ABS Wealth accounts contained data on a collapse (no exaggeration) of household incomes in Australia in during the later period of 2018, an alternative measure of income so infrequently reported and this recent decline is so drastic that Banking Day is hesitant to report the actual numbers. In summary, average incomes using this specialised ABS measure were minimal during the December 2018 quarter, and rank among the lowest ever estimates for household incomes worked out by the ABS in its “flow of funds” data.
This economy-wide smackdown on average incomes follows from a direct use of slumping property market drawn well known ABS housing indices, with this number subtracted from more a more stable (but declining) metric on household disposable incomes in late 2018.
These wealth effects overall, the IMF staff analysts make clear, are or were “more prevalent” based on the slightly stale data they used. Thus all and sundry in Australia had better brace for “high responsiveness to a monetary policy shock”. Look, we quoted selectively for emphasis (and bias), and in fairness there is some boilerplate in the paper to minimise points of difference (and highlight agreement with) much of the Reserve Bank’s recent flurry of comments on the topic of wealth effects, but this is one IMF paper with a definite “Steve Keen” tenor to it all.
Many recent studies, the three IMF staffers emphasise, “are motivated by the experience of the Global Financial Crisis (GFC) in 2008 or previous banking and financial crises”.
The IMF analysts latched onto “analysis by Mian, Roa and Sufi (on ‘Household Balance Sheets, Consumption, and the Economic Slump’ published in The Quarterly Journal of Economics in 2013)” as a primary reference to frame their implication that Australia’s inefficient and compliance-burdened financial sector may very, very soon have to face up to a sharp reversal in credit quality, after years of assuming that the minimal charge to profits for bad debt provisions from the housing bubble could be repeated, for years already, and few questions asked.
Revisions on prior earnings guidance must surely be expected soon from from all four of the large, ASX-listed banks banks with either half-year or full-year profit reports for the period ending March 2019, and all due for release by early May.
For the latest local context, let’s turn to one nugget of data on asset quality we did not report last week that lends support to the IMF team’s theme of fast rising banking stress.
“Australian mortgage delinquencies are set to continue rising”, Moody’s Investors Service headlined a media release on Wednesday.
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Mortgages that were more than 30 days in arrears increased by 0.13 percentage point to 1.58 per cent over the year to November 2018, Moody’s said, a rare and noteworthy uplift from an arrears data series warranting little more than brief comment over recent years (with the recent exception of the AFR’s Chris Joye, who over recents few weeks has surveyed much complementary material on the collateral underlying RMBS bonds from Australian banks and others. Joye is projecting that one or more of the mortgage-backeds may soon incur losses for investors holding the most subordinated tranches, a novelty for a segment of the debt market with around 30 years of repayments in full).
In short, the IMF staff paper can be read as supporting the more severe, hard landing scenarios for the Australian banking industry, drawing on an abundance of local data and the Fund’s deep understanding of the last, worldwide, banking crisis in 2008.
Picking choice quotes once more to wrap up, the IMF trio talk up the settled “evidence on how high leverage in combination with asset price shocks can lead to demand driven recessions.”
In short, they “found that the marginal effect of a decline in home value on tighter credit constraints is significantly larger for postal codes that have a high housing leverage ratio.”