Steve Keen on Risks in Australia’s Banking System

October 24, 2011

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Economist Magazine dubs Australia’s housing market the second most overvalued in the world. Debtwatch’s Steve Keen sees this impairing Australian banks. “Since real estate loans are worth roughly 7 times bank Tier 1 capital—up from only 2 times in 1990—it wouldn’t take much of an increase in non-performing housing loans to push Australian banks to the level of impairment experienced by American banks in 2007 and 2008,” notes Keen.

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“Debt is more broadly distributed in Australia than in the USA…the negative effects of debt service on consumption levels are likely to be greater here than in America. This is especially so since mortgage rates today are 50% higher here than in the USA. Interest payments on mortgage debt in Australia now represent 6.7% of GDP, twice as much as in the USA. It’s little wonder that Australia’s retailers are crying poor.”

“So if America’s consumers are debt-constrained in their spending, Australian consumers are even more so—with negative implications for employment in the retail sector. Compared to the USA therefore, there is no reason to expect that Australian banks will fare better from a sustained fall in house prices.”

“Generally bank shares go up with house prices and fall when property tumbles. According to Keen, falls in bank shares are normally very steep and occur shortly after house prices have passed their peaks.”

In addition to real estate, Australia has benefitted from selling industrial metals to China. A retrenchment in China will only add to the turmoil.

Source : debtwatch

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