The Aussie property market has had one of the longest runs in the world. Prices have gained a whopping 6,556% since 1961.
Yet much of it has been financed through an ‘epic’ proportion of debt and low interest rates.
But, 2019 is shaping to be a much different scenario.
The aftermath of the Royal Commission has left banks overleveraged on overvalued mortgages. So, banks tighten lending even more…
The credit crunch, oversupply and a slowdown in global growth all lead to a 50% Aussie property collapse.
Spending drops, people start defaulting on loans…and Australia falls quickly into a recession, something it hasn’t experienced in 27 years.
Are you prepared for an Aussie housing collapse? Find out here before it’s too late.
The big banks are at the brink of a break down. To save them, the Reserve Bank of Australia launches a $300 billion rescue plan…
…no, none of this has happened.
This scenario is part of Saxo Bank’s latest Outrageous Predictions for 2019 report.
They are not the bank’s official forecasts. Instead, these are ‘unlikely risks which are still underappreciated’ but could drastically change the economic outlook if they ever happened.
What are some of their other ‘outrageous’ scenarios?
Well, they include US Federal Reserve Chair Jerome Powell hiking rates in December 2018, causing a US market crash by Q1 2019.
Powell’s argument is that increasing rates will get rid of bad debts and will have long term benefits.
But US President Trump wants none of it…and fires Powell. His replacement promises the government a US$5 trillion credit line to buy zero-coupon perpetual bonds to fund Trump’s infrastructure projects.
Another scenario includes a European Union plagued with many ailments in 2019. High public debt…a populist revolt…rising interest rates…
Italy could trigger global recession
The main problem is Italy, who is facing a major debt problem repayment, especially as rates increase. Disease spreads to European banks, which sends the EU into a recession…and it’s a bloodbath.
Confronted with the possibility of the end of the European project, the EU launches a debt jubilee…
If you are a regular reader of this newsletter, you know that we have often written about some of these scenarios playing out, not as ‘outrageous’, but as plausible possibilities.
We have often talked about Italy’s debt problem and the possibility that it could bring the whole EU project down. Italy isn’t the only European country drowning in debt…Spain, Portugal, France, Belgium…they are all struggling with high debt.
In regards to President Trump firing Powell…well, you know that anything can happen there when Trump is involved. And the President is certainly not hiding the fact that he is unhappy with the Fed rising rates.
Saxo doesn’t see Australian property plummeting by 50% as a big probability — they put it at 1%. We see that number slightly higher.
We have often commented on the danger of property prices rising on the back of debt and low interest rates instead of salaries.
It could leave overexposed banks to property in trouble…
Property sales are now slowing…prices are dropping and getting a mortgage is not as easy as a couple of years ago.
Banks have been tightening lending standards and we are seeing a slow-down in credit not only for investors, but for owner occupiers.
With property slowing, banks will have a hard time maintaining the same profitability as in recent years. If property keeps falling, we could see the banking industry get hammered.
We are obviously hoping none of these scenarios end up playing out…but the fact is that we don’t see much of a way out after years of excess.
And while Saxo sees their scenarios as distant possibilities, they expect a change of pace from the past in 2019. According to the bank, the best we can hope is for the financial markets going through ‘rough sailing’. The worst could be the ‘Perfect Storm’.
As they wrote:
‘“If we can just avoid the pain today” is the new mantra, or more despairing still: “things may not be great, but they could be worse!”
‘We think 2019 will mark a profound pivot away from this mentality as we are reaching the end of the road in piling on new debt and next year will see us all beginning to pay the piper for our errant ways.[…]
‘[I]f some of these see the light of day, we might finally see a healthy shift towards a less leveraged society, with less focus on short-term gains and growth, and a new focus on productivity and a new economic revolution back toward globalisation with a fairer playing field after the immediate moment of crisis. On the negative side, our calls include a considerable weakening of central bank independence, a credit crunch, and big losses in the asset where everyone is too long: real estate.’
While sometimes you may think that the ideas we bring you here at Markets & Money are far-fetched, we bring them so that you consider as many possible scenarios for your investments and they don’t catch you unprepared.
After all, anything can happen.
If, back in 2006, we had told you that in 10 years the host of The Apprentice would become a US President, or that the UK would be leaving the EU, would you have believed it?
If you want to protect your family wealth, you need to know why this financial expert is predicting economic collapse. Find out more here.
Editor, Markets & Money