The Australian economy is dangerously exposed to external shocks because of the big banks’ reliance on international wholesale funding markets to back mortgages and the over-representation of shares in superannuation portfolios, according to Pacific Equity Partners managing director Tim Sims.
Mr Sims said 90 per cent of Australians with variable mortgages were “vulnerable to global interest rate changes” because fewer bank mortgages were being backed by deposits.
He also warned about the dangers of 60 per cent of the nation’s superannuation savings being in shares, with 40 per cent of those owned by foreign investors.
“In order to fund the housing market at current levels, our excellent banking system needs to import 45 per cent of their capital from overseas, from wholesale money markets offshore,” Mr Sims told The Australian and Deutsche Bank’s Business Leaders Forum in Sydney.
“That’s before you reflect on the fact that the other great big piece of value that sits in most Australians’ portfolios is their pension fund, which, because of regulation, is largely concentrated in public equities in this country. The two key elements that make up the wealth of the Australian household are extremely vulnerable.”
Mr Sims said if the international interest rate market broke down or there was a big fall in global sharemarkets, “we will survive but it will be very grim and consumers will be off the streets”. He added: “We can’t really control that given the way we have set things up.”
Earlier, NSW Premier Mike Baird had called on local superannuation funds to shift fund allocations toward infrastructure assets. “If you doubled (the amount allocated to infrastructure) to 12 per cent, there would be another $108 billion that would be available to come towards infrastructure,” he told the forum.
Mr Sims’s comments come after global bond fund giant Pimco warned yesterday that Australians were being “irrationally exuberant” and borrowing too much to invest in housing.
Speaking at a media round table in Sydney yesterday, National Australia Bank chief Andrew Thorburn said the housing market would probably slow rather than burst due to low supply, with the biggest risk a significant downturn in China.
“You’ve got to say what is likely to drive unemployment close to 10 per cent and what is likely to drive interest rates up 3 or 4 per cent. That’s the trigger. That is what’s going to cause the damage, if that happened, and I think that is possible but unlikely,” he said.
“The biggest issue would be a significant downturn in China, which had a flow-on effect into Australia”. Despite regulators’ push for the banks to hold more capital amid concerns they still are not strong enough, Mr Thorburn argued that the banks strong capital levels would safeguard the banking system from a correction in house prices.
Despite soaring house prices in Sydney and Melbourne, Jetstar chief executive Jayne Hrdlicka told the forum that the airline had seen no change to consumer behaviour after the most recent federal budget.
She described the mood of consumers as “not wildly optimistic”.
[“source – theaustralian.com.au”]