The Reserve Bank could be forced to step in with a $300 billion bailout program to rescue Australia’s banks if the housing credit crunch accelerates into a “doom loop” that causes property prices crash by 50 per cent, plunging the country into recession.
That’s according to Saxo Bank’s latest “Outrageous Predictions” report, which outlines a series of “unlikely but underappreciated events” that could send shockwaves across financial markets if they were to occur.
“This is not an official forecast, it’s an outrageous forecast that could happen if certain factors were to fall into line, but something we put maybe a 1 per cent probability on,” said Sydney-based Saxo Bank market strategist Eleanor Creagh.
It’s the first time Australia has featured in the Danish investment bank’s annual list, which this year includes scenarios like Apple snapping up Tesla for $US520 per share or a solar flare striking earth, wiping out satellites and causing $US2 trillion worth of damage.
“The ‘Australian Dream’ was financed through an epic accumulation of debt as interest rates collapsed, with household debt standing at 189 per cent of disposable income,” Ms Creagh writes in the report.
“The Great Financial Crisis was responsible for deflating housing bubbles in other advanced economies, but not in Australia. In a bid to stave off the crisis’ effects, Canberra’s ‘economic security package’ further fuelled the spectacular run-up in leverage, kicking the proverbial can down the road.
“In 2019, the curtains close on Australia’s property binge in a catastrophic shutdown driven most prominently by plummeting credit growth.
“In the aftermath of the Royal Commission, all that is left of the banks is a frozen lending business and an overleveraged, overvalued mortgage-backed property ledger and banks are forced to further tighten the screws on lending.
“The confluence of dramatic restrictions in credit growth, oversupply, government filibusters and a slowdown in global growth cement the doom loop; property prices crashing by 50 per cent.
“Australia falls into recession for the first time in 27 years as the plunge in property prices destroys household wealth and consumer spending. The bust also contributes to a sharp decline in residential investment. GDP tumbles.