The willingness of the TPG-led consortium to bet its equity on Asciano’s infrastructure assets and of Solomon Lew to buy Just Group are encouraging signs of optimism in the gloom, but, but…

Don’t be fooled into thinking that this must be the bottom if smart people like that are putting their cash on the table.

As former Fed chairman, Alan Greenspan, wrote in a Financial Times op-ed piece published overnight, although global share prices have fallen a fifth from their peak, they are still hovering at 2006 levels, “a demonstrably less fear-ridden period than currently prevails”.

He was writing about the global sharemarket in the context of the need for the world’s banks to recapitalise, asserting that the price of equities will determine whether the international financial system can maintain “a modicum of stability” as it emerges from the credit crunch.

The demand for new capital was again highlighted yesterday by HSBC’s $US10 billion in loan write-downs and, more importantly, by growing defaults on prime and alt-A mortgages in the US.

Over the weekend the eighth American bank went broke – a small Florida outfit called First Priority Bank. Those eight insolvencies and the loan provisions and write-downs among the other big banks and investment banks still afloat are all due to the wave of subprime mortgage defaults, which is now cresting.

Next: alt-A and prime. The former type of loan is the US equivalent to our “low-doc” loans, where little or documentary evidence of income and assets is required. The borrowers are usually good risks, but they are just secretive for one reason or another.

According to a New York Times article this morning, arrears on alt-A loans have quadrupled to 12% and delinquencies among prime loans, which account for more than half of the $12 trillion in US mortgages have doubled to 2.7 per cent.

The article quoted Thomas H. Atteberry, president of a firm called First Pacific Advisers that trades mortgage securities, as saying: “Subprime was the tip of the iceberg. Prime will be far bigger in its impact.”

At a time like this it’s always possible to come up with a decent quote from a gloom-merchant, but the fundamental problem is that in the US house prices have not bottomed and in Australia they have peaked and are now falling.

There are 18 million homes on the market in the US from subprime defaults. Alt-A and prime defaults, while smaller in percentage terms than subprime, will add to the housing stock before subprime overhang has cleared.

In Australia, Australian Bureau of Statistics data out yesterday showed the first fall in the national average in three years (0.3% in the June quarter).

But as Gerard Minack of Morgan Stanley pointed out in a note, prices have boomed since the last decline in September 2005 on the back of mortgage lending that has averaged four times gross income – up from 2.5 times a decade before.

Minack argues that house prices in Australia have been supported not by demand exceeding supply, but by the availability of finance thanks to competition in banking and a relaxation of lending standards.

That has now come to an end. As a result, Australia’s house prices will continue to fall, as will America’s, thanks to rising defaults and foreclosures, as well as tighter lending standards.

It’s all about the conjoined twins of housing and banking. The greatest residential real estate bubble in history has ended, along with the business that goes with it – mortgages.

The effect on the rest of the economy has only just begun. Sorry Solly.

Peter Fray

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