Australia bubble about to burst - RBS

RBS believes Australia's bubble may be about to burst as it's exposed to China’s slowdown.

In a note issued Thursday titled The Revolver, the bank said the so-called “lucky country” has benefited from China’s growth in recent times but the economy has become dependent on commodities and less diversified.

It highlighted the country’s reliance on China, with a third of Australia’s exports heading there and over half of exports being iron ore.

But with the credit crunch accelerating in China and its transition from an investment-driven to a consumption-based economy, RBS believed demand for Australia’s exports was likely to decline and said the country may not be able to re-engineer itself in time to avoid the end of the commodity super-cycle.

“The Australian economy is slowing, and we think it will likely get worse.

“A worsening economy could push up unemployment and finally pop a growing house-price bubble, potentially leading to more mortgage defaults.”

The note also pointed out that overvalued housing and overleveraged households threaten domestic growth, with Australian house prices rising substantially in recent years and low interest rates encouraging borrowing, worsening the house price bubble.

“The mortgage insurers that sold protection on those high loan-to-value loans now look the most vulnerable, under this scenario,” it noted