Top 10 at 10: Sydney housing market stops; Massive Euro bank deficit; Dilbert

Here are my Top 10 links from around the Internet at 10 to 9 am (!). I welcome your additions and comments below or please send suggestion for Friday’s Top 10 at 10 to bernard.hickey@interest.co.nz We like coffee too...

1.  'Not even an onlooker!' - This is a cracking report from on the ground in the Sydney property market and how it has gone deathly quiet in the last three weeks. This is from Curtis Associates, who run a buyers agent firm there, so you could argue a grain of salt is worthwhile, but it's still worth reading.

The pre Easter frenzy screeched to a halt in the past three weeks as the market finally succumbed to:

* six increases in the official cash rate since October 2009

* the average home loan variable interest rate having now hit the traditional pain threshold of around 7.5%

* the exodus of first home buyers

* stock market gyrations and

* the spectre of a second GFC flowing from the sovereign debt crisis in Greece.

The falling auction clearance rates and successive drops in fresh owner occupier loan applications reported in the popular press understate what is occurring in the Sydney property market.

Consider the auction on 4 May 2010 of 17 Rush Street, Woollahra, 702/72 – 78 Bayswater Road, Rushcutters Bay , 77 and 79 Windsor Street, Paddington, 21 Hampson Street, Maroubra and 6 Ocean Street, Woollahra. None of those properties sold at auction and of the four bids made that night, one was a vendor’s bid and two were questionable. Those vendors fared better than the owner of 11 Bellevue Street, Surry Hills whose auction last Saturday failed even to attract an onlooker.

2. First cracks appear - Moody's Analytics meanwhile writes that the first cracks seem to be appearing in the Australian market.

House price appreciation has historically demonstrated a high correlation with growth in housing finance; the dramatic decline in new financing commitments in recent months suggests an imminent period of subdued property market activity looms. Meanwhile, foreign market interest has all but evaporated following the government’s hurried tightening of investment rules and the onset of Europe’s debt crisis.

The chance of a U.S.-style housing collapse in Australia is remote, but a period of softer or stagnant house prices is likely. In any event, the 20% appreciation in Australian house prices last year will not be repeated in 2010.

3. Capital deficit - It seems the banks in the Northern Hemisphere need more capital. Bloomberg reports it could be more than US$1.5 trillion worth. Yikes.

Global banks may have a capital deficit of more than $1.5 trillion by the end of next year and some may require state support, according to a study by Independent Credit View, a Swiss rating company.

Allied Irish Banks Plc, Commerzbank AG, Bank of Ireland Plc and Royal Bank of Scotland Group Plc may have the biggest capital deficits by the end of 2011 among the 58 banks examined in the study, Christian Fischer, a partner and banking analyst at Independent Credit View, told journalists in Zurich today.

“Without state aid or debt restructuring these banks will hardly be able to raise capital,” Fischer said, forecasting “massive dilution for existing shareholders.”

4. The ants and the grasshoppers - Martin Wolf at the FT.comtalks about ants (who save) and grasshoppers (who spend) in this fable on the international debt crisis. It is his bleakest piece yet.

The leader of China's nest tells America: "We, your creditors, insist you stop borrowing, just as European grasshoppers are now doing." The leader of the American colony laughs: "We did not ask you to lend us this money. In fact, we told you it was a folly. We are going to make sure American grasshoppers have jobs. If you do not want to lend us money, raise the price of your currency. Then we will make what we used to buy and you will no longer have to lend to us."

So America teaches creditors a lesson from a dead sage: "If you owe your bank $100, you have a problem; but if you owe $100m, it does."

The Chinese leader does not want to admit that his nest's huge pile of American debt is not going to be worth what it cost. Chinese people also want to go on making cheap goods for foreigners.

So China decides to buy yet more American debt, after all. But, decades later, the Chinese finally say to the Americans: "Now we would like you to provide us with goods in return for your debt to us. Thereupon, the American grasshoppers laugh and promptly reduce the debt's value. The ants lose the value off their savings and some of them then starve to death.

What is the moral of this fable? If you want to accumulate enduring wealth, do not lend to grasshoppers.

5. Tonnes of gold - Eric Sprott's Physical Gold Trust plans to issue 20.9 million units to buy US$235 million of physical gold in the open market. That's about 6 tonnes, ZeroHedge points out.

Somehow, we don't think the LBMA (London Bullion Market Association) will be too thrilled with this extraction of physical gold out of the controlled synthetic precious metal ponzi system.

6. A lucky milestone - Zerohedge also points to a new milestone in sovereign debt. America has passed US$13 trillion in debt.

Total US debt per today's Daily Treasury Statement was $12,989,095 million. Also today, the US Treasury auctioned off $42 billion in 2 Year debt. This means that as of this moment, assuming the new debt were to settle today, the US has $13,031,095 billion in debt: congratulation America - you have now passed lucky $13 trillion in total debt.

But don't worry, we won't stay here for long. At the current rate of issuance, $14 trillion will be passed in 8 months, and $15 trillion in another 7. By the end of 2011, we estimate total US sovereign debt to be about $15.5 trillion. For some recent vivid examples of prosperity courtesy of runaway debt issuance, please see Argentina, Japan and Greece.

7. Woop, Woop, Woop - Ambrose Evans Pritchard at The Telegraph warns of intense stress in global credit markets and of renewed doubts about the Euro rescue package. Yikes redux 

The global credit system is flashing the most serious warning signals in almost a year on triple fears of a Spanish banking crisis, escalating political risk in Asia, and a second leg to the US housing slump. The strains in Europe's sovereign debt markets are nearing levels that forced EU leaders to launch their "shock and awe" rescue package.

"If a $1 trillion (£700bn) bail-out did not finally turn sentiment, I struggle to see what can," said Tim Ash, an economist at RBS. RBS's credit team said Libor strains were worse than they looked since most banks in Europe were paying much higher spreads, especially in Spain. The "implied" forward spreads were nearer 1.1pc.

The damage has spilt over to corporate bonds, effectively shutting the market for new issues. May will be the worst single month for debt issues since December 1999, with seven deals being cancelled in recent days. Volume has collapsed to $47bn from $183bn in April, according to Bloomberg.

Fears that America may slip back into a double-dip recession are returning. Larry Summers, the White House economic tsar, has called for a second stimulus package to keep the recovery on track, warning that the US economy is still in a "very deep valley".

Markets have been rattled by reports in the German media that the Greek rescue deal contains two secret clauses. The package will be "immediately and irrevocably cancelled" if it is found to breach the EU Treaty's "no bail-out" clause, either in a ruling by the European court or the constitutional courts of any eurozone state. While such an event is unlikely, it is not impossible. There are two cases already pending at Germany's top court in Karlsruhe, perhaps Europe's most "eurosceptic" tribunal.

The second clause said that if any country finds it cannot raise funding for the rescue at interest rates below the 5pc charge agreed for Greece, it may opt out of the bail-out. BNP Paribas said this would escalate quickly into a systemic crisis if Spain were in such a position, because the other countries cannot carry an ever-rising burden. The bank warned the euro project itself may start to disintegrate rapidly if these rescue provisions are ever seriously put to the test.

8. Is Europe insolvent - Wolfgang Munchau asks in FT.com if Europe is actually insolvent because it doesn't have enough money to rescue its banks, which are interconnected in an ugly sub-prime sort of way.

Before the start of monetary union in 1999, EU countries borrowed at different interest rates, the spreads reflecting expectations about future exchange rate realignments and default probabilities. With the arrival of the euro, spreads almost disappeared. Just as subprime CDOs enjoyed triple A ratings because of the way they were constructed, the entire eurozone enjoyed a triple A rating on the back of Germany’s.

This produced a massive credit boom in Spain and Portugal, and those credits were recycled through the eurozone banking system. Bankers in Düsseldorf, Munich and Paris bought those Spanish mortgage obligations and Greek sovereign bonds, proudly adding them to their fine collections of subprime CDOs.

9. Could Spain turn Japanese - FTAlphaville have picked up an ING report into Spain's banking system that suggests it may be about to go down the Japanese path of long term falls in house prices. The price fall could be 48% by 2013. Triple yikes. No wonder LIBOR is rising fast.

The boom in Japanese house prices from 1981 to 1991 was 225% compared with 178% in Spain from 1998 to 2008. Then prices fell by 65% over the next 14 years. So far Spanish house prices have fallen 10%, based on official data.

Against that context, the Spanish banking industry is only provisioning for an average 13 per cent of the value of total loans to developers, says Goodfellow. But the current inventory of homes for sale, meanwhile, is some three times annual demand — as noted in the following chart

After the peak, Japanese house prices fell for 14 years in a row, and bottomed some 65% below their peak. Official data suggests that Spanish house prices have fallen 10% from their peak, but anecdotal evidence suggests that some properties are being sold for 50% or less of their appraised value 3 years ago. Hence: If Spanish banks were to double their provisions for real estate developers this would amount to an incremental €53bn, which is equivalent to 23% of the capital of the Spanish banking system.

But even that might not be enough in a Japan-style collapse. ING notes that if the Spanish housing sector was to follow a similar trajectory to the Japanese market, then it would take five years to work through the inventory overhang, seeing house prices fall 48 per cent from the peak by 2013

10. Totally irrelevant video - Stephen Colbert does his thing.