by Alan Thornhill
In normal times, we might think that a new housing boom is imminent.
Population is still growing, both through immigration and natural increase.
And building activity, over the past year, has been weak.
As they used to say, in a old song, something’s gotta give.
And it will, eventually.
If your correspondent knew that would happen, he wouldn’t be slaving over a hot keyboard.
He’d be out at a concert, or reading a good book.
But the raw figures are stillÂ compelling.
They show that building approvals, throughout Australia, fell by 3.7 per cent in August.
And they hit a level 8.8 per cent below those of the same month last year.
The laws of supply and demand have not been repealed.
So demand for houses, fuelled by population growth, would normally be regarded as strong.
But confidence isn’t.
It’s been shattered by volatile markets.
And, although house prices have fallen, there are very few buyers about.
The banks aren’t helping.
Their credit standards now are much higher than they were just a year ago.
Indeed, when it comes to lending, it might well be said that Australia’s banks, like those overseas, have gone on strike.
Credit is harder to get now, than it was a year ago.
That’s why the Federal government pumped $4 billion into Australia’s financial system last Friday, making it available for home loans, issued not through banks, but through other lenders.
It was a bold move.
But, onÂ present indications, it won’t be enough.
by Alan Thornhill
Australia’s banks are still smarting.
They did not expect the Federal government to move against them as swiftly or as elegantly as it did late on Friday.
But they brought it on themselves.
By muttering that they might not pass on an interest rate cut, if there is one next week.
AsÂ any Economics I student will tell you, there are limits to monopoly power.
Or, in this case, to oligopolistic power.
We all have good reason to be grateful to Australia’s banks.
They have not, for the greater part, indulged in reckless lending, as some in the United States have done, with disastrous results.
But there is a price for everything.Â Even good behaviour.
And the good, at times, can become a little smug.
That’s why the Federal government announced late on Friday that it would inject $4 billion into the Australia’s housing loan market.
The Treasurer, Wayne Swan, said the government would be buying top quality mortgages with that money.
He was too diplomatic, of course, to say that the move was aimed directly at the banks.
But it will help their rivals, the smaller mortgage lenders, stay in business, at a time when money is particularly tight.
In short, the government moved to keep Australia’s four big banks on their toes, by reminding them that they will still face a little competition in the market.
The Labor party has learned a lot since it tried, unsuccessfully, to nationalise Australia’s banks, back in the post war era.
by Alan Thornhill
A man from the government arrives on your doorstep with a bill somewhere above the $US2,000 mark for every member of your family.
Yourself. Your wife.Â Your kids.
And what’s it for?
To bail out lenders who made aÂ lot of money, recklessly selling home loans to people who could not afford them.
Our American friends don’t have to imagine this situation.
It’s what is happening to them, right now.
That $US2,000 figure, by the way, came from a speech the Australian Treasurer, Wayne Swan, has just given to parliament.
He was speaking about the $US700 billion the US Treasury is preparing to send, to buy what Mr Swan delicately called “infected mortgage related assets from US financial institutions.
American tax payers are a little more blunt about this operation.
They are calling it a “cash for trash” plan.
With some justice.
Many of the reckless lenders escaped, with big payouts for their efforts.
The plan is being heavily promoted by the US Treasury Secretary, Hank Paulson.
But will it work?
US economist Paul Krugman doubts it.
He says rescue efforts should aim to inject more capital into financial institutions, giving them money to lend again, in better ways, this time.
But he says this should not be done by purchasing bad mortgages.
He describes the Paulson plan as “an unacceptable proposal.” (www.nyt.com)and urges the US Congress to “rework” it.
“Don’t be railroaded,” Krugman says.
“If this plan goes through in anything like its present form, we’ll all be very sorry in the not too distant future.”
by Alan Thornhill
The Federal government isn’t saying much in the Senate, about Australia’s exposure to the US credit crisis and related woes.
But, at least, it is saying a little more there, than it has anywhere else.
The government leader there, Chris Evans, has had some fascinating, if far from precise, things to sayÂ about all that.
He admitted, yesterday,Â for example, that some 1 per cent of the mortgages held by Australian banks are “sub prime.”
That compares with about 15 per cent, for US banks.
And, yes, the Australian government does have some exposure to the American Insurance Group, which the US government had to rescue.
Senator Evans said it is “negligible.”
That’s all he said.
What direct exposure have our banks had?
Once again, Senator Evans didn’t go into specifics.
But he assured the Senate that Australian banks hadÂ only “relatively modest” exposure to the failed investment bank, Lehman Brothers.
So what then, of the Federal government, itself.
It too had a “negligible” exposureÂ to Lehman Brothers, through the Future Fund, Senator Evans said.
If this sounds to you like the dance of the seven veils, you would be absolutely right.
by Alan Thornhill
They must be spitting chips at the Reserve Bank.
The stop-go policies, for which they were so heavily criticised, back in the 1980s, were never like this.
The US authorities have been acting on a grand scale.
First they bought Fannie and Freddie.
They were too big to fail.
Then they let Lehman Brothers go.
That investment bank’s assets were, apparently, too dodgy to back.
But, a day later, the Fed comes to the aid of the American Insurance Group, with an $US85 billion loan, on tough terms.
AIG, apparently, was also too big to be allowed to fail.
The New York Tmes put it well.
“Fearing a financial crisis world-wide, the Federal Reserve reversed course on Tuesday (US time) and agreed to an $85 billion bail out, that would give the government control of the troubled insurance group,” it said.
The CEO of a large Australian bank is said, many years ago, to have asked a Reserve Bank governor, what he would do, if that big bank failed.
“That is a matter I wouldÂ discuss with your successor,” the unamused Reserve Bank governor is said to have replied, rather tartly.
These are exciting times, certainly.
And they are not over yet.
by Alan Thornhill
The price of the average new home in Australia, at present, is about 7.5 times average annual earnings.
Just a decade ago, it was a mere four times earnings.
These, of course, are rough figures.
But they – along with a dozen interest rate rises – over the past 11 years – do help to explain why builders haven’t been building all that many new homes, over the past year or so, even though Australia’s population is still expanding.
The Federal government has set about tackling this problem, with a new Housing Affordability Fund, which the Prime Minister, Kevin Rudd , launched in the outer Canberra suburb of Franklin yesterday.
Developers can apply for money from the $512 million fund, to help them build low cost, affordable homes for young Australian families.
But they will have to undertake to keep the price of the homes they produce this way as low as possible.
The government, which has done the maths,Â estimates that savings of some $10,000 can be made on building costs this way.
It , also, estimates that another $10,000 could be saved by streamlining the usual red tape, that goes with building new homes.
The building industry, naturally enough, is delighted with the plan, which matches a broadly similar one the government has also launched, to increase the supply of affordable rental homes in Australia.
Co-incidentally, the new housing affordability scheme was launched on the day the Statistician reported yet another sharp downturn in housing starts in June, when starts fell 3.7 per cent, from the May level.
Weathercoast by Alan Thornhill
A novel on the murder of seven young Anglican Christian Brothers in the Solomon Islands.
Available now on the iTunes store.
Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.
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