Australia’s housing finance figures might well be ringing alarm bells.

The Bureau of Statistics reports that home finance commitments fell steeply in January, both in terms of the number of home building starts financed and the amount lent to help people buy homes.

These figures, of course, are still affected by Federal government moves to wind back its stimulus spending.

So it may take some months yet for clear trends to appear.

Even so, the bureau reports that a bare $21.2 billion was lent in January to finance home purchases, a 3.3 per cent fall from the December level.

Indeed, the bureau’s figures now show that lending to build new homes has now fallen for three successive months.

The Housing Industry Association says recent rate rises are curbing activity in Australia’s housing market.

The Reserve Bank has  raised rates in four of the past five months.

The Association senior economist, Ben Phillip, said the situation now calls for care.

“The Reserve Bank must take stock of the impact that higher interest rates are having on the new home market,” Mr Phillips said.

The bank, itself, is aware of the problem, noting that spending on housing will have to be increased, over the medium term, if the demands of Australia’s strongly rising population are to be met, without fresh pressure on both house prices and rents.

The bank’s Assistant Governor, Phlip Lowe, acknowledged these risks, in a speech he gave to a seminar in Sydney.

(see next story)

We’ll all  be out shopping again soon – this time with our own money.

The economists at  Access Economics, who have just published new retail forecasts, are confident about that.

Naturally they admit that our spending has been boosted over the past year by stimulus measures, such as tax breaks,  subsidies and low interest rates, which left extra money in many budgets.

However they say those times are now rapidly  passing , to be replaced by new growth, based on a stronger job market.

“Ultimately,” they say,”spending growth is regulated by income growth.”

Th Access economists say, too, that job growth is the “bedrock” of consumer spending.

Access noted that almost 200,000 jobs had been created in the five months to January.

It said, too, that about half of those new jobs had been full time.

“A greater sense of security makes for a more confident consumer,” Access said.

Its work is backed by other economic research.

The National Australia Bank, for example, is reporting that business confidence has returned to the surprisingly strong levels of last November.

That means business confidence is now back at levels not previously seen since May 2002.

And the ANZ bank said the number of job ads, appearing in Australia, had leapt by 19.2 per cent in February.

The ANZ said the nation is now “enjoying solid employment growth and reduced unemployment.”

However it warned that “a record 30.2 per cent” of all Australian jobs are now part time or casual.

The bank’s chief economist, Warren Hogan, said this represents “a significant degree of spare capacity or underemployment.”

Access has reservations, too.

It says, for example, that there are still “plenty of factors which will stop retail sales from being spectacular.”

These would include further interest rate rises, which would slow growth in house prices and ultimately affect consumer confidence.

These rate rises would eat directly into shoppers’ incomes, Access said.

Prepare for further rate rises.

That’s the message the Reserve Bank wants home buyers to take from its announcement of yesterday’s 25 basis point rise.

In that  announcement, the bank’s Governor, Glenn Stevens, said it is now appropriate for Australia’s interest rates to be closer to their historical averages.

“Today’s decision is a step in that process,” Mr Stevens added.

He said  Australia’s interest rates are still “lower than average.”

The latest rise, though, is the fourth in five months.

The Housing Industry Association said these rises, together, mean that first home buyers now have to find an extra $216 a month, on average, to get into their homes.

The latest rise took the Reserve Bank’s target rate to 4 per cent.

Australia’s banks and other lenders are expected to pass it on in full.

However the Treasurer, Wayne Swan said Australia’s banks would have “absolutely no justification” for any bigger rises.

He said bank margins had already returned to pre-crisis levels.

Mr Swan said families with a typical $300,000 home loan would have to “stump up” another $50 a month, as a result of yesterday’s rate rise.

Most analysts expect two more increases, of a similar size, in the not too distant future.

That would mean many home buyers would have to find another $100 a month.

Thousands of Australian families will be placed under severe financial pressure, as that happens.

Those whose main  breadwinners are still working part time, will be particularly vulnerable.

Thousands of Australians were shifted from full to part time work, when the global economic crisis struck.

However thousands of Australians, who would like to move back to full time jobs, are still working part time.

Mr Stevens said Australia’s underlying inflation rate had eased, as expected, from its peak in 2008.

But he said now that the risk of a serious economic contraction in Australia has  passed, less monetary stimulus is needed.

The Reserve Bank raised its target interest rate by 25 basis points to 4 per cent today, even though building approvals, throughout Australia, plunged by 7 per cent in January.

This followed three consecutive interest rate rises late last year.

The building industry had warned that approvals for unit and semi-detached housing in Victoria plunged by 29.1 per cent in January.

However the Reserve Bank Governor, Glenn Stevens, insisted that the latest rise is necessary.

“The global economy is growing,” Mr Stevens said.

“And world GDP is expected to rise at close to trend pace in 2010 and 2011.”

He admitted though that the expansion “is still hesitant in the major countries,”

Mr Stevens said that was  due to the continuing legacy of the financial crisis, which is producing “ongoing excess capacity.”

” In Asia, where financial sectors are not impaired, growth has continued to be quite strong,” Mr Stevens said.

“The authorities in some countries are now seeking to reduce the degree of stimulus to their economies,” he added.

But Mr Stevens also said:”Global financial markets are functioning much better than they were a year ago.

“And the extraordinary support from governments and central banks is gradually being wound back.

“Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness.

“Concerns regarding some sovereigns remain elevated.

Mr Stevens said Australia’s domestic economic conditions had been  stronger than expected, last year,  after a mild downturn a year ago.

“Inflation has, as expected, declined in underlying terms from its peak in 2008,” he added.

This had been  helped by the fall in commodity prices at the end of 2008, a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand.

“CPI inflation has risen somewhat recently as temporary factors that had been holding it to unusually low rates are now abating,” he said.

“Inflation is expected to be consistent with the target in 2010,” he added.

The Reserve Bank aims to keep Australia’s annual underlying inflation rate in a 2-3 per cent, over the course of a business cycle.

The lure of the January sales proved as strong as ever last month, with retail sales throughout Australia rising 1.2 per cent during the month,

This followed disappointing pre Christmas trade, with sales falling by 0.9 per cent in December.

The Australian Bureau of Statistics  reported that Australia’s department stores, clothing and shoe shops and grocery chains all increased their sales in January.

However the nation’s cafes, restaurants and take-away food stores saw their trade fall, during the holiday period.

The bureau also reported today that home building approvals fell by 7 per cent during January.

This followed removal of the Federal government’s stimulus subsidy, for first home buyers.

However the Housing Industry Association reported, earlier this week, that home sales, by Australia’s volume builders, rebounded by 9.5 per cent in January.

The association took this as a sign that upgraders and investors are re-entering the nation’s housing market.

The Reserve Bank board, which is meeting today to review Australia’s interest rates, will take all of  these figures into account.

It’s decision is to be announced at 2.30 this afternoon.

Although car and house sales have been strong, easing price pressures might save Australia from another interest rate rise today.

At this stage, though, that is still far from certain and we will all have to wait until 2.30 this afternoon before we will know for sure.

That’s when the Reserve Bank plans to release the results of a review of Australia’s interest rates, that its board will conduct early today.

Either way, figures that the Australian Bureau of Statistics has just published are sure to weigh heavily on the board’s deliberations.

These include the bureau’s balance of payments figures and business indicators for the December quarter.

Other figures, published by the Housing Industry Association, are also likely to be influential.

They showed a 9.5 per cent rebound in the sales of Australia’s large volume residential builders in January.

The association’s chief economist, Harley Dale, said a sustained improvement, of this kind, would suggest that a recovery, driven both  by people upgrading  – and investors – would be “achievable.’

The Federal government’s now discontinued subsidy for first home buyers has been driving the market for some time now.

The bureau’s balance of payments figures showed some mixed results.

They revealed, for example, that Australia’s current account deficit rose by $2.7 billion, or 19 per cent, in the quarter to almost $17.5 billion.

That is expected to detract 1.3 percentage points from Australia’s economic growth in the December quarter, on a  volume measure.

The bureau’s figures also showed that Australia’s net foreign was almost $648 billion at the end of December.

That represented a rise of 2 per cent over 2009.

Detailed figures, in the Statistician’s bulletin, also suggested that new vehicle imports had  been particularly strong during the quarter.

But one figure, in the Statistician’s bulletin, stood out.

A technical indicator, called the implicit price deflator, fell by 2.1 per cent in the December quarter.

This suggests that Australia’s imports, in the December quarter, will have a significant impact on other price pressures in the economy.

The strength of the $A, over most of the December quarter, helped there.

The Reserve Bank aims to keep Australia’s inflation in a 2-3 per cent range, over the course of the business cycle.

It looks at pressures, like these, very closely, when it reviews Australia’s interest rates, as it will do today.

The Reserve Bank Governor Glenn Stevens says the bank expects Australia’s underlying inflation rate to be about 2.5 per cent over 2010.

That’s important because the bank looks primarily at that rate when it sets official interest rates.

The bank aims to keep Australia’s underlying inflation within a 2-3 per cent range over the course of the business cycle.

Mr Stevens made the prediction in his opening address to the House of Representatives Economic Committee in Canberra.

However, he also suggested that further interest rate rises are still likely this year.

“If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time,” Mr Stevens said.

He said the bank would again seek to ensure that inflation remains consistent with its target over the medium term.

“This is a normal experience in an economic expansion,” he added.

Mr Stevens also said that Australia had chalked up 2 per cent economic growth last year, despite the global economic crisis.

“We expect that it will grow by a bit over 3 per cent for 2010 and about 3.5 per cent in 2011 and 2012,” he added.

Economists estimate that Australia needs about 4 per cent economic growth to absorb each year’s school-leavers into the nation’s workforce.

Mr Stevens said government spending, from the Prime Minister’s stimulus package, is still “having an impact on demand.”

However he added:”This effect will gradually diminish over the coming year.”

“At the same time, a large build up in energy and resource sector investment is under way,” Mr Stevens added.

Australia’s economic prospects look good, as the country moves towards the Federal election due later this year.

Voters, though, should be wary of big electoral promises, offered by any of the major parties.

They might well be particularly hard to fund, this time.

The extra spending, in the Rudd government’s stimulus package, is now putting considerable pressure on the Federal budget.

The Treasurer, Wayne Swan, conceded yesterday that Australia had been helped by China’s economic strength, after the global economic crisis struck.

However he told  ABC television that the stimulus had been mainly responsible for Australia’s relatively strong performance over the past year.

“I think it’s very important to understand that – first and foremost – our domestic surplus – delivered in a timely way – is the principal reason why the Australian economy is so strong, compared to just about ever other advanced economy,” Mr Swan said.

New evidence now suggests that Australia’s relatively strong performance is likely to continue.

A leading index, produced jointly by the Westpac Bank and the Melbourne Institute, continues to surge.

A senior Westpac economist, Matthew Hassan, said that “continues to point to a dramatic improvement in (Australia’s} growth prospects.”

Mr Hassan said the index also suggests that the Australian economy now has a growth outlook that is on a par with that seen in 2007  “at the height of Australia’s resources boom.”

However if that produces fresh inflationary pressures  the Reserve Bank is sure to respond with further interest rate rises.

So the  election, later this year, will be held in good, though necessarily restrained times.

Certainly not at a propiti0us time for politicians, from any party, to be making  expensive promises, to win votes.

Reject those who do.

Watch the North Atlantic.

According to one expert, that’s where the lingering risks from the global economic crisis are likely to appear.

Guy Debelle, an Assistant Governor of the Reserve Bank, who specialises in financial markets, delivered this warning in a speech he gave in Sydney.

Addressing a Women in Finance lunch, Mr Debelle said:”We are now into the phase where weakness in the global macroeconomy is feeding back into the financial sector.

“In that regard, a significant risk, in my assessment, is that we are still to see the full impact of the weakness in the North Atlantic economies on the loans on the books of financial institutions.”

“…this was a big recession which, combined with large falls in both commercial and housing property prices, should result in large loan losses,” Mr Debelle said.

(A copy of his speech can be found on the Reserve Bank’s website, at www.rba.gov.au).

Mr Debelle stressed, though, that this warning should not be taken as his central message .

“The central case is that financial markets have improved considerably over the past year,” Mr Debelle said.

In a separate development, the Reserve Bank warned that more interest rate rises can be expected this year, but that they will probably not be on a monthly basis in future, as they were late last year.

This message was contained in the minutes of the Reserve Bank board meeting, held earlier this month.

The board, then, surprised many economists, by keeping interest rates on hold.

The minutes have just been released.

They noted that board members had been briefed on Australia’s economic prospects.

Then the printed  minutes  then offered a ray of hope to struggling home buyers.

They said board members:”…did not regard that outlook as requiring an increase at every meeting.”

The board, generally, meets on the first Tuesday of each month, except January, to review rates.

It’s main aim, at those meetings, is to keep Australia’s underlying inflation rate within a 2 to 3 per cent range, over the course of a business cycle.

The minutes described the case for keeping rates on hold earlier this month as “stronger” than that for another rise.

The minutes also said that  although Australia’s underlying inflation rate is still  3.25 per cent, it is expected fall to around 2.5 per cent this year.

The Federal government expects the Reserve Bank’s decision to keep interest rates on hold will help to sustain Australia’s economic recovery.

The Federal Treasurer, Wayne Swan, explained why, at question time shortly after Parliament resumed, for its autumn sittings.

“Today’s decision means that a families with a $300,000 mortgage are still paying around $600 a month less than they were paying 18 months ago,” Mr Swan said.

The Reserve Bank’s target rate was still 7.25 per back then. It is just 3.75 per cent now.

These rates have a big influence on home loan interest rates.

And the extra cash, now in the monthly budgets of several million young to middle aged families, packs a wallop, at suburban supermarkets and in local businesses throughout the country.

There was, of course, never any question of the Reserve Bank now returning to anything like the target rate, that it had set, back then.

At most, a rate rise of 25 – or perhaps even 50 – basis points might have been expected.

Even that, though, would have led to another round of rises in home loan interest rates.

And that would have further eroded the spending power of many Australian families.

The first three rate rises, that the Reserve Bank announced late last year, have already had that effect.

And the Reserve Bank board learnt, just three hours before it announced its decision, that business confidence slumped late last year, after the last of those three rate rises was announced.

The board’s decision, though, should be seen as a reprieve, rather than a firm declaration that Australia’s interest rates won’t rise anytime soon.

They are still well below levels the bank regards as normal.

What happens now?

The Treasurer spelt out the government’s plans as he continued his answer.

“…we are committed to a long-term strategy here,” he said.

Mr Swan said the government would do  everything it could to expand the productive capacity of the economy.

It would also do everything in its power to lessen inflationary pressures.

“We on this side of the House are determined to do everything we can to see sustainable growth which lifts living standards up and we are determined to make the necessary investments for the future,” Mr Swan said.

The Reserve Bank surprised many today, by deciding to keep its target interest rate on hold at 3.75 per cent.

The Bank’s Governor Glenn Stevens, noted that the global economy is growing, and said world GDP is expected to rise at close to trend pace in 2010 and 2011.

But he added:”The expansion is still likely to be modest in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity.”

Mr Stevens did say that in Asia, where financial sectors are not impaired, recovery has been much quicker so far.

But he noted that the Chinese authorities are now seeking to reduce the degree of stimulus to their economy.

“Global financial markets are functioning much better than they were a year ago,
Mr Stevens said.

” Credit conditions nonetheless remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness.

“Concerns regarding some sovereigns have increased.”

He said  economic conditions in Australia had  been stronger than expected, after a mild downturn a year ago.

But he added:” The effects of the fiscal stimulus on consumer demand have now faded.

However Mr Stevens added”… household finances are being supported by strong labour market outcomes and a recovery in net worth.

“Public infrastructure spending is now boosting demand, as is an upturn in housing construction.

“Investment in the resources sector is strong.

“The rate of unemployment appears to have peaked at a much lower level than earlier expected.”

Mr Stevens said tha has, as expected, inflation had declined in underlying terms from its peak in 2008.

That had been  helped by several factors.

These had included the fall in commodity prices at the end of 2008, a noticeable slowing in private?sector labour costs during 2009, the recent rise in the exchange rate and a period of slower growth in demand.

“CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating.

” Inflation is expected to be consistent with the target in 2010, Mr Stevens said.

Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year, the Reserve Bank chief said.

“Business credit, in contrast, has continued to fall, as companies have sought to reduce leverage, and lenders have imposed tighter lending standards and in some cases sought to scale back their balance sheets.,” he added.

The decline in credit has been concentrated among large firms, which generally have had good access to equity capital and, more recently, to debt markets; credit conditions remain difficult for many smaller businesses.

With the risk of serious economic contraction in Australia having passed, the Board had moved at recent meetings to lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.

Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.

“Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being,” Mr Stevens said.

Interest rates to most borrowers nonetheless remain lower than average, he added.

” If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term,” Mr Stevens said.

Thousands of Australian families struggle to meet their child care bills, with mid level fees, at government approved centres, reaching $285 a week.

That national figure, from a report by the Productivity Commission, is for full time care, of 50 hours a week.

Even the  fees, for approved family day care are not much lower, at a mid level of $267 a week.

As child care fees are commercial charges and the amount of time children spending in care, weekly expenses do vary widely.

But Canberra families, which face the nation’s highest fees, must find more than $300 a week for full time child care, either at their local centres or in appproved family care.

The report, by the Productivity Commission, also exposes significant inequities in the way government child care subsidies are spent.

It shows, for example, that many of the Australian children who most need help miss out on their fair share of subsidised child care places.

These include kids with a disability, those living in remote areas, Aboriginal children and children of migrant families, who don’t speak English well, if at all.

The report says children in all of these groups get fewer places, in subsidised child care, than those from the broader community.

But poor kids don’t.

The Commission, says children from low income families get child care places at much the same rate as the broader community.

Child care subsidies, in various forms, are a big – and rapidly rising – expense for Australian governments.

The Commission reports that Federal, State and Territory governments spent $4.5 billion on these subsidies in 2008-09.

In real terms, that was a 51 per cent rise over their spending in the previous 12 months.

The Australian notion of a fair go suggests that big ticket government spending, like this, should be spread evenly throughout the community.

However the report says only 13.2 per cent of  children from non-English speaking backgrounds benefit from subsidised child care, against 18.8 per cent of the broader community.

The participation rate for Aboriginal children was just 2.3 per cent, although they make up 4.4 per cent of the population.

The Commission also said:”Children aged 0-12 years with a disability had a lower participation in child care (3.2 per cent) compared with their representation in the community (7.7 per cent).

And only 1 per cent of Australian kids, living in remote areas, get subsidised child care, even though 3 per cent of the nation’s children live in remote areas.

The price of innocent summer pleasures have been rising almost as fast as capital city temperatures.

Fruit prices, for example, leapt by 15.9 per cent, over the final three months of last year, as bad weather hit many orchards, leaving shops short of fruit.

And that traditional summer break at the beach was more expensive than ever, with the price of domestic holiday travel and accommodation jumping 6.6 per cent, in the same time.

Even staying home, feeling sorry for yourself was expensive, too, with  beer prices rising  2.1 per cent, in the three months leading up to Christmas.

There were offsets, though, with petrol prices falling 2.8 per cent, as the Aussie dollar put on a little muscle.

Computer prices fell by 7.1 per cent and the price of pharmaceuticals dropped by 5.3 per cent.

Overall, though, the Statistician reports, Australia’s prices rose by 0.5 per cent in the December quarter.

Following the  1 per cent rise chalked up in the September quarter – and an earlier rise of 0.5 per cent – that took Australia’s annual inflation rate to 2.1 per cent.

Sadly, for home buyers though, Australia’s underlying inflation rate was even higher at 3.6 per cent.

The Reserve Bank looks at these “underlying” rates, not the raw CPI figures, when it reviews Australia’s interest rates, as it will next Tuesday.

And as that rate is still above the 3 per cent that the Reserve Bank is prepared to tolerate, another round of rate rises can be expected next month.

Where do you stand, at the start of a bright new decade?

An old song puts it well.

“You load 16 tons – and what do you get?

“Another day older – and deeper in debt.”

This coal miner’s lament, which was once a huge hit, still  has lessons for  all Australians.

At the end of the noughties, for example, their nation is more  dependent on coal than ever.

That’s not a good look, in a world – rightly – worrried about climate change.

And debt levels have risen so sharply, in Australia, over recent years, that they now present a real risk to the nation’s financial stability.

At the turn of the Century, the average Australian owed a little more than $22,000.

According to the Reserve Bank,  that’s now $74,000.

So debts have more than trebled over the decade, while prices rose by just 35 per cent.

Repayment capacity hasn’t matched debt growth, either.

While average weekly earnings now stand at a truly impressive $1,249 a week – wages – from which debt repayments are made – rose by just 50 per cent over the noughties.

Don’t despair if you don’t earn quite that amount, though.  Most people don’t.  It’s the relatively small number, right at the top, who push that figure into the stratosphere.

The crash still dominates Australia’s prospects, even though its influence is now waning.

At the start of the last decade, Australia had chalked up 3.75 per cent growth – while  expecting something a little better in the year ahead.

On the latest figures, Australia’s annual economic growth rate was just 0.5 per cent and – once again – we are looking for something a little better in future.

The crash, though, hit Australia’s national finances very hard.

At the turn of the Century, for example. the Federal government took a 23.4 per cent revenue bite from Australia’s output.

That tax take is now up to 24.9 per cent.

The Federal government’s spending has also risen  sharply.

It was just 22.8 per cent of the nation’s gross domestic product, back then.

It is now about 27 per cent.

Stimulus packages might be necessary,  after stock market crashes.

Bu they are not cheap.

So what else hits the pockets and purses of ordinary Australians, today – and how has all that changed, over the past decade?

At 5.7 per cent, Australia’s unemployment rate is still low, by current standards.  The US rate, for example, is 10 per cent.

Most will have forgotten, though, ours stood at 7.5 per cent at the turn of the Century.

And Australia’s inflation rate – which was approaching 6 per cent then – is now down to 1.3 per cent.

Share prices had been rising strongly, as the turn of the Century approached.  But the tech-wreck  rock was just ahead.

That, sadly, became a model for a later disaster, too.

Technical advances were certainly impressive, at the turn of the Century .

But they were also over-hyped, on world share markets.

Sadly we  forgot that lesson, all-too-quickly.

If we had remembered it, we might well have asked some salutory questions, when complex financial products were also hyped, some years later.

So what lies ahead now?

We will make just one prediction, but we offer it with absolute certainty.

Expect the unexpected

It’s a safe bet.

So what have we  learnt, economically, from the year that is now passing?

Firstly, perhaps, that the economics of John Maynard Keynes are not dead, after all.

The new neo-classicists, who held that markets, alone, could be trusted to keep economies strong, were proved wrong, yet again.

Just as their predeecesors were back in the 1930s, when Keynes argued that monetary authorities and governments must intervene directly, at times, to support economic growth.

Ideologically, at least, Australia’s Liberals are still close to the neo-classicists, at heart.

That’s why the Opposition’s Treasury spokesman, Joe Hockey, was signalling shortly after the crisis struck, late in 2008, that the opposition’s response would be based, primarily, on tax cuts for those in the middle to high tax brackets.

That is, precisely, those who are most likely to save, not spend, any extra money they might receive.

That is not, necessarily, a hot way to tackle an all too imminent recession.

The Rudd government’s response, through stimulus packages, was much more full blooded – and effective

But Joe Hockey does have a point, when he says budget deficits can’t go on forever.

So has the Rudd government overshot the mark?

Two Treasury economists, Dr David Gruen and Colin Clark, made some pertinent remarks about that, in an article published earlier this month.

“…Federal governments of both political persuasions have demonstrated the resolve needed to bring deficit budgets back into surplus after the economy has recovered from recession,” they say.

The economists add, too, that governments, of both persuasions, have also “committed themselves to increasingly well articulated medium term policy frameworks for fiscal policies.”

Comforting thoughts, eh?