Property prices:what now?

Home buyers have been squeezed by rising property prices and a string of interest rate hikes.

So could the property bubble burst?

That is now a real possibility.

The rate rise, expected today, will push more Australian families into housing stress.

Most will cope.  But not all.

So many will be forced to sell up.

That trend is already evident in the outer suburbs of many Australian cities, particularly Sydney.

So property prices, in some suburbs, might well fall further in the months ahead.

As regular readers will recall, another rate rise could attract a flood of hot money into this country.

Australia’s interest rates are already substantially higher than those in America, Japan and many other countries.

So foreign investors  are likely to find relatively safe, interest only, investments very attractive indeed.

That will, once again, strengthen the $A.

And a stronger $A will help to ease inflationary pressures in Australia.

But that will happen very slowly.

Recent evidence suggests that local shopkeepers are keeping  big slices of the strong $A dividend, themselves, to boost their own profits.

None of this, though, will help sustain property prices, particularly in the outer suburbs.

One factor might.

That is a strong migration program.

Western Australia and Queensland are still keen to attract more migrants.  The two big resource States still need many more people to fill the  gaps in their workforces. Those shortfalls are restricting development, in those places.

But neither New South Wales or Victoria are likely to benefit much from that.

High house prices are already forcing people out of Sydney.

And a the current slowdown, in the manufacturing sector is likely to limit job opportunities in  Victoria and South Australia.

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Rates:Shock and awe?

The Reserve Bank’s strategy of raising interest slowly and steadily has had only a limited impact, so far.

That raises a question. Will it try something a little stronger, this time? A little shock and awe, perhaps?

That is a rate rise of 0.5 per centage points, instead of yet one more rise of 0.25 point jump. The bank’s board, which meets tomorrow to review rates, will be tempted.

It’s not as though the string of rate rises, already announced, has had no effect. Surveys show that both consumer and business confidence has been dented. And spending is not rising as strongly as it was.

The trouble is, though, that despite all that, inflationary pressures are still remarkably resilient. The Reserve Bank wants to change the public’s mindset. And yet one more small rate rise might not be enough to do that.

The bank has another worry before it, too. That, of course, is the government’s determination to proceed with the $31 billion worth of staged tax cuts that it has promised to pay over the next three years.

The first round of those cuts is due very soon. They will be paid from July 1 this year. The Treasurer, Wayne Swan, says the tax cuts will help to curb inflation, by encouraging restraint in wage demands.

The Reserve Bank doesn’t agree. It believes that people on low to moderate incomes, in particular, will just spend that extra money, when they see it in their pay packets.

That, too, will tempt it to take preemptive action, with a bigger than expected rate rise this week.

All this means that there is now a real chance that we will see a rate rise of 0.5 per centage points tomorrow, rather than the usual small rise.

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Miners:the black side of the boom

The mining boom is bringing billions of dollars to Australia.

But it is also adding to the inflationary pressures that are giving the nation big headaches.

Figures just released by the Australian Bureau of Statistics tell the story.

They also show why those inflationary pressures are not likely to ease any time soon.

The bureau reported, for example, that Australia’s miners currently expect to spend 12.6 per cent more, on new capital in 2008-09, than they did last financial year.

With underlying inflation now running about 3 per cent, that would represent a real increase of almost 10 per cent in their new capital spending.

And miners are the last of the really big spenders, when it comes to capital equipment.

But the boom, with all its demands, arrived suddenly.

So suddenly, in fact, that their fifth estimate of likely spending this financial year was a massive 23 per cent higher than that of the comparable estimate, the previous year.

Estimate 5, for this financial year, is that the miners, alone, will spend no less than $29.6 billion, over the year to June 2008.
With commodity prices now at record highs, the fact is that they can’t afford hold back on new capital projects.

But thissudden rush does have its consequences for tother Australians.
One is that interest rates will probably rise again, next week, as the Reserve Bank tries to curb both demand and inflation.

For some families, that will mean bigger home loan repayments and less to spend on food.

That’s tough. But that’s what mining booms are like.

They have  been a big part of  Australia’s history.

During  the  gold rush days, for example, even common tools, like picks, became too expensive for Australia’s farmers.

That’s because the miners were willing to pay anything for them.

Wall Street rallies

US traders shrugged off predictions of recession overnight, Australian time, to stage a strong rally.

The Dow Jones industrial index rose 189.2 points, to close at 12,570.22.

That happened after a new report showed home sales in the US stronger than the market had expected.

Traders were also encouraged by the news that the ratings agency Standard and Poors had confirmed its Triple-A rating for MBIA inc. and the Ambac Financial Group.

This eased earlier fears about the future of troubled bond insurers.

MBIA shares rose by more than 16 per cent on the news, while Ambac shares jumped by more than 10 per cent.

European share markets also gained ground overnight, as financial stocks generally rose.

Asian markets also recorded strong results.

However analysts warned that the volatility seen in recent weeks is likely to continue for some time yet.

They said that the forces, which set off that unrest, are still strong.

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The enviroment – balancing the costs of investing, and not investing

The five year drought, that Australia has just suffered, has given everyone a clear idea of the damage that global warming can do.

Cattle numbers are down. The national sheep flock is just a remnant of what it once was. And farmers have seen their once bountiful wheat fields dusty, dry and barren.

All of this makes a new report, by economist Ross Garnaut, very timely.

Essentially, he is urging the government to take a leading role in combating climate change, saying Australia might well become the most damaged country in the Western world, if it does’nt.

And, after such a severe drought, even city people know very well just what is at stake.

Professor Garnaut says Australia needs to go beyond its present aim of a 60 per cent cut in greenhouse gas emissions by 2050.

He is advocating a 90 per cent cut.

At this stage, the new Rudd Labor government is not entirely convinced.

But Professor Garnaut’s report is compelling.

So, too, is Australia’s bitter experience with the drought.

The drought has devastated Australia’s once great rural industries.

The nation was once said to ride on the sheep’s back.

These days, the mines, alone underpin Australia’s prosperity.

The losses Australia has suffered, in its agricultural sector, have been huge.

These are the kind of costs Australian governments, both Federal and State, will have to balance in future against the undoubtedly substantial costs of making the adjustments necessary, to cut our greenhouse gas emissions even more sharply.
And there were some re-assuring words, from a totally unexpected source, on that subject this morning.

That is, from Professor Garnaut, himself.

He said those costs would be “reasonable.”

Oh, come on Ross. You are an economist. You are supposed to be miserable

You can make it nastier than that, can’t you?

Wage growth:the full picture

The Australian Bureau of Statistics will release its latest average weekly earnings figures later today.

Although they will just be for November, the new figures should give us a more complete picture of wage growth trends in Australia, over the past year.

Labour price figures, that the Bureau published yesterday, suggest that this growth, a basic input into inflation, has, at least, been more moderate than might have been expected in a minerals boom.

They showed that, overall, labour costs rose by just 1.1 per cent in the final three months of last year and by 4.2 per cent over the year.

These figures exclude bonuses.

Once they are taken into account, though, the annual growth rises to 4.3 per cent.

So have the big boys in the boardrooms of the nation been quietly giving themselves fantastic bonuses?

Perhaps.  But Craig James, of Comsec, sees a more prosaic explanation.

He says good workers are hard to find and even harder to keep, during economic booms.

So a boss who ensures that the good people he has are adequately rewarded is simply pursuing good business practices.

As always, though, pay rises which are not matched by productivity increases, will eventually be illusory.

They are just swallowed up by inflation.

And that is a very real risk, right now.

This, naturally, means that any attempt to make sense of wage figures, alone, will be incomplete.

That is, at least, until productivity figures are also published.

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Terminal conditions:the rules are set

The Federal government has set its rules for a new superannuation concession that it is offering terminally ill people.

The Minister for Superannuation and Corporate Law, Nick Sherry, made the announcement at the weekend.

“Under the previous early release rules, persons in this situation who continued working faced restrictions on the amount of superannuation they could access,” Senator Sherry said.

“The new condition of release will give persons with terminal medical conditions unrestricted access to their superannuation benefits,” he added.

Senator Sherry said this change complements the government’s related measure, contained in the Tax Laws Amendment (2008 Measures No.1) Bill 2008.

The government brought that bill into parliament on February 13.

It made superannuation tax free when it is paid to people suffering from terminal medical conditions.

Need to know more?

The details can be seen in the Superannuation Industry (Supervision) amendment regulations 2008 (No,1).

That is available on the Federal Register of Legislative Instruments website.  The address is www.comlaw.gov.au

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Bankruptcies:clearing the mess

Insolvencies are always messy.

But they are particularly so, when those who go broke – and those they owe – live in different countries.

New legislation, that the government introduced into parliament yesterday, is meant to ease the trauma of cross border bankruptcies.

At least a little.

The Minister for Superannuation and Corporate Law, Senator Nick Sherry, said it would set international standards in place.

“The bill gives effect to the Model Law on Cross Border Insolvency developed by the United Nations Commission on International Trade Law.”

So you can relax now. That’s all fixed.

Perhaps.

More likely not.

But the proposed legislation should open doors, that have been firmly shut in the past.

How would it work?

Senator Sherry said the bill would:-

• Encourage co-operation between courts and insolvency practitioners in different countries.
• Clarify the rights of foreign creditors to participate in Australian insolvency procedures and
• Assist co-ordination of international insolvency procedures.

All of that has to be good.

Senator Sherry also said, when introducing separate legislation, that the government will legislate to make lump sum superannuation payments tax free to people suffering from terminal medical conditions.

He said this would relieve some of the financial stress that these people and their families can encounter, when these circumstances arise.

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