Friday 7th December 2007 - 10:13 pm
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Australia’s own sub-prime housing stress

by Alan Thornhill

Sharp rises in housing costs have thrown 425,000 relatively poor Australian families into financial stress.

This is revealed in a new report, just released by the Australian Institute of Health and Welfare.

The Institute confirms that most Australian family budgets look bright, with their gross mid-level incomes rising by no less than 34 per cent, in real terms, over the 10 years to June 2006.

But it warns, too, that Australia is a very diverse country, with a very diverse community.

Its report notes, in particular, that sharp rises in rents house prices, over the past decade, have pushed thousands of families, with relatively low incomes, into severe financial stress.

It is widely accepted, that housing costs produce stress, when they exceed 30 per cent of a family’s disposable income.

John Howard made much of his “battlers.” That was one of his favourite descriptions of poorer Australian families.

The Institute looked at what had happened to them, on Mr Howard’s watch. Massaging figures produced by the Australian Bureau of Statistics, it came to the conclusion that some 425,000 Australian families, with incomes somewhere in the bottom 40 per cent, now spend more than 30 per cent of their income each week, on either rent or home loan repayments.

Default levels, on Australia’s home loans, are still low. That’s because Australia’s banks and other home lenders have been much more careful than their American counterparts, in choosing their customers.

But, if the Institute is right – and there is no reason to doubt that it is – thousands of Australian families are, already, finding it very hard, indeed, to keep a roof over their heads.

The Institute reports, for example, that almost half of all Australian families, in this income range, who rent privately, now pay more than 30 per cent of their gross income to their landlords each week.

That might well have had something to do with the outcome of the Federal election on November 24. The result, in fact, might well be seen as the battlers’ revenge.
The report, the latest in a series published every two years, is close to essential reading for financial advisers.

Its available at The data on financial stress is in table 8.5.

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Wednesday 5th December 2007 - 12:03 pm
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Sharp jump in incomes

by Alan Thornhill

Australians have more spending money than ever,with net disposable incomes rising by 5.1 per cent over the past year.

That seasonally adjusted figure, comes fromthe September quarter national accounts, which the Australian Bureau of Statistics released today.

It is just one of many in the national accounts which will worry the Reserve Bank, which only just held off raising rates, yet again, earlier in the day.

The bureau said real net disposable income rose by no less than 1 per cent in the September quarter alone.

But isn’t that a good thing? Well, yes, mostly.

However big surges in income can produce problems, particularly when there is little spare capacity in the economy, a situation the Reserve Bank, itself, says applies now.

The bureau also reported that the Australian economy grew by a quite substantial 1 per cent in the September quarter and by a truly impressive 4.3 per cent in the 12 months to the end of September.

Most economists are now worried that the prospect of the $31 billion in tax cuts, that Labor promised before the election, will encourage even more enthusiastic spending over the coming year.

And they too fear that this could overheat the Australian economy. They are urging the government to find spending cuts, in its own program, to offset that.

The new Finanance Minister, Lindsay Tanner, has promised to do that. His boss, Kevin Rudd, has already promised to take “a meat axe” to wasteful spending in the public sector.

The bureau’s figures also confirm that this is now close to an urgent necessity.

They show , for example, that final consumption spending rose by 1.2 per cent in the September quarter and 3.7 per cent over the year.

It is capital spending associated with the mining boom though, that is really driving the Australian economy. Although it eased by 0.3 per cent in the September quarter it rose by no less than 10.6 per cent over the year.

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Monday 3rd December 2007 - 8:27 am
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Rudd pressures banks

by Alan Thornhill

Australia’s new leader, Kevin Rudd, is urging Australia’s banks to not to raise their home loan interest rates.

He was speaking on ABC radio this morning, just hours before he – and other new Labor ministers – drive to Yarralumla  to be sworn into their new posts.

The National Australia Bank, in particular, has warned that its home loan interest rates may have to be raised, to cover the higher costs of funds, incurred as a result of the sub-prime mortgage crisis in the United States.

Mr Rudd acknowledged that Australia’s banks do have a right to raise rates, for commercial reasons.

“That’s a decision for them,” he said.

However he also urged the banks to remember that Australian families are already “under pressure” financially.

“They should be very, very mindful of their customer base,” Mr Rudd said.

This process is known, in financial circles, as “jawboning.”

The main culprits are usually central bank chiefs.

Mr Rudd, though, has set something of a precedent by indulging in a little jawboning even before he officially takes up his new post, as Australia’s 26th Prime Minister.

He was speaking on the eve of the next board meeting, at which Australia’s central bank, the Reserve, will review the nation’s interest rates.

Although the bank’s Governor, Glenn Stevens, is making no secret of the fact that he is worried about Australia’s rising inflation, another rate rise this week is considered unlikely.  That is because the US sub-prime mortgage crisis is already slowing US economic growth.

Thursday 27th September 2007 - 6:24 pm
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Sub-prime:Who will pay?

by Alan Thornhill

Who will pick up the bill, if the current crisis in the US sub-prime mortgage market worsens?

To an extent, central banks around the world have already answered that question, by showing that they are prepared to kick in billions to steady world financial markets.

That question, though, is still worrying authorities.

The Treasurer, Peter Costello, admitted that today.

“I think the fall out from the US sub-prime market has a considerable way to go,” he told reporters in Melbourne.

The Reserve Bank’s assistant governor (Financial System), Philip Lowe, had also broached the subject, in a talk he gave to a conference on Globalisation and Systemic Risk, in Chicago, earlier in the day.

His analysis was more detailed than the Treasurer’s

Mr Costello delivered his usual commercial for the government.

He said its good economic management had seen Australia safely through both the US recession of 2000-01 and the 1997 Asian economic crisis. Admitting that the US might well be about to “turn down” again, Mr Costello urged voters to stick with the proven performer.
“We can keep Australia strong with experienced management and good policy,” he said.

Mr Lowe said Australia’s flexible exchange rate, its open capital market and its “relatively deep securities market had helped it weather those storms.

He was too diplomatic, of course, to recall that much of the credit for that was due to a Labor Treasurer, Paul Keating, rather than to Mr Costello.

However Mr Lowe did mention a new risk, that has so far received very little, if any, public attention.

He said changes in the global financial system had “clearly run ahead of the supporting regulatory framework.”
“We are ,moving inexorably to a world of global financial institutions that are operating in global markets,” he said.

“Yet crisis management largely remains essentially local.”

The risk this presents is serious.

Mr Lowe, himself, put that very eloquently.

“Who pays for any bailout?” he asked, rhetorically.

That question has yet to be answered.

It should not, however, incite panic.

True, the Great Depression of the 1930s was produced, largely by major countries adopting beggar thy neighbour policies, when the going got tough.

But the world has learnt much since then. The integration of world financial and trading systems, under globalisation, has been both rapid and powerful.

Mr Lowe, however, has clearly done the world a great service by pointing out, so clearly, that serious risks still remain.

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Tuesday 25th September 2007 - 12:28 pm
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Debt:The new risk

by Alan Thornhill

There is a hidden danger in Australia’s family debt patterns, according to the Reserve Bank.

But it’s not where you might expect.

The bank’s Deputy Governor, Ric Battellino, made it absolutely clear today that he does not believe The Economist’s famous prediction that Australia’s debt binge will “end in tears.”

But that doesn’t mean that the Reserve Bank is comfortable and relaxed with Australia’s spiralling household debt levels either.

Mr Battelino says Australian families are “running a highly mismatched balance sheet.”

The assets, on that sheet, are mainly property and shares.

The liabilities, of course, are mainly the debt used to acquire those assets.

So what’s the problem?

“This balances sheet structure is very effective in generating wealth during the good economic times,” Mr Battellino says.

“But households need to recognise that it leaves them exposed to economic or financial shocks that can cause asset values to fall and – or – interest rates to rise.”

Mr Battellino frankly admits that the explosive growth in family debt, seen over the past decade or so, is without precedent in this country.

However, he points out that household debt levels did rise sharply in Australia, at least twice previously.

That happened both in the 1880s and the late 1920s.

That, alone, will probably startle some.

Both periods were followed by sharp economic setbacks.

However, Mr Battellino believes the present debt bubble might be more robust.

He says it is misleading to think that it has been driven by struggling young couples, desperate to get their first home.

In fact, he says, most of the debt has been taken out by higher income families, in their forties and fifties.

Those, in fact, who can both afford and sustain the repayments.

Could, they, however, survive a sharp downturn in property prices, set off by a world wide credit crunch?

Some questions, Mr Battellino does not attempt to answer.

Friday 17th August 2007 - 6:58 pm

High risks ahead

by Alan Thornhill

A combination of tight credit and higher interest rates could put the Australian economy in some peril by the end of the year.

Add the usual risks – as big spending politicians try to buy votes in this year’s elections – and the situation starts to look like a powderkeg.

You don’t have to take our word for this. The Reserve Bank, itself, has issued the grimmest of warnings, over what could happen, if a credit crunch and higher rates arrive together.

And that ugly prospect looks much more likely now than it did, a few weeks ago, when a senior Reserve Bank economist, Jarkko Jaaskela, wrote a paper, warning of this risk.

Don’t forget, either, that the Treasury Chief, Ken Henry, has bluntly warned Australia’s politicians, that reckless, pre-election promises do, indeed, have financial consequences.
Over recent days, the sub-prime mortgage crisis in the US has unsettled financial markets throughout the world. The impact was immediate. Credit risk is now attracting a substantially higher price than it was, just a few weeks ago.

As non-tradtional lenders in Australia, like RAMS, raise the money they lend to home-buyers in these markets, there will, certainly, be flow on effects here. RAMS and similar lenders have been big operators in the Australian market. So some tightening in credit, at least, is now certain. An outright credit crunch is also a distinct possibility, if other lenders, like Australia’s once risk averse banks go back to their old ways and start rationing credit again.

There could well be another interest rate rise this year, too. The Reserve Bank now expects Australia’s inflation rate to stay close to its 3 per cent red line over the year ahead. And the bank’s Governor, Glenn Stevens, has been sounding a lot like John Wayne lately.

“A man’s gotta do etc….”

Higher rates and a credit crunch, together,could well have drastic effects. Indeed, Jaaskela warns, they could produce an “asynchronous response.”

Those words might well become as famous, in the months ahead, as that Iraq war euphemism, “collateral damage.”

As Jaaskela, himself, explains an “asynchronous response” could involve a great deal of financial pain, for Australia’s debt laden families.

“When the growth of credit is below the critical threshold level, interest rate movements are more potent,” he says.

A graph he produced suggests that the public would be forced to cut its spending very sharply, if a credit crunch and higher interest rates arrive together.

Mr Jaaskela is even prepared to use the dreaded R word, in this context.

“There is some empirical evident supporting the idea that recessions are likely to be periods when borrowers’ balance sheets are weak and the availability of credit is tight,”

That’s economist talk for “watch out.”


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Alan Thornhill

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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