Friday, 4 January 2008

US Sub-prime woes hurt Australian Home Buyers

For months the Australian banks have been bemoaning the impact that the global credit squeeze has had on their home loan margins. With borrowers already under pressure from high house prices and the rates increases made by the Reserve Bank of Australia to contain inflation, none of the big four banks were willing to be first to increase their lending rates for fear of losing market share. But today two of the banks finally decided to increase their lending rates independent of any move by the RBA - National Australia Bank increasing it's standard variable loan by 0.12% to 8.69%, and ANZ Bank increasing it's fixed rate loan rate by 0.25% to 8.54%. The one positive of this move may be that the RBA feels less urgency to increase the official rate by another 0.25% when they next meet, as the banks will have done some of the work for them.

Copyright Enough Wealth 2007


Contrarian Investors' Journal said...

If interest rates keep going up (or credit crunch gets worse, making money much more expensive), it will come to a point where we will have a serious bout of debt deflation (see What can tip Australia into a downward property price spiral?).

What happened in the US (10% fall of median house price year to year) can easily happen to Australia. All we need is a trigger to tip us over. said...

That would be called asset deflation (house prices declining). The closest thing you can get to 'debt deflation' is where high inflation rates cause the real value of debts to decline over time.

I can see house prices dropping 10% where they have run up in the past few years (WA or NT), or didn't correct after the last boom (VIC, SA, QLD) but I think it's less likely in Sydney as prices has been pretty flat already for the past few years, and already declined from the previous peak in the western suburbs.

The stronger Australian economy and low vacancy rates (with housing construction below the level of demand in recent years) pushing up rents makes a 10% drop across Australia a lot less likely than is currently happening in the US.

Contrarian Investors' Journal said...


The closest thing you can get to 'debt deflation' is where high inflation rates cause the real value of debts to decline over time.

No, this is not debt deflation. What I mean by debt deflation is the contraction of money and credit, which will lead to falls in asset prices (as what happened in Japan). See How money & credit can shrink (i.e. deflation)?

Yes, you're right that such fall in house price is unlikely but I would add a very crucial qualifier- that the current macroeconomic conditions remains the same indefinitely. Unfortunately for Australia, with a total private debt to GDP ratio of 160% (during the Great Depression, it's only 80%), it makes us very vulnerable to macroeconomic 'shocks' that can tip us over (the source of any macroeconomic 'shocks' is most likely to be from overseas). I would recommend that you visit UWS Professor Steve Keen's web site, Steve Keen’s Oz Debtwatch, who is sounding the danger of Australia's vulnerability.

But I would not agree with the assertion that "housing construction below the level of demand in recent years". Take a look at this report: Myths on the Australian housing/rental crisis & its implications. In this report, it shows that the increase in the number of dwellings far exceeded the population growth and household formation. Furthermore, the increase in unoccupied dwellings is almost triple the increase in population growth.

When you say that the "Australian economy" is stronger, what is the yard stick of measurement?