When world markets turn bullish as they did last night, Australia can sleep well. But all Australians, and particularly those that have borrowed large sums to buy houses, should be aware that we have lost our security blanket. If there are serious global hiccups we are now more vulnerable than we have been for decades. And so is the value of our houses.
The mining industry and the 270 new projects involving investment of about $300 billion were our security blanket. They gave confidence to global institutions to lend to our banks even though Australia’s enormous overseas bank borrowing puts Australian debt into a similar range to Italy and not far behind Spain when related to GDP. In the good times, overseas lenders did not put us in the same basket as Spain and Italy because they were optimistic about Australia.
Overseas institutions view of Australia has changed now that our government has made a serious mistake by incorporating into future budget estimates a tax that makes uneconomic most of those new mining projects and will, therefore, stop bank funding.
Then, realising its mistake, the government is now scrambling around looking to negotiate its way out. Yet the only real way out is to dramatically change its proposed resource super profits tax, including the retrospective nature of it, and, as a result, slash future revenue from the government’s coffers.
The fear is now spreading. The big lenders to Australia – China, Japan, and the Middle East and European institutions – are now worried there has been a fundamental change in the sovereign risk of Australia because we have started to do silly things. This is critical because our four major banks borrow overseas to fund about 40 per cent of every housing loan.
If share and commodity markets keep rising and there are no major problems in China then we will ride on the back of global enthusiasm, mining tax or no mining tax. In other words those fears by the lenders to Australia will be covered by good times.
But if something goes wrong in the world – particularly if banks become nervous about lending to each other – then we will no longer have the economic standing to rise above the problems as we did in the global financial crisis.
In simple terms, if there are serious global problems during the next three or four years our banks will not be able to roll over the enormous amounts they have borrowed in the past unless they pay a substantial risk premium. Raising more money could be out of the question. Banks will attempt to cover any overseas shortfall by attracting local term deposits via higher interest rates.
The combination of less money and higher interest rates will bring down the value of houses because it’s the availability of bank finance and its cost as much as dwelling demand and supply that sets the level of house prices.
And so a family wanting to borrow $500,000 might find they can only obtain $400,000 and so they will pay $100,000 less for the dwelling they want.
Treasury is forecasting that the world will trade well in the next few years and in particular China will continue to boom and there will be uninterrupted growth.
If they are right, then home-owners will continue to sleep well and house prices will be maintained or will rise. But if treasury is wrong about global events, then those visiting Spain should have a peep at the Spanish housing market which is down sharply because banks can’t fund the old levels. That’s where we are headed without our security blanket for tough times.
When Kevin Rudd and Wayne Swan, apparently acting alone, decided to go for a mining tax I am sure they had no idea that there were increasing the risk for every Australian with a major investment in a dwelling, particularly if they have borrowed large sums.
This article first appeared on Business Spectator.
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