Thursday, March 26, 2015

Australia could weather housing crash: Deloitte

Australia’s $5.5 trillion real estate market has several protections against a housing price crisis like the US subprime mortgage crash which ravaged the economy during the GFC, says Deloitte.

According to Deloitte’s 2015 mortgage report, Australian house prices are safeguarded by low risk-weighted home loans, regulatory bodies, and a culture of paying down mortgages beyond minimum requirements.

Deloitte risk and regulatory financial services leader, Kevin Nixon, said Australia had relatively light risk in housing debt, as the ratio of an average mortgage weighed against the value of a home was “quite low”.

Asked whether Australia could weather a 30 per cent house price fall, such as when average US house prices dropped 20 per cent in two years during the GFC, Mr Nixon said: “It would hurt, but for a lot of people it would just eat up their equity on paper, and as long as they don’t lose their jobs, they can continue to service their loans.”

Mr Nixon said steady house price appreciation, the ageing of mortgages in a portfolio, and the propensity for Australian borrowers to pay down their mortgages over and above required monthly payments would lessen risks to the housing system.

With Australia’s strong growth in house prices, Mr Nixon said, the longer a homeowner holds an outstanding mortgage, the less leveraged the original loan as a proportion of the home’s value will become.

For example, a home loan of $300,000 will be leveraged against an asset — the house — the value of which increases faster than interest accumulates on the loan, in the process reducing the risk of the original mortgage.

But Mr Nixon said this prospect also raised the issue of consumers refinancing their mortgages against current, inflated home values.

“Where one would become concerned ... is where we see people en-masse refinancing their mortgages against their increasing housing value.” Mr Nixon said. “The system-wide buffer disappears.”

The Australian Bureau of Statistics showed nominal house prices grew at 9 per cent in the year to September. But that figure was nearly 15 per cent in Sydney over the same period. Monthly data since then suggests the trend had continued.

Low interest rates were providing the potential for rapid house price gains to continue, the Deloitte report said, with the Reserve Bank of Australia recently cutting the official cash rate to its lowest ever level of 2.25 per cent.

But Deloitte said even with house prices surging, measures of mortgage stress — the ability of households to pay down housing debt — remained below the average over the last decade.

“This suggests that households can afford to borrow more, although there is vulnerability if interest rates increase,” Deloitte said.

Macquarie executive director Frank Ganis said the Australian real estate market was safeguarded by local consumers paying down their mortgages at a quicker rate.

“Approximately two-thirds of real estate in Australia is owner occupied, and of those two-thirds, half have no mortgage,” Mr Ganis said.

While the RBA has said it was concerned by rapidly rising house prices, Deloitte said it supported the central bank’s stance against the use of tighter regulation by way of macroprudential tools.

“Systemic risk can be very difficult to predict, define and contain narrowly,” Deloitte said. “To address risks in a formulaic manner is problematic and may in fact be counterproductive.”

Deloitte said Australia’s housing market was in safe hands with its two stabilisation bodies — the RBA who regulates through interest rates, and the government regulating through policies addressing unemployment.


Deal of the century: Australia borrows $4b for 20 years at 2.865 per cent

The Australian Office of Financial Management has scored the deal of the century. It has managed to borrow $4.25 billion for 20 years at an interest rate of just 2.865 per cent, the lowest ever for long-term debt.

Although high by international standards, the rate is far lower than the previous long term rate of 3.945 per cent struck for $7 billion of 22 year bonds issued in October.

The long time horizons mean the rates are protected for two decades, whatever happens to financial markets.

The sale caps a string of extraordinarily good deals for the government's fund raiser, the AOFM. In February it issued a 4 year bond for 1.92 per cent and in March an 11 year bond for 2.59 per cent.

The rates are close to the Reserve Bank's inflation target of 2.5 per cent, meaning that in real terms the government is borrowing for close to nothing.

Tuesday's bond bond sale takes the Coalition's net borrowing since taking office to $94 billion. It removed the debt ceiling imposed by the previous government shortly after taking office after doing a deal with the Australian Greens.

The Office of Financial Management said it planned to issue no further bonds until June 2015.


Shallow Shorten endorses a dangerous doctrine

Under the spotlight, Bill Shorten doesn’t shine. He shrinks. Listening to the Opposition Leader talk about what he stands for is about as painful as having your legs waxed after a long winter hiatus.

When ABC radio host Jon Faine asked him: “What does Bill Shorten actually believe in?” the Labor leader said he believed that “everybody is somebody”.

Shorten sounded as if he were about to do an impersonation of Dean Martin, except that the 1950s crooner sang that everybody loves somebody sometime. Turns out Shorten coined the phrase from the Gilbert and Sullivan opera The Gondoliers. Even the full quote — “when everyone is somebody, then no one’s anybody” — offers no insight into what Shorten believes in.

Shorten was a union leader, then a Labor MP, then a shadow minister, then a government minister, now he is leader of the ALP. He has had plenty of time to distil a coherent set of values.

Sadly, Shorten’s interview with Faine echoed the same shallowness he expressed in an interview with Leigh Sales on the ABC’s 7.30 program last year. The transcript reads as if there are bits missing as Shorten tries to convince us he can fix the budget with “inclusive growth”. It’s the kind of sweet expression of nothingness, along with “social justice” and “community values”, favoured by the intellectually lazy, dense or tricky.

Alas, watching the interview again reveals the only gaps are those in Shorten’s thinking, his convictions and his authenticity. It’s the best example of the worst interview you are likely to hear from a mainstream political leader.

As a union leader, Shorten had some fire in his belly. As Opposition Leader, he is like a high school student at his first debate. You get the feeling he would happily argue one side as the other.

If ever there were a time for a Labor leader to display a commitment to economic credibility, it’s after the Rudd-Gillard-Rudd years. There’s no point speaking about growth — inclusive or otherwise — unless you believe in indispensable rules that engender growth. Take the basic issue of sovereign risk.

Sure, this sounds like a dreary ivory-tower obsession of business schools. Except that it’s not. Minimising sovereign risk goes to the heart of our ability as an economy to attract business, grow the economy, create more jobs and thereby boost tax revenue so the government can afford to do what governments should do.

The first rule of business is to identify the best places to do business. Whether you’re running an illegal racket, say people-smuggling, or an entirely legal one, say investing in infrastructure, you choose the countries that are good for business. Although the federal government has done a fine job shutting down the evil trade in people-smuggling, the Victorian government, sadly, has done its best to tell legal business investors they are not welcome, with real ramifications for the entire nation.

Yet last week, when asked during a doorstop before question time whether he supported the building of the East-West link road in Victoria, a piece of infrastructure Shorten previously has supported, he said: “No.”

Incredibly, the federal Labor leader who told Sales last year that growth depends on better infrastructure has tethered himself to the Daniel Andrews model of government in Victoria.

Labor’s new Victorian Premier has refused to honour a $6.8 billion contract with a consortium of local and international infrastructure investors to build the East West Link road. Andrews says the state won’t pay full compensation, with reports the government will legislate to avoid contractual obligations around compensation.

This is mickey mouse government. Either Andrews is a novice who has no understanding of basic principles that underpin economic growth or he doesn’t care that he has told the world that Victoria is not a safe place to invest.

Previous Labor governments supported the need for a better link between Melbourne’s eastern and western suburbs. Government officials went to Spain and France to promote the state as a safe place to invest billions in infrastructure. European construction giants Bouygues and Acciona, along with locals Lend Lease and Capella Capital — signed a contract to build the road. Andrews said a year before the state election that “I am not in the business of irresponsibly ripping up contracts and sending a mes­sage to the world that Victoria is not open for business”.

Yet Andrews has sent precisely that message — loud and clear. And it has been received. Online journal InfraAsia reported last week that Andrews’s decision to rip up a legally enforceable contract has “well and truly spooked” potential investors in Australian infrastructure: “The upshot of Labor’s decision to suspend East West Link … is that investors can no longer be assured that a signed contract is worth the paper it is written on.” International business journal Infrastructure Investor featured an article: “Can Australia be taken at its word?”

It suggested Australia is at serious risk of losing the mantle as “the world’s most attractive infrastructure destination”. Foreign investors have quickly understood that under the Andrews doctrine, no one is safe when they sign a contract with a government that is about to face an election.

If the contract won’t be completed before the election, the contract can be torn up by a new government without compensation. Has Andrews considered the full consequences of his ill-conceived doctrine? It may mean that long-term contracts, including a collective agreement signed by a Labor government with public servants, can be duly torn up when a Liberal government takes the reins.

In practice, the Andrews doctrine gives the opposition a right of veto over government action — and that veto right brings effective government to a halt.

Last week, Shorten endorsed the doctrine. The two Labor leaders couldn’t be further removed from the commonsense approach of Bob Hawke and Paul Keating to capital and workers.

Again, shadow treasurer Chris Bowen is more sensible than Andrews or Shorten, telling the National Press Club last year: “Even if we don’t like them, for reasons of sovereign risk Labor honours contracts in office signed by previous governments.”

The NSW election on Saturday will surely see Mike Baird, the impressive Liberal Premier, re-elected. With a real commitment to reform he is already a standout among state leaders. Here’s an idea that could distinguish Baird even further from the neophyte Victorian Premier. Baird could commit to amending the state Constitution to reflect section 51 (xxxi) of the federal Constitution, which effectively prevents the government from expropriating property except on just terms. In other words, you can’t rip up contracts without paying proper compensation.

It’s true the High Court of Australia has made a mash of the federal provision by interpreting it so widely that litigants are always heading to court seeking money for something or other. But that doesn’t mean a state should be allowed to tear up a contract without compensation. Smart drafting can ensure a sensible law.

Meanwhile, all Shorten can do is say a quiet prayer to his predecessor Kevin Rudd each night.  It was Rudd who introduced rules around the leadership that means Shorten is secure as leader. While he’s at it, he should pray for some sound principles.


Herbicide cancer claim cops a spray

The most common chemical used in Australia by farmers and gardeners to kill weeds “probably” causes cancer, according to the World Health Organisation.

The finding by the French-based International Agency for Research of Cancers that the ­active ingredient in Monsanto’s Roundup — glyphosate — is likely to be a carcinogen has shocked the agricultural sector.

The multi-weed killer remains approved for safe use in Australia, except around waterways, and throughout the world. The federal government’s Australian Pesticides and Veterinary Medicines Authority has not commented on this week’s WHO finding or decided whether it plans to review the safety of glyphosate, which makes up the bulk of Australia’s $1.5 billion annual herbicide sales.

Since its invention by chemical company Monsanto in 1974, glyphosate has become the most common herbicide sprayed by all farmers worldwide, usually ­applied after autumn rain and before crops like wheat, barley and canola are sown to kill weeds.

Monsanto yesterday reacted with “outrage”, accusing the WHO cancer agency of “agenda- driven bias”. It claimed the ruling was inconsistent with decades of safety reviews and more than 800 studies showing glyphosate is safe for human health.

South Australian grain grower Mark Jaensch has been using Roundup and other cheaper or generic brands of glyphosate on his 500ha of crops for the past 30 years.

He is about to order another 600 litres of the herbicide today as he waits for a good autumn break on his Callington farm to signal the start of new weed growth, spraying time and, finally, crop sowing.

Ironically, his glyphosate chemical use has increased since the 1990s when he started using new “direct drilling” methods, sowing crop seeds directly into old stubble beds — without the usual ploughing to control weeds — in a bid to preserve soil moisture and prevent erosion, topsoil loss and dust storms.

“I’m reliant on it; we can’t put our crops in without (glyphosate), it would be hard to replace it,” Mr Jaensch said.

“But to be honest, I’m not too worried about this new (WHO warning); unless something comes out more concrete than ‘probably causes cancer’, I think it’s just scaremongering — I mean it’s not even classed as a dangerous poison on the label and you can still buy it in a spray can from the supermarket.”

Mr Jaensch said the chief difference from the 30 years ago was that he was now a better and safer user of herbicides such as Roundup.

His big tractor with its air-conditioned cab has charcoal filters to prevent him breathing sprayed chemicals, laws are much stricter about under what weather and wind conditions herbicides can be used, and most farmers now must undertake a safe chemical course before being able to buy products.

IARC report co-author and glyphosate expert Kate Guyton said the new finding of “probable carcinogen” was based on existing evidence from multiple studies of the effects of glyphosate on male agricultural and forestry occupational workers.

She said the report stopped short of saying the chemical conclusively caused cancer, or how much exposure would trigger cancer, but did find that scientists know people exposed to glyphosate in their daily jobs experienced a higher incidence of non-Hodgkin lymphoma than those not exposed to the chemical.

Other studies have found that glyphosate leads to DNA and chromosomal damage in laboratory animals, which can lead to cancer.

“I don’t think home use is the issue; it’s [in] agricultural use this will have the biggest impact,” Dr Guyton said.  “For the moment, it’s just something for people to be conscious of.”

A recent study by the Australian Centre for Agricultural Health and Safety and the University of Sydney found the incidence of cancer is lower in farmers, than in the general population, despite having the highest level of exposure to pesticides.

Federal Agriculture minister Barnaby Joyce said today he would seek advice from the government’s Australian Pesticides and Veterinary Medicines Authority on whether the safety of glyphosate use needed to be reviewed.

But Mr Joyce did not appear overly worried by the new World Health Organisation “probable carcinogen” warning.  “A literature review of existing research suggests there is limited evidence that potentially links glyphosate with cancer,” Mr Joyce said.

“We propose to seek advice from the APVMA whether, on balance, the position has changed [but] this [IARC finding] would appear to be a re-identification of a small number of old research papers.”


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