M3 Money 16th July 2018

The lifeblood of a growing economy is a growing Money Supply (Currency, bank deposits, term deposits with the banks). Through the magic of money creation, when ANZ lends you a million dollars, it creates it out of thin air. The seller of the house takes the million dollars and puts in on deposit with NAB (he must put it somewhere). The only thing NAB can do with the surplus $1m is lend it to ANZ, who need to borrow the funds because they just lent the same amount out.

All this happens before you go to bed, having drunk a bottle of whiskey trying to figure how the hell you are going to pay back a $1m on that one-bedroom apartment.

If the banks keep shovelling out the money based on large multiples of your income and underestimating your living expenses (forget the school fees, Credit Card payments and annual holidays) it all works a treat. Along comes, a Royal Commission and all the bankers discover a new religion called “Responsible Lending”. https://www.macrobusiness.com.au/2018/04/westpacs-new-mortgage-expenses-crunch/

Deposit annual growth slowed from 6.6% in October last year to about 2.5% in May. The recent few months point to lower growth still – under 2%. The graph below shows these growth figures are synonymous with the slow down during the GFC and Paul Keating’s recession “we had to have” in 1990.

Despite the slowdown, the banks are still trying to lend more than what can be funded by bank deposits, so the banks have turned more to raising funds from offshore. RBA statistics show that offshore borrowing has accelerated from zero growth six months ago, to 8.6% annual growth currently. This, in turn, has placed pressure on the 90-day bank funding rate that has moved from 1.7% to above 2% currently. That is a full 2 rate rises above the RBA’s 1.5% target rate. We probably have all noticed that most of the mortgage lenders, except the 4 major banks, have raised their lending rates because of this increase in funding costs.

Adding to the sobering views on the property market, the Labor Party, if elected, will reform negative gearing and the capital tax discount after the next election, due over the next 10 months. Taxes on Property are a big cash cow across all level of Government – raising $52 Billion in 2017, up 56% in 5 years. I am not too sure what the State Governments could do to replace the revenue lost in a property downturn, apart from borrowing to spend and/or cutting back services.

With the market interest rates at two rates rises above the official cash rate, has the RBA lost control of using interest rates to control a downturn in the economy. With real wages growth sluggish and the wealth engine of rising property prices stalling, it may be prudent to consider paying off debt and deleveraging.