here I come

My big picture position is always that if the Government sector is running a surplus then the private sector must run a deficit (ie increase borrowing). Sector Analysis is an accounting identity where the Government Sector plus the Private Sector plus the Balance of payments (external sector) must net to zero.

Australia is one of the most highly indebted nations in the world and the annual growth of debt is down to 3.9%. Both sides of Government are intent on running a surplus, in a faux sense of fiscal responsibility, and force the private sector to borrow to fund re-current expenditure. The only answer is stimulus – lower rates, First Home buyer grants and incentives, and loosening credit standards.

The Reserve Bank’s Statement of Monetary Party noted that growth in the Australian economy has slowed and inflation remains low. The RBA is aware that the market is pricing two rate cuts but that is still not enough to stop them from decreasing the GDP growth forecasts. Once the unemployment rate deteriorates and next week’s election is out of the way, expect a cut in interest rates. Shopping around for a competitive mortgage interest rate from one of the major banks indicates a rate of around 3.60%. A couple of interest rate cuts can see mortgage rates close to 3.00%. Rates like these may encourage investors back into the market if they can positively rather than negatively gear, given the abolition of future negative gearing tax deductions.

Recently it was widely reported that APRA was considering cutting the interest rate used to test debt serviceability by ½ percent. The same income means increased borrowing.

In the latest innovation to get first home buyers to borrow 95%, the Coalition Government has decided to act as guarantor of the loan exposure between 80% and 95%, circumventing the Mortgage Insurance Industry that already provides this service. In what amounts to a $10,000 subsidy, it may have been more financially conservative to let the industry perform an established credit vetting process and just provide a federal cash grant to the First Home buyers.

Will financially challenged borrowers now be able to borrow 95%, where they couldn’t before? Will the Government do any credit checking? Will the whole loan be counted toward the capital ratios of the bank, or only the unguaranteed portion? It looks like the risk in the banking system can only increase but at least the day has been saved – more borrowers borrowing more.