How’s your equity going?

The Reserve Bank Board meets tomorrow to discuss interest rates. The expectation amongs analysts is that they are likely to cut the official rate by as much as .5%, however there is a great deal of speculation that the major banks are only likely to reduce the home loan rate by .25% if at all.

The rationale being that the “costs of borrowing” for the major banks has increased due to the US credit crisis.  This is despite Prime Minister Kevin Rudd reassuring Australia (and the Banks themselves for that matter) that they had only minimal exposure to the US meltdown and were – in what’s becoming an almost comical catchcry – “fundamentally strong”. 

Meanwhile the housing market continues to falter with home prices floundering in most, if not all, Australian States. The situtation is particularly grim in Western and South Western Sydney where many mortgage-holders find themselves in a situation of negative equity; one where the value of the house has fallen below the original purchase price and original mortgage.

Add to this, the scarcity of available rental properties and increasing rents, and we have a pretty dire outlook for homeowners and those renting or seeking to rent.

So what do you think? Should the Banks be doing more to help home owners? Should the Government be doing more to help first-home buyers, or will this only exacerbate the problem?

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24 Responses

  1. Just a reminder everyone that you may need to click “HOME” occasionally to see new posts..

    🙂

  2. Since the big four are borrowing to borrow then they do not need our deposits and it would be interesting if people withdrawed all their money and placed it in the fringe banks.

    There will be no answer to the housing situation when the population chooses to live in ever growing cities and hug the coast like leeches on a hairy Greek leg…what is the plan when the cities hang out the no vacancy shingles?

    Just like everything these days, reactive instead of pro-active.

  3. “what is the plan when the cities hang out the no vacancy shingles?”

    Release more land? It didn’t seem to work for Western Sydney.

    Some people talk about housing (and the shortage) as being simply a supply and demand equation. Personally, I think that there are many more factors involved.

    But like you say, without proactive planning, things will no doubt end up being a shambles, and hence those responsible like Iemma and Costa pay the price.

  4. The reason banks are contemplating not passing on the full rate cut is that the cost of borrowing has risen substantially from what it was at the time of the last rate cut. Banks have to balance the interests of shareholders, depositors and mortgage holders, and need to maintain stability and strength. To pass on a full rate cut if that would be economically unwise would be irresponsible.

    We all have to tighten our belt in these difficult and uncertain times. We should not be asking if the banks and the Government should be doing more – it is that mentality of looking for handouts that has encouraged a mindset that there will always be someone around to bail us out. This is crunch time – we all have to adapt and learn how to wear it until the good times roll round again.

  5. Reb, here’s a funny story…scapette owns 10% of the family horse stud about thirty clicks from Sydney GPO just past Liverpool.

    It is ten acres and is fenced and railed and about twenty stables, feed shed,lunging yard and two large exercising paddocks…it is a nothing to do concern.

    My oldest sister who thinks she is a business person has for the last five years being trying to get it subdivided because she wants to personally develop it…quite ironic for a person who has never developed a relationship with a man!

    My brother who after three attempts finally got his architect degree who’s claim to fame is a string of video shops in the eighties and nineties will design the structures.

    The plan is to demolish the lot and build houses there…here’s the funny part…they plan all this and have costed to walk away with seven million.

    They have been offered just over six million to sell it as a horse breeding concern!

    The thing is that my Aunt Vera has life tenure there and if this happens they will buy her a flat to live out her days in a box…the Liverpool City Council keeps rejecting their development applications and will keep doing so until my aunt passes away.

    Funny that…

  6. “Banks have to balance the interests of shareholders, depositors and mortgage holders, and need to maintain stability and strength.”

    Hmmm, “stability and strength” = profit forecasts. Why can’t the Banks take a hit and downgrade their profit forecasts rather than give their customers a break?

    “It is that mentality of looking for handouts that has encouraged a mindset that there will always be someone around to bail us out.”

    Are you talking about the US Banking industry??

    🙂 🙂 🙂

  7. Ad astra,

    If you and the government are correct in your analysis, then why is the RBA contemplating an interest cut in the first instance???

    Would it not be prudent to keep the rate steady until such time that there is clarity in these cloudy times?

    With the different messages being sent out I don’t wonder why there is so much confusion on this issue.

  8. Scaper,

    Interesting story. Sounds like Aunt Vera is pretty sharp!

    Why wouldn’t your brother and sister just accept the six million and use some of that to set up Aunt Vera somewhere nice?

  9. For at least the past 2 years we’ve been talking about housing affordability and how this combined with easy credit has resulted in housing in Australian cities being the least affordable of western economies. All agreed (except for Howard and Costello) that there would eventually have to be a ‘levelling’. And now here it is.

    I’ve mentioned this previously, but here goes. For a capitalist society/economy to operate efficiently, there has to be something called competition. If there is little or no competition then shucks by jingo it is not longer capitalism.

    Result: as applied to housing, with chronic underinvestment in Public Housing (with the states equal to the previous Federal government as culprits) there was a whittling away of the competition re affordability. But sh**t what the heck, credit if not cheap is easily available and if you max out via one, then just apply for the other.

    There was a small bleating about housing affordability but mostly to do with people with ‘interests’ wanting their costs reduced eg…developers promised if their costs were reduced re taxes/off street parking/contributions to public open space that these savings would be passed on to the consumer. It didn’t happen. Surprise, surprise the greedy buggers kept the savings for themselves. Wow..who could imagine.

    Anyway..back to business. Competition at the low end of the market via Public Housing. Ethical lending standards. And with just those 2 items we might make it back to the 80’s.

  10. Stuntreb,

    Vera is about eighty now and a certain nephew is watching out for her.

    She has lived there since she was married and if it was not for my father buying the farm and converting it into a horse stud and appointing her stud mistress she would have been on the street.

    My mother died when I was fourteen and I went completely off the tracks…Vera is responsible for guiding me back and contributed to what I am today.

    Ever saw the show Dallas?

    That is my family…so caught up in their perceived self importance and greed it quite frankly makes me sick!

    I see this behaviour out there and it is a blight on the world.

  11. Scaper,

    Yes, I remember Dallas. Who could forget those shoulder pads?

  12. stuntreb,

    In my family’s case it is mighty big chips not padding.

  13. …and the real purpose of the RBA, is?

    Tick, tick, tick…’cmon JMc…

  14. TB

    Sorry mate I’ve been caught up elsewhere. I suspect the RBA may continue cutting rates in order to try and avoid recession as well as an attempt pressure banks to lower their rates. More an emergency measure than anything else. Even if inflation continues to increase every effort will probably be made to try and ease the squeeze by banks.

    Banks will do exactly what they always do, and that is resist.

    The truth is ‘as you know’ that the RBA in reality have little, if any, real control over what is happening.

    We’re in unchartered territory is probably a better answer but that takes the fun out of trying to guess what will happen next.

  15. I’ve never been able to swallow that our banks are fundamentally sound. The truth is our own levels of personal debt and the fallout from any major defaults hasn’t hit home yet, and from what I can gather many of the potential liabilities to toxic financial instruments may actually be hidden away off the balance sheets.

    Inter-bank lending has no doubt become extremely tight simply because nobody trusts anybody at this point in time.

  16. Oh, and one last word, “I’m speculating’ LOL but I think I may be close to the truth. F#*k I hate this level of uncertainty and lack of real information.

  17. John,

    I think that one of the banks will blink and will drop the rates by the full percentage, and then the other banks will have no choice but to follow.

  18. Joni

    You could be spot on Joni. My mistrust goes to the level of accuracy we’re getting from banks that’s why I’m finding it difficult. Predicting this crisis was the easy part.

    We also need to consider that it’s in the government and the banks best interests to try and avoid a major panic.

  19. Just to add to the confusion with a little hope and despair attached, Paul Sheehan writes: “Soros is back in the fray with another book, and another warning, and this one is closer to home. He thinks the global economy is caught in a commodities bubble, not just a housing bubble. Oh-oh. The commodities boom is supposed to be Australia’s get-out-of-jail card.

    The title of his new book is dull, The New Paradigm For Financial Markets [excellent book by the way], but the message is not. He says we should not trust financial markets to be self-correcting, or innately stable, or innately wise. “Prices in financial markets do not necessarily tend towards equilibrium. They do not just passively reflect the fundamental conditions of demand and supply.” He is rejecting the supposed truism that the market is always right.

    So it is not just America’s fault. In Australia average household debt is also up there with that of Britain and the US.

    What does Soros want us all to do about the mess? Surprise, surprise, he wants a lot of things, but notably a crack-down on financial derivatives speculation, an orderly deflating of the asset bubble and the rapid development of fuel alternatives to oil, which must keep rising in price. It is what many ordinary non-billionaires, the sort of people who write to the Herald letters page, have been urging for years.”

  20. John… oh shit! It’s not gonna be pretty.

  21. Actually Joni your ‘oh shit! it’s not gonna be pretty’ analysis sums the whole scenario up much better than I can at the moment 😉

    Wall Street has been hammered again and hard and you know what that means the ASX will surely follow.

  22. Joni,

    I think you’re right. The CBA might lead with the others to follow suit, although I suspect by only .25%

    Can believe the Aus dollar fell 7 cents overnight to review slightly by 2 cents!!!

    This is surely unprecedented.

    Also, are we yet to see the impact of credit card debt being defaulted??

    It seems the emphasis has so far been on the state of the housing market in the US and the credit crisis being associated with ‘housing’ related debt at this stage only..

  23. “He says we should not trust financial markets to be self-correcting, or innately stable, or innately wise. “Prices in financial markets do not necessarily tend towards equilibrium. They do not just passively reflect the fundamental conditions of demand and supply.” He is rejecting the supposed truism that the market is always right.
    19. John McPhilbin | October 6, 2008 at 9:57 pm”
    …………………………………………..

    Well he got that right, JMc!

    The governments will (should) now start to come in for a hammering as journalists start to lose money and research what goes on in the seedy world of finance…and lack of regulation and oversight by governments – OUR governments NOT the banks/business governments!

    I see Germany has become the second European country to step out of line with the EEC (Ireland beat them to it) and legislate to guarantee bank (read PEOPLE’s) funds – a major step – but then Germany has historical experience of economic upheaval after two world wars…

    Gawd! Doesn’t history repeat itself…and its not taught in (or at least not very well) in most schools…

    Maybe this will finally explain to people that “pure” socialism, communism , capitalism, fascism and any other ism doesn’t work.

    Society must be protected from all types of predators and that is the prime role of governments.

    Ask anyone what a politician’s job is and you will get all sorts of answers . In fact a politicians role is to create, review and pass laws for OUR society – simple (mmmmm…)

    On the same note – in a democracy it is understood that you have the freedom to say and do whatever you like UNLESS THERE IS A LAW against it…and haven’t the banks proved that!

    That’s why we have the situation we have right now – the robber barons are still with us and we are still considered to be the ignorant serfs -nothing is new…

    There are no absolutes…including an absolutely free market.

    As for the banks not passing on the interest rate – what a joke…with money flowing into cash at an unprecdented rate – local money is even cheaper for the banks than before! Just another con job – if the cash is not invested on the market where do people think it goes?

    FYI info, JMc, our little nestegg has been doing nicely in cash since March – however stormclouds may be on the horizon – The Minister is saying things like …”is nowhere safe, mattresses might be good? Should we bury it in the backyard?” History will not be repeated in this household…it’ll have to be the attic!

  24. Tb,

    Might be an idea to buy gold rather than put it under the mattress?

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