Be careful what you wish for. Right now, among many things, young Australians are wishing for lower dwelling prices and bank regulators are wishing for banks to cut back on home mortgages to investors and increase their capital ratios.
We are also wishing for a lower dollar to help miners.
It is just starting to become apparent what those wishes might collectively actually mean to ordinary Australians. The collapse of the mining investment boom plus Joe Hockey’s motor closure set Australia on what seemed an inevitable path to a nasty high unemployment recession.
What has so far saved us from that unpleasant fate is massive government overseas borrowing to fund big deficits and a housing boom that is boosted by Asian investment. Both those anti-recession pillars now look like being simultaneously knocked out. We will leave the plans of new Treasurer Scott Morrison for another day to concentrate on the housing/banking pillars.
Suddenly we are finding that builders in our capital cities, but particularly Sydney and Melbourne, cannot get finance from banks for building projects. Having massive pre-sales is not a ticket to bank finance unless you can get a Chinese bank to help out. The difference between the number of approvals and what is actually built, particularly in Sydney, shows that many projects are either not going ahead or have been delayed.
I understand that many builders in desperation are going to non-bank lenders and paying much higher fees and interest charges to enable their projects to proceed. To remain solvent the builders have to charge more for their dwellings to cover the higher financing costs.
If we achieve much lower dwelling prices then many of those builders -- some are large -- and their sub-contractors will collapse, sending shockwaves through the economy at a time of planned lower government spending.
So now we turn to banks, whose shares represent four of the top five listed ASX companies. Banks are at the heart of our savings and business communities. This process puts them in a profits squeeze which they will try to mitigate with much lower costs and slugging depositors.
However, we just saw the Commonwealth Bank encounter a 50 per cent shortfall in its retail share offer subscriptions and yesterday the shares fell close to the issue price. As we can see, the squeeze on the banks is affecting more than just the building community and as bank shares fall banks will become more and more cautious in their lending because equity capital raisings become more expensive.
Pressing banks to cut lending and to have more liquid assets sets us on a dangerous path because if we actually do cause dwelling prices to fall substantially and developers go broke, then bank bad debts rise. As we have seen before those forces can soon spiral out of control and you have a full credit squeeze. I personally experienced my first credit squeeze in 1960-61 but I remember my parents suffering in the mid 1950’s -- don’t wish for them.
In Australia no one under 40 has really been through that sort of experience so they have no idea what can actually happen if you pull too many levers the wrong way at the same time.
And don’t forget the dollar lever. We all understand why we want a lower dollar but every time the Reserve bank calls for a lower currency the shorters of the currency have a ball while the Chinese who have invested in our dwellings suffer. It makes the next generation of Chinese investors nervous.
Clearly we do not want dwellings in Sydney and Melbourne to keep skyrocketing but we currently have a series of people working on bank ratios, bank lending, government deficits and so on. No one is thinking about the overall collective dangers of what we are doing in our separate silos.
And remember according to Infrastructure Australia we are going to need a lot more dwellings to cater for a rising population. (Australians will be squeezed by the housing supply shortage, May 25.)
What if we decided to achieve dwelling price falls by dramatically increasing the supply of dwellings instead of contracting the supply at a time of shortage -- particularly in Sydney?
But that would take a cultural shift from federal, state and local politicians and the multitude of different regulators.