Fixed Income
Christopher Joye

In my column today I argue that May presents an intelligence test for RBA governor Phil Lowe; explain why the banks are already doing the heavy-lifting for it by slashing home loan rates on the back of the free-fall in both long-term risk-free rates and funding costs; further discuss the alternative proposal I revealed this week for APRA and the RBA to reduce the minimum home loan serviceability interest rate from 7.25% currently to 6.75%, which would boost borrowing capacity by 5%; suggest the RBA shift half its bloated resources to the massively understaffed APRA and Treasury; query the News-Fairfax dichotomy precipitated by the election; discuss RBA research showing that labour’s share of national income is at or even slightly above where it was in the early-1960s, even as the economy has become more capital intensive; posit that Shorten’s vision of an existential class conflict is rendered redundant by the fact that because workers save 9.5% of their wages in super, they own corporate Australia (the more profitable the top end of town, the more money the average teacher and tradie makes in their super fund); suggest that if Shorten promises to junk the $100 billion white elephant that is Australia’s French submarine disaster, I would vote for him; describe my own personal impressions of dealing with ScoMo; and conclude with some congratulations for both parties supporting the outstanding and globally unique policy innovation that will involve the government investing $2 billion to attract international capital to improve the availability of SME loans and reduce their cost (click on that link to read or AFR subs can read here). Excerpt enclosed:

We finally get to figure out whether Phil Lowe is half smart and worth the $1.02 million a year he pays himself (the Reserve Bank of Australia’s board is a rubber stamp).

It would be incredibly dumb to unnecessarily cut the cash rate—and possibly influence the election result—when this will get capitalised straight back into house prices and stop a desperately needed correction in Australia’s overvalued bricks and mortar.

To be clear, it is likely Lowe fails this intelligence test in May, at least judging from the probabilities in market prices.

When the chief risk officer of one of our biggest banks tells me he would like house prices to fall another 10 per cent, you get a sense of just how important it is for the RBA to allow this market to fully clear and unwind the enormous bubble Martin Place blew between 2012 and 2017.

Most bank CEOs I have spoken to oppose a rate cut even though it would immediately bolster their loan growth, reduce arrears, and improve their profitability notwithstanding the hit to net interest margins from the reduced earnings on transaction accounts that pay no interest.

As we first forecast, banks are already slashing mortgage rates. Fixed-rate home loan rates have been crushed by as much as 90 basis points while variable rates are also declining as long-term government bond yields fall and bank credit spreads, which represent their cost of borrowing above the risk-free rate, compress sharply.

I would personally benefit from a rate cut and the housing market turning. I have a big variable-rate mortgage and the intensification of the search for yield will increase the value of all the assets in my portfolios. But I am not here to argue for what is in my best interests.

Earlier in the week I revealed that APRA and the RBA were sensibly considering cutting the minimum interest rate banks apply when working out how much they will lend to a borrower from 7.25 per cent currently to 6.25 per cent, which would instantly increase borrowing capacity and purchasing power by about 5 per cent.

Bank CEOs like ANZ’s Shayne Elliott have backed this demonstrably sensible idea, although he was an exception in supporting a cash rate cut (NAB’s CEO said the RBA should save its ammo). While Elliott is probably Australia’s best bank CEO, he has an axe to grind: ANZ reported a large increase in the default rates on its home loan book and disclosed for the first time that 5 per cent of all its mortgages were under-water, or have negative equity (notably excluding loans that are not performing). If you included loans behind on repayments, this number would be bigger.

Read the full column here.

 



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