A big hitter in Australian economic
circles, David Murray, former chief executive of the Commonwealth Bank and
leader of a recent Australian government-sponsored financial system enquiry,
has come out strongly against
the situation that allows for the tendency of house prices
in Australia to continue to rise.
As regular readers of the OmiCronFX
commentary will note, the recent surprise decision of the Reserve
Bank of Australia (RBA), to refrain from a much expected cut in core interest
rates, was also because of the fear that even lower rates could further
increase the likelihood of a bubble in the residential property market Down
Under.
According to Mr. Murray, the main
criterion for retention of the triple-A rating on Australian government debt,
so prized because of the small number of sovereign nations in that particular
club, is that total government debt should not exceed 30% of GDP.
Housing
seen as key
In Australia, many investors are
prepared to borrow to purchase houses to rent them out even though they know
that the rental income will not cover the interest being paid. They are
prepared to do this for two reasons – (1) they expect the capital appreciation
of the properties to supply their profits, and (2) because favourable tax
treatment of the income and expenditure on the investments allows them to
offset some, if not all, of the shortfall. Borrowing for asset purchase under
these conditions is known as “negative gearing”. However, the resulting demand
for housing continues to drive up prices.
The tax treatment, in particular, has
the effect of raising the borrowing of Australian states, and the nation as a
whole, which, according to Mr. Murray, is pushing government and government
guaranteed borrowings towards levels that could impact the credit rating of the
country. He is calling for the tax treatment to be changed and for the
government agency concerned, the Australian Prudential Regulation Authority
(APRA), to introduce measures that will restrict borrowings in the buy-to-let
segment of the market.
If these measures were to be implemented
effectively the RBA could once again consider lowering core interest rates, and
thereby allow the Aussie dollar to fall to a more sustainable level (instead of
apparently depending on the actions of the US Federal Reserve to weaken the
Aussie). If Mr. Murray is correct, and the triple-A rating is lost, it will
mean that the international rating agencies will have done this job for them because in that eventuality, as far as the Aussie dollar is concerned, it would be a
case of “look out below”.
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