Monday Message Board

It’s time once again for the Monday Message Board. Please post your thoughts on any topic. Civilised discussion and no coarse language, please.

44 thoughts on “Monday Message Board

  1. Tony G, I don’t know why you’re going on about this, Prof Quiggin’s response is more than adequate. BUT, to humour you, why are you talking about interest rates? Aren’t they merely an inadequate measure of housing affordability? What ahs happened with housing affordability in the past 18 years? Isn’t that a more fundamental question?

    If so, have a look at this: http://www.rba.gov.au/Speeches/2008/sp_so_270308.html

  2. It looks like Robert Mugabe may finally be about to give up power in Zimbabwe – but nothing’s final yet and Mugabe has demonstrated a rare capacity for blood-minded stupidity and irrationality.

    It’s frightening to reflect that bad as he is, Mugabe would have been considered unremarkable back in the 60’s and 70’s when much of Africa experienced similar or worse misrule and repression.

    I suppose that reflects the fact that Africa is actually making progress however slow and however inadequate to the needs of its people.

  3. If the economic gurus won’t let me pin the increase risk premium on the ALP, then the next palatable target is the banks.

    Smiley said;
    “I’m still intrigued as to why you do not see a greater correlation between the Sub-Prime meltdown, the fact that a lot of banks are having to write-down billions of dollars of credit and the sudden increase in the risk premium.”

    The Australian banks only source about 26% of their funding from offshore debt markets and not all of those debt markets are markedly affected by the U.S. sub prime crisis.

    http://www.rba.gov.au/PublicationsAndResearch/StatementsOnMonetaryPolicy/Boxes/2007/2007_11_d_box.pdf

    The Australian banks source 3/4s of their funding locally, at very favourable rates, The sub prime crisis should only have a marginal effect on them.

    The banks have failed to raise the rates they pay on deposits at the same rate the RBA has moved, yet they have put 30+ basis points on top of all their loans plus passed on the full RBA cash rate moves. Forgive me if I am not sympathetic to the banks crying poor over sub prime events in the US.

    wilful
    That is an interesting article I think this section is relevant;

    “factor that has been mentioned is the existence of a range of government charges, including developer levies or infrastructure charges. More broadly, concerns have also been expressed that zoning policies and building approvals processes have hampered in-fill development closer to the city centres.”
    Should be zoning policies and building approvals processes have hampered development everywhere.

    When the manufacturers of housing are taxed at 65% it is going to impact on supply and prices.

    http://www.propertyoz.com.au/pdf/Tax_Karantonis.pdf

    Table six in this study by Professor Angelo Karantonis clearly indicates that manufacturing of housing is taxed at a much higher rate than other manufacturing.- averaging 65% (the last row).

    We have been over this issue before.
    https://johnquiggin.com/index.php/archives/2008/02/02/the-great-australian-dream/#comment-205735

    Dwelling commencements in NSW are at record lows
    and if the supply side issues are not addressed soon, some people will be living under trees.

  4. But tony, they are State issues, and Labor hasn’t been uniformly in power anywhere at that time except most recently. So your ideological point is entirely lost.

    And besides, most of the objections to infill come from the safe Liberal seats.

  5. Wilful,

    I am not aligned to Liberal or Labour, I hate them both. The people are divided by party lines and conquered by the elite political ruling class.

    Yes, housing affordability is primarily a state issue.The states have increased total housing taxes from 11% of State revenues to 30% over the last 10 years. And that does not include GST on new houses.

  6. The ideological point making belongs with all those whose response to Tony G’s point was a knee-jerk denial of a problem, or an attempt at moral equivalence, or something, rather than objective analysis of the question posed.

    Just because something makes the ALP look like dickheads does not mean that it is wrong.

  7. Housing affordability is a state and federal issue.

    The national and international credit bubble, the long economic expansion, the first home buyers subsidies, the unfettered population growth due to importation of hundreds of thousands of skilled workers to plug the gaps left by underfunded education system; the lack of oversight of credit providers and irresponsible lending have all combined to vastly overprice houses in Australia.

  8. This spread thing is potentially interesting.

    Spreads are determined by:

    1. The policy of the big market makers. Presumably, there was very little difference between the spreads of the individual big banks.

    2. The propensity of savers to deposit in these market-making banks. If savers in fact invested elsewhere during ALP administrations, then the banks would have to offer more at that time to encourage local depositors. That answer could be determined by calculating the relationship between official rates and rates on term deposits offered by the big banks.

    If there is no appreciable real difference in the banks’ cost of borrowing during Coalition and ALP administrations, then it is arguable that banks use ALP administrations as an opportunity to feather their own nests and/or use interest rates to make life uncomfortable for ALP administrations. In other words the spread has a political rather than a financial motive.

  9. Katz, no – deposit rates are determined by “The propensity of savers to deposit in these market-making banks” (well partially most of the money actually comes from wholesale investors).

    The spread is the difference between the official interest rate (the rate which the Commonwealth is prepared to pay on funds borrowed) and the lending rate.

    The spread can move independently of either deposit or loan rates.

  10. Katz, no – deposit rates are determined by “The propensity of savers to deposit in these market-making banksâ€? (well partially most of the money actually comes from wholesale investors).

    I read this as you acknowledging that I am correct. Those wholesalers you mention also compete for savers’ money. They are competing in the same capital market as the banks are for term depositors.

    The spread is the difference between the official interest rate (the rate which the Commonwealth is prepared to pay on funds borrowed) and the lending rate.

    Commonwealth? We’re talking about private loans here.

    The spread can move independently of either deposit or loan rates.

    How is the above different from this:

    In other words the spread has a political rather than a financial motive.

  11. I would not conclude anything from the two financial rate of return series given by Tony G. except that the difference is not a constant. I’d be very surprised if the difference would be a constant.

  12. Katz said

    “calculating the relationship between official rates and rates on term deposits”

    I am not sure what that data does to my assertions.

    I used 60 day $10,000 term deposits as published by the RBA for a benchmark of deposits, found here;

    http://www.rba.gov.au/Statistics/Bulletin/F04hist.xls

    Cash Rate to 60 day $10K term deposit, last column is the spread.
    i.e
    Aug 90 CR 14 TD 13.05 Spread 0.95

    CR 60 Day TD Spread

    Aug-90 14 13.05 0.95
    Oct-90 13 11.9 1.1
    Dec-90 12 10.75 1.25
    Apr-91 11.5 10.4 1.1
    May-91 10.5 9.75 0.75
    Sep-91 9.5 8.8 0.7
    Nov-91 8.5 7.75 0.75
    Jan-92 7.5 6.95 0.55
    May-92 6.5 6.4 0.1
    Jul-92 5.75 5.45 0.3
    Mar-93 5.25 5.15 0.1
    Jul-93 4.75 5 -0.25
    Aug-94 5.5 5.15 0.35
    Sep-94 5.5 5.3 0.2
    Oct-94 6.5 5.55 0.95
    Nov-94 6.5 5.75 0.75
    Dec-94 7.5 6.05 1.45
    Jun-96 7.5 5.9 1.6
    Aug-96 7 5.45 1.55
    Nov-96 6.5 5.3 1.2
    Dec-96 6 5.05 0.95
    Mar-97 6 4.9 1.1
    Apr-97 6 4.8 1.2
    May-97 5.5 4.5 1
    Jul-97 5 4.25 0.75
    Sep-97 5 3.7 1.3
    Dec-98 4.75 3.5 1.25
    Nov-99 5 3.45 1.55
    Feb-00 5.5 3.85 1.65
    Apr-00 5.75 4.15 1.6
    May-00 6 4.35 1.65
    Aug-00 6.25 4.4 1.85
    Feb-01 5.75 3.95 1.8
    Mar-01 5.5 4.9 0.6
    Apr-01 5 4.8 0.2
    Sep-01 4.75 2.8 1.95
    Oct-01 4.5 2.7 1.8
    Dec-01 4.25 2.9 1.35
    Apr-02 4.5 2.9 1.6
    Jun-02 4.75 3.15 1.6
    Nov-03 5 3.65 1.35
    Dec-03 5.25 3.75 1.5
    Mar-05 5.5 3.45 2.05
    May-06 5.75 4.1 1.65
    Aug-06 6 4 2
    Nov-06 6.25 4.25 2
    Aug-07 6.5 4.75 1.75
    Nov-07 6.75 5 1.75
    Feb-08 7 5.6 1.4

    Further to that, the spread between standard variable rate loans and 60 day $10k term deposits.

    Aug-90 3.45
    Oct-90 4.1
    Dec-90 4.25
    Apr-91 4.1
    May-91 4.25
    Sep-91 4.2
    Nov-91 4.75
    Jan-92 5.05
    May-92 4.6
    Jul-92 5.05
    Mar-93 4.85
    Jul-93 4.5
    Aug-94 3.6
    Sep-94 4.2
    Oct-94 3.95
    Nov-94 3.8
    Dec-94 4.45
    Jun-96 3.85
    Aug-96 3.8
    Nov-96 3.45
    Dec-96 3.2
    Mar-97 2.65
    Apr-97 2.4
    May-97 2.7
    Jul-97 2.95
    Sep-97 3
    Dec-98 3
    Nov-99 3.35
    Feb-00 3.45
    Apr-00 3.4
    May-00 3.45
    Aug-00 3.65
    Feb-01 3.6
    Mar-01 2.4
    Apr-01 2
    Sep-01 3.77
    Oct-01 3.62
    Dec-01 3.17
    Apr-02 3.42
    Jun-02 3.42
    Nov-03 3.17
    Dec-03 3.32
    Mar-05 3.87
    May-06 3.47
    Aug-06 3.82
    Nov-06 3.82
    Aug-07 3.57
    Nov-07 3.57
    Feb-08 3.39

  13. Nice work Tony G.

    It looks to me that there is no readily discernible pattern in the Coalition v ALP years.

    In other words, the banks were reacting to commercial exigencies.

    Your last table suggests that the banks sailed closer to the wind, allowing less margin for error as time went by.

    In other words, the banks ran leaner and meaner over time.

  14. The Australian banks source 3/4s of their funding locally, at very favourable rates, The sub prime crisis should only have a marginal effect on them.

    So why has there been, over the last six months, constant news reports (I listen and watch ABC mostly) that the banks are increasing their margins because it is becoming more difficult to source funding. Both the RBA and the news reports cannot be right.
    The term that I’ve heard being used recently is Credit Crunch

  15. So I guess what I’m trying to get out of you Tony G is that you don’t believe that there is a credit crunch going on at the moment and the banks are lying. They should be saying that they’re increasing their lending margins because Labor is in power.

  16. “Commonwealth? We’re talking about private loans here.

    The spread can move independently of either deposit or loan rates.

    How is the above different from this:

    In other words the spread has a political rather than a financial motive.”

    The Commonwealth Treasury quotes rates at which it will sell and re-buy its own bonds. This is he official cash rate.

    The spread, yet again, is the difference between the official cash rate and the rate at which private banks lend to home buyers.

    The RBA can raise or lower the official rate for a whole variety of reasons – including for example to try to prevent a rapid increase or decrease in the value of the dollar.

    If, for example, the RBA cuts rates and banks delay passing on the cut to borrowers then in the short term the spread is increasing at the same time interest rates are declining.

    Yet again, there is only a vague connection between the official interest rate and the the spread. For the past couple of years, until early this year, the spread remained roughly constant while official rates were repeatedly raised.

    And wholesale lenders primarily use funds raised from super funds or merchant banks such as Macquarie not, as you appear to think, private individuals.

    And don’t even get me started on the Yen carry trade.

  17. looking at the deposit data in tandem with the lending data, I do not think it changes my unpopular view (on this blog) that rates charged to borrowers were higher under the ALP (the numbers are prima facie evidence).

    Over the ALP era 1990-96 depositors were paid more as the margin below the cash rate was less.

    Borrowers were charged more as the margin above the cash rate was bigger.

    The over all spread between what depositors received for their money and what borrowers paid was slightly bigger during the ALP era, compared to the Howard era.

    From 1996 -07 depositors were paid less, as the margin below the cash rate was bigger.

    Borrowers were charged less as the margin above the cash rate was smaller.

    The over all spread between what depositors received for their money and what borrowers paid was slightly smaller during the Howard era, compared to the ALP era.

    As stated above, we are in a new era now and time will be the judge of Rudd.

    Smiley Said;

    “you don’t believe that there is a credit crunch going on at the moment and the banks are lying”

    IMHO (met with general discredit on this blog) there is something happening in the credit markets, but I do not believe a lot of the sensationalism portrayed about the credit markets in the media.(sensationalism is how they sell newspapers). Also leverage players in the financial markets make a lot of money when markets move, they have a financial interest in sensationalising things.

    In relation to the risk of Australian home borrowers defaulting. The home mortgage default risk in percentage terms has changed little, yet they are being charged more (so if “the banks aren’t lying” someone is. )

  18. Tony, let’s put it this way – the banks are seeking to increase their profitability to convince lenders and shareholders of the strength of their balance sheets.

    It’s no coincidence that the major bank with the largest overseas assets (NAB with its English and Irish banks) is leading the way.

    If there is a systemic tendency to higher interest rates under Labor (and I’d still like to see a larger data set) it may simply mean that bankers have greater confidence in Coalition governments and therefore have a systematic perceptual bias.

    Certainly, the Coalition has been very, very kind to the banks on a range of regulatory and competition issues.

    Maybe Kiwi Bank needs to open some branches here.

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