Real interest rates, another brick hits the property wall.

Real interest rates, another brick hits the property wall.

As each week goes by it becomes more and more obvious that our economy is slowing (weakening for that matter) and the obvious remedy will be interest rate reductions (and not before time). Just that when the Reserve Bank of Australia (RBA) addresses monetary policy next Tuesday, the banks are not certain to follow suit. With the National Australia Bank and ANZ already rubber stamping a rate reduction based on speculation of a 0.25 per cent reduction it appears (for the moment) that the CBA and Westpac will do the same. International credit markets have been hit hard, given that the banks own borrowings were significantly higher. This explained why the banks were charging customers an additional 50 to 60 basis points. Danny John wrote this week “Lower costs, but not for long as pressure hits.” At the same time, it was also costing the banks a great deal more to borrow from long –term credit markets – typically in chunks of three to five years.

Those rates have been much higher, with charges of between 100 basis points to 200 basis points over “cash” becoming the norm since January. It is the cost of borrowing tens of billions of dollars from these markets to meet the country’s lending demands that is most worrying for the banks, since this funding has been “locked in” to as far as 2013.

Also, previously cheap long-term loans taken out between 2003 and 2005 are coming up for replacement and refinancing will be at higher rates than last time.

About a quarter of the funding needs of the Big Four banks – Commonwealth, NAB, Westpac and ANZ – is sourced from long – term markets with another fifth to a quarter provided by the short – term ones. The rest is from customer deposits.

The trend in long – term markets is for bank borrowings to rise – from about 42 basis points above “cash” rates at present to 82 basis points by the end of next June. The relief provided by the short – term markets where the difference is just 10 basis points (0.1 per cent) is likely to be reversed once the Reserve cuts its own rates – by as much as 50 basis points (0.5 per cent) by Christmas.

Bank economists are forecasting the spread in rates to rise 58 basis points which, with the additional long – term price pressures, could lead to an overall rise to 140 basis points – 1.4 per cent – within the next 10 months.

Under that scenario, the banks will face the same dilemma that they faced late last year: raise rates no matter what the Reserve does, or take an even bigger hit to the bottom lines of their home – loan divisions. Given money market trends, betting in the industry is that home loans won’t come down as quickly as they went up, and may stay high for months.

Despite what the Federal Government says, the banks reducing interest rates is akin to seeing the government reducing income tax. The Rudd government insists that higher interest rates are an evil inherited from the previous Liberal Government which simply identifies its struggle with the basic fundamentals of the economy. To put this into greater perspective, our elected PM announced this week. “They are challenges which are substantial on the basis of the legacy of 12 years of neglect inherited from those opposite, they are substantial because of 10 interest rate rises we had in a row.”

Construction figures keep declining which, based on consumer confidence and the cost of money comes as no great surprise.

Mosman Council was in the spotlight with yet another disgraceful performance which was reported by Carmel Melouney from The Sunday Telegraph – Apathy at Mosman. “Councils are fighting State Government moves to strip them of development powers – but one council doesn’t want them.

Last week, Mosman Council provided the perfect example of why reform is needed when it abruptly cancelled a planning meeting because most of the councillors couldn’t be bothered attending.

Fifty residents were present and the agenda was full, with nine applications to consider, but only four of the 12 councillors turned up.

Residents with development applications before the council will now have to wait until the September meeting to see if a minimum of seven councillors have the time or inclination to show up and assess their proposals.” An absolute disgrace!

Mosman Council on the other hand is brilliant at processing parking fines but there again that has nothing to do with elected councillors.

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