News   Pumps $1bn into bonds   Author: David Uren Date: April 22nd, 2208   THE Reserve Bank has stepped into the breach following the global credit crisis, with a $1.1 billion bid to revive the market for mortgage-backed bonds. The bank took $780 million in mortgage bonds onto its books yesterday, following a $320 million investment on Friday. The absence of investor interest in mortgage-backed bonds has decimated the business of non-bank mortgage lenders. Their share of the market has dropped from more than 30 per cent to less than 10 per cent since the sub-prime mortgage crisis hit last August. Senior economist with finance broker ICAP, Matthew Johnson, said yesterday: "There is speculation that the Reserve Bank's action is part of a coordinated decision by global central banks where everyone is going to pitch in and try to help securities markets.'' Although the level of orchestration may be exaggerated, the Bank of England yesterday unveiled a pound £50 billion ($105 billion) fund to support mortgage-backed securities. The US Federal Reserve has also greatly increased its support for securities markets following its bail-out of broker Bear Stearns. Central banks are acting to reignite mortgage bond markets as hopes rise that the worst of the sub-prime crisis has passed. This generated a sharp recovery in the sharemarket yesterday, with the All Ordinaries index recovering 160 points to close at 5664 points. The Reserve Bank believes it is unfair to lump Australian mortgage securities in with US sub-prime equivalents, as default rates in Australia are among the lowest in the world. However, many investors trying to offload Australian mortgage securities have been forced to offer a yield of two percentage points more than the official cash rate in order to find an investor. The Reserve Bank yesterday completed "repurchase'' deals at less than 0.25 per cent above the cash rate, making it profitable for banks to buy mortgage-backed bonds and then sell them to the Reserve Bank, with an agreement to buy them back. The Reserve Bank decided in October it would accept mortgage-backed bonds as security in its money market operations, but found little interest from the banks, because it was only interested in entering repurchase arrangements for a few days. The bank decided on Friday it would accept mortgage-backed bonds for up to a year. At present, the bank has only about $2.1 billion in mortgage-backed bonds on its books, but this could quickly grow if it keeps entering repurchase agreements for them over longer terms. Although the Reserve Bank has been happy to see the growth in home borrowing slow down as a result of both rising interest rates and reduced access to credit, it believes a functioning mortgage bond market is important for longer-term financial stability.       Home loan finance plummets as interest rates bite Author: Nassim Khadem, Economics Correspondent, Canberra Date: 15/04/2008 Words: 573 Source: AGE           Publication: The Age Section: News Page: 5 AUSTRALIANS frightened by higher interest rates avoided taking on home loans last month, with housing finance falling to its lowest level in four years. Figures from the Bureau of Statistics also show that the Big Four banks are the winners, with the sharp decline in home loans mainly happening in lending by non-bank mortgage providers. Banks financed almost 90% of all home loans by value in February, which is the highest rate in 13 years. The sharp fall in home loans follows a spate of economic data showing that interest rates are biting, and strengthens analysts' views that rates will stay on hold despite higher inflation numbers expected next week. The number of loans for owner-occupied housing fell 5.9% in February, to 63,817 - the biggest slide since January 2004 and the first dip since October. The value of total housing finance fell 7.1% in February to $21.5 billion, its lowest level since March last year. Economists say consecutive rate rises in January and February have "spooked" first home buyers. The average housing loan fell by $3900 to $230,000, down 6% from the highs reached in June last year. "People are feeling the pinch of the higher cost of living," said CommSec equities economist Savanth Sebastian. "The uncertainty about interest rates is unlikely to see the housing market recover until the end of the year." Mr Sebastian said investor housing was also weak, and predicted it would take time for investors to return to the market. Lending to investors fell by $685 million (9.5%) to $6.6 billion. The number of loans for the construction of dwellings rose just 0.6% in February, loans to purchase newly erected dwellings rose 0.3%, and loans to buy established dwellings fell by 6.6% - the largest fall in more than seven years. Housing Industry Association policy director Chris Lamont said the lack of housing investment would inflict further pain on struggling renters, and worsen affordability. The housing data indicates that while a smaller number of home loans are being provided, the main losers are in the non-banking sector, which typically have had to charge higher rates than the Big Four banks. All lenders have faced higher borrowing costs as a result of recent financial turmoil, causing them to increase rates above and beyond those set by the Reserve Bank. But the banks, because of their larger size and superior credit rating, are able to borrow from the markets at lower rates than the non-bank lenders. Aussie Home Loans founder and managing director John Symond said because his business relied more heavily on mortgage broking than home loan lending, he wasn't hit as hard as other non-bank lenders. "The credit markets have shut down. They (non-bank lenders) haven't got any money to compete with the big banks," he said. "The situation will get worse before it gets better . . . the Reserve Bank may well start dropping interest rates because the economy will have slowed. Consumer confidence at the moment is at its worst level in decades." A spokesman for Wizard home loans said despite the company not having access to low-cost retail deposits, it provided lower rates than the banks to stay competitive. "Wizard's funding model is completely different to traditional non-bank lenders such as RAMS," he said. "Wizard loans are funded on balance sheet, which leaves us significantly less exposed than those lenders who rely on securitisation."     Lower interest rates will do the trick - eventually Author: Ross Gittins. Ross Gittins is the Herald's Economics Editor. Date: 15/03/2008 Words: 1124 Source: SMH           Publication: Sydney Morning Herald Section: Business Page: 47 Whenever inflation rears its ugly head and the Reserve Bank jacks up interest rates, it's surprising how many people start applying their minds to the mysteries of economics. They want to be convinced that higher interest rates really will get inflation down. I guess it's because rising interest rates are unpleasant that so many people conclude they won't. One common objection you hear is that, because raising interest rates adds to business costs and they pass those costs on in higher prices, this will actually make inflation worse rather than better. But this is argument is just another example of the "cost-plus" theory of prices, which is fallacious. It assumes businesses always have the ability to raise their prices in response to higher costs. It's true businesses would always like to pass on their higher costs - and so stop their profit margins being squeezed - but whether they're able to is a different matter. That depends on the relative strengths of demand and supply at the time. Of course, if the Reserve is worried enough about inflation to be raising interest rates, that suggests demand will be pretty strong relative to supply - as indeed it is at the moment. So, in a speech he gave this week, the Reserve Bank governor, Glenn Stevens, admitted that, yes, it may be possible for businesses to raise their prices without losing sales. But only initially. "Since higher interest rates do eventually slow demand, it will get more difficult to raise prices in due course," he said. That's the point to grasp: higher interest rates reduce inflation by weakening demand, thereby making it hard for firms to raise their prices without losing sales. Demand may even weaken to the point where some firms are offering discounts on their prices. How exactly do higher interest rates weaken demand? Short answer: a lot more ways than you'd think. Economists call them "channels". The first channel is the "cash flow effect". Higher interest rates leave people with mortgages with less money to spend on other things. But here's a point that's been lost in the discussions of late: it's not just people with mortgages who are hit by higher interest rates, it's also businesses. Almost every business has borrowings. So businesses, too, will be left with less cash to spend on other things. Another channel goes by the fearsome name of the "inter-temporal substitution effect". It simply means that higher interest rates make it more expensive to spend now rather than later. That's because you either have to borrow to cover the spending or, if you're drawing on your savings, you're forgoing more interest income. So higher rates encourage both households and businesses to delay their spending. (Note that this is true of all households, not just those with mortgages.) A third channel (there are more) is the exchange rate. Higher interest rates relative to those on offer in other countries tend to attract capital inflow and so put upward pressure on our dollar. This worsens the international price competitiveness of our export industries and also makes it harder for our industries to compete against imports in the domestic market. Either way, it reduces net external demand's contribution to aggregate demand. So be under no illusion: raising interest rates does dampen demand (which is just the economists' word for spending) and thereby does slow the rate of inflation. Another argument you sometimes hear is that raising interest rates doesn't reduce demand because, though it may reduce the disposable income of borrowers, it increases the disposable income of savers by the same amount. The good thing about this argument is its recognition that banks merely lend other people's money and that when the Reserve raises the official interest rate this increases banks' borrowing costs as well as permitting them to raise the interest rate they charge their borrowers. In principle, their profits should be little affected. Some people add that this means higher interest rates add to the costs of the poor while adding to the income of the rich. But this implies it's the poor who borrow and the rich who lend. If you think that, you don't know much about life - or banks. The poor can't afford to borrow, but the rich can. And banks are reluctant to lend to poor people but keen to lend to the rich. Why do the rich need to borrow? To get richer. (There are, of course, a lot of people in the middle who are neither poor nor rich.) But what's wrong with the argument that raising interest rates merely shifts income from borrowers to lenders? Well, if we lived in a closed economy - one that didn't trade with the rest of the world - it would be right. All the borrowers and lenders would be locals. We, however, live in an open economy - one that borrows heavily from foreigners every year. We borrow to allow our imports to exceed our exports and to fund the current account deficit on the balance of payments. So, because so much of our borrowing - or, to be more precise, our banks'borrowing - is done from foreigners, there's no doubt that a rate rise hits our borrowers harder than it benefits Australian savers. Yet another argument we're hearing is that higher interest rates won't reduce inflation because the worsening we've experienced is caused by just a few big price rises, which have been caused by factors beyond the Reserve Bank's control. There's the high world price of oil, for openers, the effect of the drought (or, globally, the increasing use of grains for fuel rather than consumption) on food prices and even the rise in rents, which is occurring because the demand for rental accommodation is growing faster than its supply. This argument is simply wrong. The rise in prices has been quite widespread. Of the 11 price groups in the consumer price index, seven have recorded average annual increases in excess of 3 per cent over the past two years. As for the notion that there's nothing the Reserve can do about the rise in world oil prices, the truth is that its effect has been moderated by the rise in our dollar, caused at least partly by the Reserve's higher interest rates. But the best reason for believing higher interest rates will eventually lower the inflation rate is experience. It's always worked in the past. Anyone who lived through the recession of the early 1990s should be in no doubt about that.     Rates Grip Author: Leon Gettler Date: 08/03/2008 Words: 769 Source: AGE           Publication: The Age Section: Business Page: 1 Official rate rises are only the start as the big banks show they're not afraid to go a few points higher, writes Leon Gettler. ANZ boss Mike Smith has flagged cutbacks to loans and a rate increase next week above the Reserve Bank's quarter-percentage-point increase. And the banks, he said, had good reason to push rates up and ration credit to home and business borrowers, something he acknowledged would affect the broader economy. "The fact is, turmoil in global credit markets means the cost of funds has gone up over and above the Reserve Bank's increase," Mr Smith said. "I don't recall too many people saying that bakers shouldn't put up the price of bread when the cost of flour rises. So the debate around this issue is quite strange, as it would be to most people who want to run a sustainable business. "Certainly, I believe the increase we pass on will have to strike a balance between the additional increase in funding costs and what we pass on to customers and what we absorb ourselves." Mr Smith declined to elaborate when asked later how much of an increase ANZ would need to cover its costs. "When we move on rates, we will let you know how we calculated that," he said. His comments come after National Australia Bank created a political problem for the sector by lifting its mortgage rate by 0.29 of a percentage point, four basis points above the RBA's 0.25-percentage-point increase. Analysts expect all the banks will follow suit to claw back their costs. But NAB's announcement has left ANZ and the other banks confronting a difficult question: how to sell an increase higher than the official rate rise to the RBA, Treasury and Treasurer Wayne Swan. Bank insiders say increases higher than NAB's rise would now be harder to justify. Still, that did not stop Westpac yesterday coming out with an increase of 0.3 of a percentage point, taking its standard variable rate to 9.27% from Tuesday. Like NAB, Westpac says the additional charge does not recover the full cost. It says it will make further adjustments if conditions do not improve. And earlier this week, St George chief executive Paul Fegan dropped a hint that his bank was considering a 40-point rise. Adelaide Bank was the first to go above the official rate rise, increasing the cost of funds it supplies to its 35 mortgage brokers and originators by 40 basis points. Mr Smith said ANZ was paying more than 50 basis points extra for wholesale funding compared with a year ago. Speaking to the Australian British Chamber of Commerce, he said the cost of funds was well over the RBA increase, credit costs were rising - and getting tighter - and business confidence was on the slide. "One of the many things I believe is missing from the debate is that if we can't properly reprice lending, there is a real risk banks will ultimately be limited in the amount we are able to lend customers to buy houses or to expand their businesses." He said signs of that were already appearing, with Macquarie Group's decision earlier this week to become the first prime lender to scale back its mortgage business. "These are factors that are bound to affect the level of activity in the economy." Mr Smith acknowledged later that the repricing of lending, by slapping down a higher interest rate and cutting back on credit, basically amounted to the same thing. But the existing model needed to change. "You can't on one side be spending more to raise the money and not earn it on the other side of the balance sheet. It's just not sustainable business," he said. His comments follow observations from RBA assistant governor Guy Debelle this week that unstable credit markets could force banks to wind back the amount of credit they offered. Mr Smith said the central bank's use of 12 rate rises as an instrument to cool down the economy had placed a considerable burden on Australian households trying to manage already stretched budgets. "You can't keep having interest rate rises and expect things to remain constant. There will inevitably be a deterioration in areas." As a result, he said, questions needed to be asked "whether other instruments of economic policy could also play a role in containing and reversing inflationary pressures". "The banking system itself, because of the cost of funding now, will provide a sufficient brake to the economy if you just allow those rates to flow through," he said. "I don't think you need direct intervention right now."     Home owners renew interest in renovation Author: Jacob Saulwick Date: 28/02/2008 Words: 301 Source: SMH           Publication: Sydney Morning Herald Section: News and Features Page: 3   SYDNEY'S home owners have shrugged off rising interest rates and started renovating again, with the value of renovations and additions increasing for the first time in 18 months. But the jump in renovations came amid a slump in overall building late last year, sparking speculation that interest rate rises were starting to bite into economic activity. The jump in renovations - a 7.9 per cent increase in the three months to December, according to Bureau of Statistics figures released yesterday - breaks a fall in NSW renovations since mid-2006. "This is the first sign we are starting to see some improvement here - it's a very positive sign," said Jason Anderson, a senior manager at industry researchers BIS Shrapnel. Mr Anderson said home-buyers tended to renovate soon after they purchased a property, which meant most of the work would have been done in buoyant inner-city property markets. But the national chief executive officer of Masters Builders Australia, Wilhelm Harnisch, said the high cost of property in inner-Sydney would prompt more people to start renovations, which would be cheaper than moving house and paying stamp duty. "Alterations and additions will be a growing feature of the Sydney housing market," Mr Harnisch said. The value of all national construction work fell by 1 per cent to $28.9 billion in the three months to December. The chief markets economist at NAB Capital, Robert Henderson, said the slowdown could be good news given that the Reserve Bank was trying to rein in the economy. "There is evidence here of a slowing in the rate of growth of non-residential building, not an unwelcome sign given that the industry is operating at such a strong level and capacity constraints have dogged construction work over the past few years," Mr Henderson said.