Australia is an over-borrowed construction society

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Permanent Building Societies were strongly focused, member-owned financial corporations specializing in residential real estate.

They were all the rage in the 1980s, until they weren’t anymore when interest rates rose.

Platoon leader Pyramid Building Society borrowed too much for expensive properties, and when the music stopped in 1989, he couldn’t find a chair and went bankrupt.

Then the species died out.

Oh dear. This is what Australia is today: a permanent building society that has borrowed too much for expensive properties, now faces higher interest rates and, as it happens, is about to to have an AGM to elect directors.

Except that in 1989 the Reserve Bank raised the cash rate to 18%, from a 1988 starting point of 11-12%, whereas in 2022 the starting point is a very different 0 .1% and the Bank of Philip Lowe is much less enthusiastic than the Bank of Bob Johnston or Bernie Fraser.

In fact, Dr. Lowe’s speech at the Press Club last Tuesday was striking in its lack of gung-ho.

In my brief spot on 7:30 a.m. that night, I called it “an extended shrug” because he was basically saying he didn’t know what was going to happen or what they were going to do about it.

Which is understandable because being the CEO of a building society is uncharted territory for him, and the Australian Building Society’s track record today is much more skewed than it was under the tenure of his predecessors. .

The debt-to-income ratio triples

In December 1989, when the overnight rate reached 18%, loans and advances totaled $151.4 billion, or about 50% of GDP.

Today, loans and advances total $2,966.1 billion, or 150% of GDP.

This represents a compound annual growth of 9.74%.

During the same period, the national median house price increased at a compound annual growth rate of 6.4% per year.

In other words, debt has grown far more than necessary to keep pace with house prices.

And it also grew much faster than revenue.

From 1989 to 2021, as the cash rate fell from 18% to 0.1%, the ratio of household debt to disposable income tripled from 0.6 to 1.8 times.

This means, purely arithmetically, that a 0.25% rate hike today is equivalent to a 0.75% hike in 1989.

But there’s more than arithmetic to this: in addition to being mortgaged up to the eyeballs instead of just a third of the way up (the knees?), 1.1 million households have never had to deal with rising interest rates.

This is the number of first-time buyer loans granted since the last rate hike on November 3, 2010.

Dr. Lowe is in no rush to lift the official exchange rate from its all-time high. Photo: AAP

RBA dovish

It all adds up to patient and careful banking by Philip Lowe, unrecognizable even from the banking of Glenn Stevens, and most certainly the banking of Bob Johnston, Bernie Fraser and Ian Macfarlane.

The existence of these earlier banks was all about aggressively anticipating inflation, which is why the cash rate was 18% in 1989 when inflation was down: the unemployment rate was descended to – shock! – 6 percent. Inflation would soon accelerate; something must be done.

This 6 percent was called the NAIRU, which stands for the unemployment rate without accelerating inflation, or the unemployment rate that would start to take wages off the ground and accelerate inflation.

At that time, all the work of the RBA’s tight ranks of economists was to estimate and monitor the NAIRU, so that the boss could come out with his interest rate saber and preemptively kill inflation before it hits. out of his lair. That’s about all they did.

In 2008, when unemployment fell to 4%, well below the then NAIRU of 5-5.5%, Glenn Stevens’ Bank raised rates twice, in February and March, even s It was perfectly obvious that something quite unpleasant was happening. is happening in the US housing and mortgage markets, with investment banks collapsing like the victims of John Wick.

Caution might have been warranted.

And indeed those rate hikes had to be hastily and embarrassingly reversed in September of that year when the manure really hit the fan in America, but it was too late, and the RBA had shown its colours: anticipating inflation was more important than pre-emption. -the exit from a global financial crisis.

Rest in Peace NAIRU

Unemployment is now at 4.2% and Dr Lowe’s chart in his Wednesday speech predicted it would fall to 3.75% before long.

So what is the NAIRU now, and does it matter anymore?

The latest NAIRU estimate I could find on the RBA website was from a speech by Deputy Governor (Economics) Luci Ellis in June 2019. She stated it at 4.5%.

There was a Treasury working paper last year that said the NAIRU was 4.5% to 5%, “over the last few years before the COVID-19 recession”.

There’s no updated official estimate from the RBA or the Treasury, but economists now think it’s in the ‘low 4s’.

The unemployment rate is therefore at the NAIRU and will soon be below it, but not only is there no sign of a rate hike, but the Governor said something quite extraordinary on Wednesday: “We can test how far we we can bring down unemployment without having inflation. . We should take advantage of this opportunity.

In other words, the NAIRU is dead: it ceased to be, expired and went to meet its creator. It’s a stiff one. Deprived of life, he rests in peace… he is an ex-NAIRU!

And the reason it died, I argue, is that Australia has become an overworked construction society, about to have an AGM.

Alan Kohler writes twice a week for The new daily. He is also editor-in-chief of Eureka Report and financial anchor on ABC news

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