Buckle Up

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Your editor is working on the June edition of the Australian Wealth Gameplan, so today’s Daily Reckoning notes will be necessarily short. But we did promise to follow up on whether the Resource Super Profits Tax will or could have any effect on the Australian housing market. So let’s do that.

Late last week Robert Gottliebsen at Business Spectator penned a fine article on the subject. Gottliebsen writes that, “All Australians, and particularly those that have borrowed large sums to buy houses, should we aware that we have lost our security blanket. If there are serious global hiccups we are now more vulnerable than we have been for decades. And so is the value of our houses.”

He goes on to explain the relationship between the level of housing finance available in Australia and the mining industry. With 270 pre-RSPT projects queued up valued at $300 billion, foreign lenders had plenty of confidence in Australia as an attractive economy to lend into. This despite the fact that total debt in the economy (public, corporate, AND private) is the neighbourhood of Italian and Greek levels, according to Gottliebsen.

The RSPT has changed that, he writes. “Overseas institutions view of Australia has changed now that our government has made a serious mistake by incorporating into future budget estimates a tax that makes uneconomic most of those new mining projects and will, therefore, stop bank funding.”

“The fear is now spreading,” he continues. “The big lenders to Australia – China, Japan, and the Middle East and European institutions – are now worried there has been a fundamental change in the sovereign risk of Australia because we have started to do silly things. This is critical because of our four major banks borrow overseas to fund about 40 per cent of every housing loan.”

Of course none of this will be a problem if global lenders don’t get spooked and pull their head in. And if the forecast released yesterday by ABARE are correct, Australia will reap a record harvest for its commodity exports in future years based on strong volumes and price gains in coal and iron ore.

You reckon even dunderheaded government policy would not be enough to drive off foreign capital if the commodity forecasts are accurate. If, however, they are not, then the government will have a big hole blown in its budget figures. That means more borrowing.

It also, as is now the case in the UK, probably means higher taxes to squeeze blood from as many rocks as possible. But you can only do that so much before you begin to restrict growth in consumption – which, in a consumption based economy, is what drives growth, employment and wages (crucial to supporting home prices).

So all the bones are connected to one another. And the road we’re travelling on is getting pretty jarring. More on how to buckle up and be safe tomorrow. Until then…

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. “which, in a consumption based economy, is what drives growth”

    I’m disappointed Dan, I thought you knew better than this. Consumption can never drive growth, only production can create capital & drive growth. Consumption can only consume capital.

    If we do have a consumption based economy, then capital is being consumed. No wonder the price of gold is rising.

    Reply
  2. Why not tax over seas companies who come here and slowly ship our coal, oil etc over seas and take the money with them? can some one please explain to me why we dont get more for the holes left in the ground? And while your at it, we live in a world (ALthough it is in a mess at teh moment)that is busting for iron ore etc, do we not think it will all just get factered in, as it has in other northern european countries where it has worked quite well, or are we just worrried about the profits of big mining companies? Im actually serious with these questions i dont understand so fill me please….

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  3. Housing in Australia is in retreat. Demand is falling and supply is also falling.
    But there is no devastation. I ceased commenting on thios site months ago as there was nothing more to be said. DD was prophesying doom and gloom for the housing market and he had followers. Others, including me, were content that it was heading for a soft landing. But reconciliation between the two views appeared impossible. Only time will tell. Obviously DD would like more time. Or do you agree that the USA destroyed its own middle class by deliberately lending to those who could not afford the housing they bought?

    Reply
  4. So the RSPT is out and the Mineral Resource Tax is in.. What are DR’s views? We will see soon enough I am sure.. What about the rest of us?

    Stillgotshoeson
    July 2, 2010
    Reply
  5. “Australia will reap a record harvest for its commodity exports in future years based on strong volumes and price gains in coal and iron ore.”

    I think statement to be very true, and Australia should do well into the future, I just feel the deleveraging event is to occur before we “prosper” again. That is why I am optimistic for the future..

    Despite what some think, I am not a doom and gloom merchant with a wish and desire for others to be financially hurt or crippled.. just a realist resigned to the fact that people will be financially hurt and crippled in the correction due.

    Stillgotshoeson
    July 2, 2010
    Reply

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