The RBA’s Interest Rate Bait Isn't Attracting Many Bites


The ABC reports that, despite the recent interest rate cuts by the RBA, it’s having little effect on borrowing:

‘Official figures show Australians are taking out home loans at the slowest annual pace recorded, indicating the property downturn may be far from over.

‘Figures from the Reserve Bank show total lending to the private sector grew 0.4 per cent in December, with the amount Australians borrowed rising by only 3.6 per cent last year.

‘The data shows housing credit remains the most consistently robust category of borrowing, with a 4.5 per cent rise over the past year.

‘However, that annual growth rate is the slowest in the Reserve Bank figures which go back to 1977.

‘Home lending growth of 0.3 per cent in December is also one of slowest monthly increases recorded.’

Is this really surprising though? As much as the RBA wants to generate another housing boom to replace the quickly expiring mining boom, people aren’t quite that gullible. Not everyone, anyway.

When interest rates start scraping the bottom of the barrel, the creation of credit happens not through central bank determination, but rather through the credit worthiness of borrowers. Judging from the latest borrowing statistics, most credit-worthy borrowers have already passed through the banks’ gilded doors during Australia’s long residential property boom.

Those few who haven’t can smell the RBA’s bait and don’t want a bar of it. And you can hardly blame them… 30 years of debt servitude to own what is essentially a depreciating asset. Only the land appreciates in value and it’s appreciation in recent decades is all out of line with economic fundamentals.

A credit boom in Australia started the run, and a credit boom in China (which pushes up our national income, which increases our borrowing capacity) is prolonging it.

Not for much longer, we say…again.

Which should make the upcoming Federal Election an interesting one. It’s still more than 8 months away, but that’s plenty of time for China’s latest credit surge to turn ugly. If that’s the case, it will be a very difficult election for Labor to win.

They’ll have a mining tax that’s not generating any tax (but they’ve spent the proceeds anyway) and a carbon tax that’s hurting ‘working families’ and not making a bit of difference to the overall carbon emissions, not on a global scale anyway.

Abbott’s pitch/bribe of abandoning these taxes will be very compelling.

Just why Labor decided to go for such a long term campaign we have no idea. We’ve read nothing about it, mind you. We think political watching is one of life’s great time-wasting activities.

But we do think it just heaps another layer of uncertainty on Aussie investors. Especially as the pollies will be coming out of the woodwork with plans, ideas, bribes and fixes to win an electorate over by September.

We’re one month down so far this year…and it’s been a very good one for punters. A positive January usually portends a positive year. But genuine investing is all about risk and reward. And to get a reward in this type of market, you have to take an inordinate amount of risk.

Greg Canavan
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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Gregory JA
Gregory JA
3 years 8 months ago
Hi Greg, I read with great interest especially on “30 year debt” comment above. I seriously think you have hit the nail on the head in regards to housing growth being stubbornly low even with very low interest rate. Those who have good credit would have been locked up, while those who don’t are rationed out even with the low interest rate. 30-year debt sounds like a lifetime commitment which I think is way too long to pay up debt, and the nominal total house cost+debt interest will far outweigh the capital gain! 30 years is a long time, and… Read more »
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