From an outsider’s perspective, the Rudd Government has proven itself to be exemplary at “political execution”. They’ve successfully implemented their chosen agendas and ruthlessly controlled the media reception.
While one can debate the intellectual merits of the policies, Rudd has been decisive and masterful at managing the vagaries of human psychology. The key mantra appears to be — somewhat curiously for a politician — under-promise and over-deliver. This is a smart and unexpected move.
Hence we had from the early days of the (back then) “credit crisis” relentless comparisons with the Great Depression, which did no favours at all for consumer and business confidence, and constant references to war-like conditions.
In my conversations at the time with the Prime Minister’s office I got the impression that this was part strategy and, as time elapsed, increasingly genuine.
On the one hand, they quickly recognised that the economic downside (if the situation unfolded) was immense and worked maniacally — and effectively — to externalise blame for this “global” calamity.
During the early days most observers, including the RBA, were convinced that Australia would navigate its way through the challenge relatively unscathed, which is one reason why the RBA had the confidence to allow mortgage rates to be lifted a stunning 6-7 times in the midst of the contagion.
Rudd’s gloomy framing of what was initially a benign crisis proved to be unwittingly prescient. As conditions deteriorated I noticed that the tone of his young advisors changed strikingly — they shifted to the view that we really were on the brink, which in turn motivated unusual decisions like RuddBank.
Rudd and his advisors were becoming seriously spooked by both the gravity and complexity of this snowballing cataclysm, which, if truth be known, was well beyond the comprehension of anyone not endowed with an encyclopaedic understanding of the nuances of financial markets (including many academic and government economists).
Similar management principles were applied by Rudd when dealing with the controversial first time buyers “boost”. Only weeks ago the media rushed to report Rudd’s insinuations that the boost would be withdrawn post June — all good things have to come to an end, we were told. When asked about this by one journalist, I responded that I’d be staggered if it transpired. And so it proved not to be.
The government’s decision to extend the boost to both existing and new homes for another six months while phasing it completely out by 31 December 2009 delivers many voters a pleasant surprise given their prior conditioning. It’s also intelligent near-term policy.
In a perfect world, the non-means tested first home owners’ grant, which costs taxpayers $1bn per annum, would have been eliminated after it had outlived its original purpose of compensating buyers for the GST. (I’ve previously proposed that it be converted into a zero interest loan, which would save taxpayers billions.)
At a total cost of around $2bn (including the recent extension), the boost has been a cheap and effective insurance policy for shoring up what is arguably Australia’s most important economic market.
Australia’s housing sector does not share the vulnerabilities present in the US: we have among the lowest mortgage default rates in the world (which are just 15 per cent of US levels), no sub-prime lending to speak of, an exceedingly strong banking system that has not needed to ration residential credit, and, in contrast to the overbuilding in the US, an acute shortage of homes.
The residential property market was nevertheless cruelled by the impact of mortgage rates peaking at 9.6 per cent in August 2008 as a consequence of the RBA’s war on inflation. Following a nascent house price and building approvals recovery in 2007 after the end of the last boom in 2003 (the RBA has repeatedly highlighted that Australia’s housing market is actually leading the US and UK by three years), the sector froze in 2008 under the weight of high rates. Building approvals fell through the floor while house prices registered 3 per cent falls.
Rudd and Swan know that the construction industry, which employs 350,000 people and contributes $70 billion a year to Australia’s economy, is one of our few remaining hopes to help fill the void left by the devastated resources, export and services sectors.
As a domestically focused industry, with substantial requirements for goods, services and labour, housing investment also has a big “multiplier” effect (estimated to be 1.87 times). That is, last year’s $70 billion of output generated $131 billion of output elsewhere.
Yet housing starts (i.e., supply) in Australia were running at an incredibly low 110k homes a year in 2008, which is miles below Treasury and industry estimates of underlying demand of circa 180k to 200k properties per annum.
In Australia’s largest state, NSW, building approvals were at their lowest levels since the 1950s. As a result, economists at ANZ and Westpac projected that Australia’s housing shortage would hit over 200,000 homes next year, which is multiples previous peaks.
The shocks posed to the building, housing and mortgage industries by the GFC (such as the closure of the securitisation markets and the demise of smaller banks, building societies and non-banks), which had been amplified by the RBA’s interest rate settings, presented policymakers with grave system stability risks.
There is currently just over $1 trillion of mortgage debt held against the $3.8 trillion of private residential property, which is far and away Australia’s largest investment class (notably 15 times the size of the commercial property sector that RuddBank is intended to mollify). That’s a surprisingly low 26 per cent debt-to-property value ratio.
Housing is also the banking system’s single biggest exposure and accounts for over 60 per cent of household wealth. (Notwithstanding shrill cries about the extent of mortgage debt in the community, only half of all Australian home owners have any mortgage debt at all according to the 2006 Census. And in contrast to claims in the media this week that millions of families are in “mortgage stress”, the RBA estimates that only 20,000 of Australia’s circa 2.5m borrowers are currently more than 90 days behind on their repayments.)
In concert with the stunning reversal in mortgage rates to 5.7 per cent, which is their lowest level since July 1968, the first home owners boost has helped stimulate the demand for new housing. This has given the construction industry confidence to start new works, as borne out in both the solid recovery in the building approvals data in 2009 and a rebound in loans for construction purposes.
The health of the housing market has also been evidenced in strong housing finance approvals (73 per cent of which are not first time buyers), auction clearance rates, and resilient house prices (the RBA recently rejected ABS data for the first quarter of 2009 in favour of the much broader APM and RP Data-Rismark findings, which suggested prices were flat-to-positive).
Some have argued that the boost is creating Australia’s own sub-prime bubble. Yet this is complete tosh. First, while recent first time buyer activity has been historically high it was recovering from levels in 2008 that were well below the 20 per cent long-term average (of all home loans financed).
Second, the banks have now reduced their loan-to-value ratios to levels that have basically negated the effect of the boost.
Finally, lenders across the board have been tightening credit standards since the crisis first emerged — the restrictions imposed on first time buyers today are the harshest they’ve been for around 15 years.
Phasing out the boost in the manner proposed at a cost of an extra $500m is taxpayers’ money well spent. To the extent that she exerted an influence on this decision, Tanya Plibersek has once again proven herself to be a capable housing minister.
Christopher Joye is an Australian economist with Rismark International.