Eurozone to outperform Australia? Even before the European Central Bank (ECB) starts its 1.1 trillion euro quantitative easing program on Monday, it has raised its growth forecasts for the next two years -- and cut its inflation predictions. In fact, there is a chance that if the growth forecasts are accurate (a big ask, mind you) the eurozone economy will do better than Australia in the next year. The ECB sees GDP growing by 1.5% this year, up from 1% in December, and 1.9% in 2016 and 2.1% in 2017, if it completes its easing spending program. Considering Australian growth will slide from 2.5% in 2014 to something under 2% for much of this year, our growth trajectory is heading in the opposite way to the eurozone’s. Inflation in the zone though remains low -- the new forecast for 2015 is zero inflation (currently minus 0.3%), down from December’s 0.7% increase. Inflation will rise to a positive 1.5% next year and 1.8% in 2017 if the ECB’s easing program is completed, although the forecasts for 2016 and beyond are very rubbery ... in a eurozone sort of way. -- Glenn Dyer Kiwis to the fore, again? Back home and not content with whacking us in the cricket and rugby union, our Kiwi mates seem to be showing us another way of cracking down on investor home buying. In a statement yesterday, the Reserve Bank of New Zealand said it was starting talks with the country’s lenders (dominated by our big four banks, so any change will be easy to transplant back across the Tasman) on defining housing investors. After finally working that out, the RBNZ wants the banks to create a new asset class for mortgage loans to residential property investors within its capital adequacy requirements. “A primary purpose of the consultation is to seek views on how to best define a property investment loan,” the RBNZ said."[O]nce the Reserve Bank has settled upon a definition, it proposes to amend existing rules by requiring all locally incorporated banks to include residential property investment mortgage loans in a specific asset sub-class, and hold appropriate regulatory capital for those loans.” Ahhh, there’s the catch. Banks, including our big four, will have to allocate more capital to support investor lending in their balance sheets, meaning higher interest rates. That is one way of slowing the rate of growth in NZ home lending -- by forcing a greater capital cost on the banks for this type of activity. The Australian Prudential Regulation Authority, our lead bank regulator is currently examining all Australian home lenders, and is tipped to announce some sort of similar capital-based move in the next two months to rein in investor lending. Under the new consultation, the RBNZ will look at three possible alternative ways to define loans to residential property investors: 1) if the mortgaged property is not owner-occupied; or 2) if servicing of the mortgage loan is primarily reliant on rental income; or, 3) if servicing of the mortgage loan is at all reliant on rental income. With our aggressive use of negative gearing, it would seem these three definitions would catch most of our investor lending, especially to self-managed super funds. The RBNZ tightened the rules on loans with a high loan to valuation ratio (and low deposits in 2013) to try and slow down a lending boom -- but had to relax that early in 2014 because of the threat to new home building, many of which are bought by buyers with low deposits. Naturally, that's where much of the new lending has moved to, especially in Auckland, and, as we reported earlier this week, helps explain why Auckland house prices jumped 13% in the year to February, up from 12% in the 12 months ending January. -- Glenn Dyer But in Sydney, the RBA wonders about macro controls on housing. In a Q and A after a speech in Sydney yesterday, Reserve Bank deputy governor Phil Lowe wondered about the utility of macro controls. He pointed out that most of the controls now being talked about or used, Australia was already using in the 1970s. He said “this was called financial regulation”. So, he said, “we have to be realistic here”. "These measures can work for a while, they can help, and I think what APRA has done now will help at the margin, but we can't rely on these type of measures to control housing prices," Lowe said. "If you want to control housing prices you've got to address supply -- land supply and transport infrastructure. It’s not APRA tinkering around with prudential instruments.” Ahh, land supply, a responsibility of state and local governments, who have a vested interest in restricting supply because it boosts stamp duty and other fee incomes, and forces up the value of other houses, lifting rateable income for the councils. And, in spirit of the IGR (but with more credibility), Lowe pointed out that, in a decade’s time, Australia’s population will have grown 10%. That’s around 2.4 million people, or a city the size of greater Brisbane. -- Glenn Dyer China’s commodity fine print. Among the flood of statements and "data" from China yesterday associated with the set piece opening of the National People’s Congress and announcement of a new, lower growth rate of about 7%, there were some very intriguing details. For example, China said it would raise spending on commodity stockpiling by 33% this year. The country’s Ministry of Finance said in a report to the National People’s Congress on Thursday that it will set aside 154.6 billion yuan (US$24.7 billion) to stockpile grains, edible oils and other materials. According to media reports, the Ministry said the increase is to pay for expenses and loans used for these official reserves as well as subsidies for losses sustained in auctioning stockpiled cotton. And that’s the key to this rather large amount of money. It has nothing to do with buying copper or oil on world markets and adding to the country’s strategic stockpile. It's all about buying agricultural commodities to keep Chinese farmers happy. China has bought so much foodstuffs and other materials (especially cotton) that to start selling it would trigger a fall in prices within China (upsetting farmers) and globally, damaging the cotton, corn, sugar, wheat, rice and soybean markets. The global cotton market (Australia is a big exporter) would be especially crunched because China has amassed 60% of the world’s cotton stocks under this subsidy system and to unload it would be catastrophic. The central government is now trying to release some of the cotton without damaging its internal cotton market, and the global market (which would upset the US, India, Australia and Egypt). It is trying to reform the system to allow for direct payments to farmers, not based on production. China seems destined to relive the subsidy rorts and strains that the EU and the US have experienced in the past 30 years of propping up inefficient farmers in the name of "self sufficiency". -- Glenn Dyer Graft and Macau. Premier Li Keqiang, in his statement to the National Congress yesterday, made sure everyone got the message on the anti-graft campaign. He reiterated zero tolerance for corruption, vowing to build a law-based and service-oriented governance of the country (whatever that means). That will go down like a bomb in Macau, already suffering from the downturn in gambling revenues caused by this anti-corruption campaign by the central government (which targeted 14 senior members of the military this week). Figures released Wednesday showed a record 49% fall in gaming revenues in February because of the impact of the Lunar New Year/Spring Festival. Falls of that size are not unknown for the month when the Lunar New Year comes around. Shares in James Packer’s Crown rose on Wednesday, then fell 1.4% yesterday. Perhaps investors had caught up with proposals emerging from Macau’s government for a cap on visitors. Macau’s Secretary for Social Affairs and Culture, Alexis Tam, says the tourist capacity of the city is a “serious problem”. Seeing visitors from China account for the majority of Macau tourists the move to restrict holidaymakers numbers would directly hit casinos because mainlanders make up the vast majority of gamblers. If that happens, watch the share prices of the casino companies, including Melco Crown, 33%-owned by Crown, continue to head south. -- Glenn Dyer