The credit crunch has finally hit the Aussie housing market. Local low-doc lender Bluestone raised its lending rates by 17 to 55 basis points yesterday. This means potential new home buyers with sketchy credit histories will pay an interest rate anywhere from 7.8 percent to 12 percent—if they can get a loan. It looks like we’ll have to cancel our plans to build a New Hat Factory for the ever-expanding Markets and Money Australian Enterprise.
It didn’t take long did it? Now that banks cannot easily off-load lending risk on to someone else’s balance sheet, they’re suddenly a lot more discreet about who they lend to. “I’d expect rates for existing customers to rise,” said Bluestone’s CEO Alistair Jeffrey, “because banks’ cost of funding has risen and they will not want to risk their profit margins.”
Making it harder to get a loan is not going to improve housing affordability across Australia. But as we’ve said since we started the Markets and Money in Australia a year ago, too much credit is what’s caused the affordability problem to begin with, leading to inflated house prices. And right on cue, we find out that the Reserve Bank is worried about the inflationary consequences of Australia’s credit addiction.
In the August “Statement of Monetary Policy,” the Bank concludes that “inflation appears likely to be somewhat higher than earlier expected.” Labour markets are tight. Prices are rising, although wages haven’t followed suit. But what really worries the bank is how much money households and businesses keep spending. This means, if you read between the lines, the Bank doesn’t think rates are high enough yet to discourage people from spending money they don’t have.
“Notwithstanding the increases in interest rates that took place last year,” read the Statement, “the demand for finance strengthened in the first half of 2007, particularly in the business sector. Over the six months to June, business credit outstanding grew at an annualised rate of 22 per cent, up from a rate of 15 per cent at the end of last year.”
Business borrowing, when done rightly, turns into productive investment. But increased business spending could translate into higher wages too. And that could translate into higher consumer spending, which is already too high, according to the bank. “In the household sector…the rate of increase picked up sharply in June, though this appears to have been boosted by borrowing to fund superannuation contributions ahead of rule changes at the end of that month.”
Next month’s figures will reveal if the sharp increase in household borrowing was super related, or just a good old fashioned winter blues credit binge. But the Bank was pretty clear in telegraphing its intentions: global credit crunch or not, inflation mischief is afoot in Australia and the bank may act again before the Federal election to raise the cost of money.
Markets and Money