The RBA/ APRA strategy of filling the unexpected mining bust hole with low interest rate stimulated residential construction and the household debt that goes with it was always misconceived.
Such a strategy could only work for a short time because the ex-mining workforce required to build the housing was always going to be able to fill the housing supply gap quickly in a few years– especially with the very efficient (cheap, fast and nasty) construction methods now available.
Sure population ponzi immigration booms help provide demand for some of this excess housing output but the ponzi population folk need jobs and construction cannot support more than a fraction of them. If it tries it would only build even more housing stock more quickly – and in part that actually happened.
The only thing that has really kept the model going for this long is that much of the excess supply is staying off the market.
If all the new supply was made available for rent or purchase to owner occupiers things might be very ugly already.
The thing that really demonstrates that this post mining fix was a “brain bubble” on the part of RBA/APRA is that even though the model depends on selling apartments to foreign people who will keep them empty, those people required money / mega loans from our banks to complete the sale.
We were not building using foreign capital at all – we were building using foreign debt borrowed by our banks and guaranteed by the Australian taxpayer.
Which means to keep the model working our banks are tying large loan default risk concrete blocks around their ankles.
But APRA is now telling them to stop doing it – i.e. stop lending so much to foreign speculators.
Every day a new bank is announcing it is cutting loans to foreign speculators in Australian property. Why on earth APRA allowed them to do so in the first place is a mystery.
That is sensible because the model was only rational if foreign capital really was at risk building us our shelter – it is funny how that wasn’t what was happening. In reality our banks were borrowing off shore to lend to foreigners to punt on house prices.
Totally mental !
So what happens now that we have thousands of apartments in the pipeline, that need to stay empty because we can’t generate enough real jobs to employ the people who might fill them, but the foreign buyers of these ‘buy to leave empty’ apartments are either walking away or cannot get credit from our banks to complete.
No wonder Robert Gotti is in a panic and writing articles every few days begging APRA to keep the money flowing to the offshore speculators or allowing locals to load up on debt to buy them at the current boom time inflated prices.
The taxpayer cheque book will be needed to bail out an entire industry.
Banking Royal Commission Now.
This is what happens when the RBA/APRA allow foreign ZIRP/NIRP debt to support record LOW interest rates.
A massive bubble in household debt and an inflated exchange rate floating on all the deliberately attracted unproductive capital inflows.
Telling the RBA to cut interest rates to drive down the exchange rate has been as effective as telling a fat man to lose weight by eating more donuts.
Just to be clear
The idea of cutting interest rates to drive down your exchange rate only works if you are prepared to export capital and block capital inflows.
By exporting capital you are buying foreign currencies and selling your own.
It works for countries that generate high domestic levels of savings that are looking for home.
Find them a home offshore and your exchange rate will experience downward pressure as those savings are exchanged for deposits and financial and real assets in other currency regions.
This is what China, Germany, Japan, Korea and many other mercantalist countries do and have done for decades.
It simply doesn’t work if you are a country like Australia with a woeful saving record and the only way you can produce low mortgages rates is if you have to let your banking sector go offshore and suck in ZIRP/NIRP capital exports from other countries.
And that is the fundamental problem with recommending a target interest rate as a way of driving the $AUD down.
It will only work if you are prepared to allow mortgage rates to rise – i.e. stop or restrict banks from sucking in unproductive capital exports from offshore to drive down local mortgage rates.
It will only work if your tax and other policies favour saving and then export those savings to your trade competitors AND they allow them in. Most mercantalists will not.
Calling for a cut to the RBA target rate is fine but it will not drive down the exchange rate while people are still happy for:
1. RBA/APRA to allow our banking sector to suck in foreign export capital to supply the Australian housing sector with near ZIRP mortgage rates.
2. Our government to suck in foreign export capital by selling govt bonds offshore
3. While asset sale programs are going on hand over fist.
Considering the charter of the RBA, their repeated public statements and the neo-liberal ideology regarding capital flows that rules the roost, calling for the RBA to cut interest rates means one thing.
More imported unproductive capital that places UPWARD pressure on the exchange rate.
This why the $AUD has managed to stay way above where it should be even though the mining boom is bust and our trade performance is woeful.
It is floating on a sea of capital exported by other countries.
Only by restricting the above three transactions do we have any hope of fixing the problem.
If we can run massive campaigns to call for the change of politically challenging tweaks like negative gearing (CGT reform is more substantial) surely we run massive campaigns to regulate the key three transaction types that are gutting our productive sectors of the economy.