Banks drag the rates chain

Australia’s largest apartment builder, Harry Triguboff, has fired the first shot at the banks for 2012, saying their case for not reducing rates is “nonsense”. He believes they can lead the reduction in rates.

The banks' fear that they will have to pay more when borrowing funds seems very difficult to believe.

To begin with, as soon as the Reserve Bank correctly reduced the cash rate, the banks followed by paying less for funds they borrow. Now, we constantly hear that people are spending less money. Retailers suffer because of that. So there must be more money available for lending. The sharemarkets are pretty dead, so people definitely do not buy many shares. The real estate turnover in the last year was not high and the prices were static. Yet we have more people in the workforce and the wages have risen, so more money again became available.

But let us think what happens when the banks say they have to replace cheap finance with expensive finance. It is nonsense. Our interest rates have dropped, not risen. So the banks are better off again when they borrow.

The banks should reduce interest rates quicker than the Reserve Bank, not drag the chain. Being slow in reducing rates is bad for the banks themselves. There are many people who owe more than their properties are worth and they will only be able to service their loans comfortably and pay them back when the market starts rising again and repayments drop. People then will not be able to waste money on high interest and still spend money on other items. And that is why the economy requires the banks to borrow overseas. For some unknown reason our 10-year government bonds are 3.74 per cent and America’s are 2.01 per cent, Japan’s are 0.97 per cent, Britain’s are 2.04 per cent and Germany’s are 1.94 per cent. Are the American and British economies so much better?

We have long-term contracts with Asia for our minerals. Asian countries are ploughing as much money as we let them into Australia. Coal mines are being purchased. Gas fields and ports are being developed with foreign funds. So the countries with money are constantly supporting us. It is one thing to say that there are minerals in Africa and the Arab countries, but they have no infrastructure and no political stability. With whom do you make a deal there? The instability in Africa and the Arab countries make Australia much more attractive. Where is stability in Iraq, Iran, and Libya?

China, even though it is prepared to build up Africa, is not usually prepared to fight regimes on deals made by previous dictators. Even Rio Tinto and BHP Billiton think twice before they abandon Australia because of uncertainties elsewhere. Our country is not broke. We owe very little money. Our banks are very solid. They never lent money to weak countries. Thus our banks, when they require funds overseas, must talk from strength. Billions were invested into Europe. Who today would lend them money? Maybe some would for a very short term. And the US and Europe have no intention of raising interest rates.

I know that we in Australia have been used to paying high rates of interest. However, this is already changing and it will gain momentum.

One of the reasons that people overseas say our housing is overpriced is because of the high repayments which are caused by inefficient councils and high interest rates. Our councils are still under the delusion that people are against apartments. How come people flock to our apartments and are disinterested in outer cottages? This trend towards inner city apartments is worldwide. And it won’t change in a hurry. So councils must make codes which are economically feasible. And they must give certainty of floor space and speedy processing. This trend has already begun, but unfortunately it is uneven.

Even though Queensland has more efficient councils, the Chinese don’t buy there. In Sydney, we are only now awakening slowly, so developers run to Queensland, where they get approvals. Queensland will have too many units approved, and Queensland does not have the demand of Sydney. So by being slow in Sydney we will create a glut in the Sunshine State.

But let us assume that things will go wrong here. We can easily stop spending money on carbon emissions policy and the NBN. Can America or Europe stop spending money on anything which does not produce profit?

Lately we hear that Japan may be interested in providing finance in Australia. To say that they have to hedge exchange risk on their funds is wrong. When foreigners buy properties here do they cover rates of exchange? So why cover the exchange rate when lending money? Anyone who invested Japanese yen in Australia for the past 10 years without hedging the exchange rates would have made money many more times than the one who hedged. Besides, while Japan has a lot of money, it also has many earthquakes. If I was a Japanese hedge fund I would love to invest in Australia in Australian dollars in order to diversify.

From April 2001 until now our dollar strengthened against the Japanese yen from ¥62.72 to ¥79. So on our currency alone, the Japanese would gain ¥16, or 1.5 per cent per annum. When we compare the difference in return on their investment, the average return in Japan would be 0.25 per cent and in Australia it would have been 5.25 per cent. So every year they would have made an extra 5 per cent. Of course our interest rates are now coming down. But the difference would still be 4 per cent per annum.

Now, take China. They invested in the US, where the average interest rate for 10 years was 2 per cent while ours was 5.25 per cent. So Chinese investors would have made 3.25 per cent more per annum and they would not have lost 23 per cent on exchange rates. The US dollar depreciated from ¥83 to ¥63.525.

Our currency would be stronger than the US to the same extent for the Chinese lender.

In view of all the above, it would be difficult to imagine that the Japanese and Chinese would not invest here.

Taking all this into account our banks would be wise to borrow in currencies with cheaper interest rates. And that would allow them to charge less.

Of course the right solution for everyone to be happy is for our Reserve Bank to drop rates, and the banks to drop theirs too.

Harry Triguboff is founder and managing director of Meriton Group.

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