THE DISTILLERY: Housing's new normal

Commentary on the RBA is missing the point. Robert Gottliebsen and Adam Carr of Business Spectator and Tim Colebatch of The Age all question the wisdom of an April rate rise using different criteria. For Carr and Colebatch it's softening retail conditions and weakening new housing approvals. Carr is particularly strident, supplying what appears to be a killer graph of the history of mortgage growth, suggesting that current relatively modest levels leave room for rate leniency. For Gottliebsen, it's the notion that raising rates will inhibit new developments which would alleviate argued underlying supply shortages.

The point being missed is captured in the phrase by Bill Gross of Pimco: we live in a 'new normal' of zombie banks, higher costs of capital and slow growth. Although Australia avoided the worst of the corrections in external imbalances and in the banks that funded them during the GFC, it did not avoid the causes, one major one being the build-up of foreign liabilities in the national financial system. Local deposits fell to 43 per cent of bank funding in 2007, whilst foreign debt stock approached somewhere in the vicinity of half a trillion. Wholesale funding was a large portion of this at $357 billion. When the crisis came, it nearly bankrupted us.

Glenn Stevens knows this. He knows also that the GFC was a watershed insofar as externally funded economies can no longer assume new money will always be available to roll over old debts, let alone new ones. The days of Australia being able prudently to accumulate foreign debt to finance endless housing growth are over. This is our 'new normal'.

In terms of forthcoming rate rises, two data points in the past few days tell the tale. The ABS December quarter financial accounts reported a huge surge in foreign wholesale borrowing: above 10 per cent in a single quarter to a record high of $381.6 billion. No doubt this was related, in part, to the funding issues at CBA and, in particular, Westpac – analysed so well by Stephen Bartholomeusz of Business Spectator – following their retail lending binges. 

The second data point is the mortgage stock mix tracked in the RBA's D2 Statistical Tables. Growth is shifting from owner-occupier mortgages, which hovered around an annualised 10 per cent for much of last year, to investment mortgages, which have surged from under 5 per cent in September 2009 to above 12 per cent in February 2010, even as owner-occupiers remain a robust 7.5 per cent. Combine this with the clearly-building 'irrational exuberance' at large in the community and it's obvious there's an investment surge brewing.

If it's allowed to run, the current account deficit will blow out, past even the already frightening projections made by the RBA and Treasury that funding the mining boom will take us past the 7 per cent plus of GDP of the last cycle. After the GFC, no responsible central bank can allow that. And this column is increasingly confident that Glenn Stevens won't. This column still maintains that the RBA would prefer to talk more than move but, make no mistake, if appeals fall on deal ears, it will raise. It should do so in April.

Returning to the arguments of our three commentators, the new normal makes it a mistake to read the past as indicative of the future. For Carr's illustration of the history of mortgage growth, this column predicts that you will not see a continuation of the mortgage trends of the past 30 years into the next 30. Indeed, you should expect to see the mid-line between spikes and troughs to be roughly where it is now, if we're very lucky. That means living standards are going to fall, retailers suffer and, in terms of the housing supply argument put by Gottliebsen, more people living together. This column suggests looking on the bright side – it's better than being Spain or Ireland.

Of course, even if the RBA can guide us around this chasm, another worse fate awaits. According to Michael Stutchbury of The Australian and his profile of Treasury's Ken Henry, the collapse of the natural environment may get us first: "Henry questions the 'mental competence' of the human species to rationally deal with environmental degradation.” Of particular focus is water: "... Henry blames excess irrigation for exposing acid sulphate soil in the South Australian lower lakes and the death of mature river red gums along the Murray. Fish stocks in the Murray-Darling basin have collapsed to 10 per cent of pre-European levels... Henry says 'we've kidded ourselves' about economists' attempts to internalise free-rider environmental costs through sustainable extraction quotas ...His final plea to 'insist on dealing rationally rather than intuitively' with environmental problems is a sensational bureaucratic challenge to a political system accustomed to distributing the bounty from Australia's natural resource base.”

Sadly, this column believes that challenge will go unanswered. Perhaps James Lovelock of The Guardian is right in saying that democracy must be removed before we can deal with climate change.

In corporate comment today, it's all about Sigma. Alan Dury of The Australian Financial Review plods through a critique of the company and its "operational headaches”. For shareholders, though, two other comments are more useful. Stephen Bartholomeusz observes that "... Sigma's share price was smashed on resumption of trading – it was almost halved. It would be a brave, or foolish, board that looked to the shareholders who provided almost $300 million of new equity last year on the basis of a forecast of modest growth in profits for the year to January for more help in refinancing those maturing debts. Mind you, if Sigma were forced to raise more equity, it is probable that the board and senior management would, in those circumstances, look somewhat different. In fact there will be some in the market who will be surprised that the faces haven't started to change already.” 

Bryan Frith argues righteously that "... during the suspension Sigma was able to tell the ASX that the company was in dispute with its auditors over 'various unresolved issues' that arose during the audit, that there was likely to be a material reduction in goodwill, the full year results were likely to be impacted by certain adjustments to reported profits and a final dividend was unlikely. Had shareholders who wished to do so been able to sell their shares it would almost certainly have reduced the losses that may be claimed in any potential class action, and those who took the risk and bought in would appear to have limited, if any grounds for complaint. That's something for directors to take into consideration when deciding upon whether or not to obtain a lengthy suspension of trading in the shares of their companies.”

This column will observe that the suspension makes the mooted Slater and Gordon class action against Sigma for alleged breaches of its continuous disclosure obligations inevitable. It will, however, leave retail investors on the sidelines, unless ASIC offers a waiver to the recent court ruling that such actions represent 'managed investments'. So, no heads have rolled. Nobody was allowed to sell even as the stench around the company grew. And punters have no recourse against the alleged misdeeds that halved their capital in one foul swoop. This column must ask how columnists can argue that we need fewer rules for directors.