Call to end negative gearing

A leading economist has called on Canberra to put an end to negative gearing as the best way to dampen frothy property markets in Sydney and Melbourne.

In its Stability Review released last week, the Reserve Bank of Australia pointed out that strong demand by investors mean that investor housing loans now account for about 40 per cent of all home loans.

The RBA also said for the first time it was working with the Australian Prudential Regulation Authority (APRA) on “additional steps” to reinforce safe bank lending, particularly for lending for investors.

With investor demand surging, and steep rises in Sydney and Melbourne property prices, RBA governor Glenn Stevens last week noted it was “perfectly sound and sensible to ask ourselves whether we might at least lean on that a bit”.

But Saul Eslake, chief economist at Bank of America Merrill Lynch, says the central bank has made “a very compelling case for the government to consider ending negative gearing for new investors”.

He accepts that it is not politically feasible to abolish negative gearing entirely because around 15 per cent of voters are currently taking advantage of negative gearing – a tax regime that allows them to buy assets and deduct the interest costs against other income.

But he says that it would be easy for Canberra to decide that any new investment past a certain date would not be eligible for negative gearing.

Federal coalition MP and chair of the House of Representatives Economics Committee Kelly O’Dwyer dismissed calls for a change to negative gearing.

“We have no plans as a government to change negative gearing,” she said on the ABC’s Lateline on Monday.

Mr Eslake argues that the Reserve Bank has three options for tackling the “unbalanced” housing market “They can let the market run, which history has shown is not a good option.

Or they can lift interest rates which will cruel the rest of the economy to stop an alleged risk in the housing market.

“The third option is to introduce new macroprudential rules to limit how much the banks lend to certain types of borrower. But the risk here is that the new rules either don’t work or that they hurt the wrong people, such as first home buyers.”

In contrast, if Canberra decided to curtail negative gearing, it would reduce borrowing by investors, which would mean that investors either paid less for properties or did not buy as many.

Mr Eslake says that some supporters of negative gearing argue that it gives investors the same tax treatment as business.

‘This is a nonsense argument,” he says. “Unlike investors, businesses don’t get a 50 per cent discount on any profits they make when it comes to capital gains tax.”

Supporters also run the argument that scrapping negative gearing will lead to a steep jump in rents, as happened after former Treasurer Paul Keating decided to abolish negative gearing in 1985.

“Actually if you look at what happened, rents went up in Sydney and Perth, but they didn’t rise in any other market,” Mr Eslake said.

“And that was because in 1986-7, Sydney and Perth had vacancy rates of less than 2 per cent. And so rents would have gone up anyway.”

In addition, some argue that abolishing negative gearing would create a shortage of rental properties because landlords would simply dump their portfolios.

Australian Financial Review, Australia by Karen Maley 1st October 2014

SMSF assets swept up in housing boom

DIY super Duncan Hughes Self-managed superannuation funds are increasing the amount of debt they use to buy properties by nearly 80 per cent ayear, a sign of how the investment boom in housing is being driven in part by personal super funds.

The debt growth figures, published by the Australian Taxation Office, are five times the rate for listed shares and seven times that for cash and deposits.

Industry experts say continued growth at this rate, from a low base, has the potential to “threaten the stability” of self-managed super funds.

“Many in the industry bury their head in the sand and ignore any concerns around this growth in leverage,” said Claire Mackay, a principal of Quantum Financial Services, whose company was winner of this year’s SMSF Adviser of the Year. Ms Mackay is a member of the ATO’s Superannuation Industry Relationship Network, an industry consultative committee.

Revised figures from the Tax Office show there are estimated to be more than 534,000 self-managed funds with assets totalling about $557 billion.

Estimates for assets held by SMSFs using limited-recourse borrowing arrangements were revised threefold from $2.6 billion to $8.3 billion.

Based on the original Tax Office figures, that means an earlier fivefold increase in the value of limited-recourse borrowing arrangements for SMSFs between 2009 and 2014 has been revised to an increase of 17.5 times.

SMSFs can only use limited-recourse borrowing arrangements when purchasing property. If something goes wrong and the fund defaults, its other assets are not at risk. But lenders insist on personal guarantees outside the fund, such as the family home.

“If there was reason for concern before, there’s even more now,” Ms Mackay said.

Industry specialists are calling for a crackdown on property spruikers as well as advisers who encourage investors to leverage their super assets to buy properties, often concentrating all their retirement savings in a single asset If the past trend continues, limitedrecourse lending will increase over the next five years by more than 1600 per cent compared with 92 per cent for listed shares and 68 per cent for cash.

Even if the rate of increase falls by half, the growth in limited-recourse lending is likely to be significant Tax officials say less than 3 per cent of self-managed funds have limited-recourse borrowing arrangements.

Residential assets account for about $19.5 billion while non-residential assets – or commercial accounts used by business owners to buy their premises – account for $65 billion.

“Yes, this growth is from a low base, but a continual growth rate of this size has the potential to threaten the stability of the SMSF sector in the nottoo-distant future,” Ms Mackay said.

“We should not wait until it’s too late.”

The Financial System Inquiry raises the idea of restoring a ban on gearing with super because, even though current levels are low, they have the potential to rise rapidly and create problems in the system.

Cavendish Super, a major SMSF provider with more than $5 billion funds under administration, recommends the borrowing criteria be tightened, claiming that properly used leverage is beneficial, particularly for those needing to “fast-track” savings as they near retirement age.

Others, such as SMSF Owners’ Alliance executive director Duncan Fairweather, urge regulators to crack down on funds being used to buy a single, highly leveraged asset that is “vulnerable to changes in property values and rental markets”.

Key points ATOfiguresshow personal super funds are increasing debt for property at five times the rate for shares.

Industry wants crackdown on property spruikers.

Australian Financial Review, Australia, 13th Sep 2014

 

SMSF property debt a risk to financial system, says Cooper

Self-managed super funds are accumulating too much property debt, which is a major risk to the financial system, warns Challenger’s Jeremy Cooper.

Mr Cooper said the interim report of the financial system inquiry led by David Murray was right to question whether borrowing by self-managed funds should be banned, and warned that housing debt was a risk to the stability of the financial system.

‘There’s enough leverage in society anyway,” said Mr Cooper, who is Challenger’s chairman of retirement income. “We leverage up our homes, the minute you buy a share you’re building leverage, there’s a lot of personal debt around and we’re seeing people going into retirement with more debt”

Mr Cooper, a former deputy chairman of the Australian Securities and Investments Commission, said he was against government policy allowing self-managed superannuation funds to highly gear into property investments, but it was hard to unwind.

“I don’t like it, but it’s tricky to allow something and then ban it,” he said. “It’s problematic because there’s a lot of illusions about geared property investment that people fall into. They forget the effect of inflation and fact that they have to pay stamp duty.”

Mr Cooper is also worried about the impact of a policy option released by Treasury that wealthy retirees may not have to withdraw as much money from their private pensions.

The Australian Financial Review on Tuesday reported widespread concerns that a reduction in the minimum drawdown from account-based pensions would be an easy way for the rich to preserve tax-free superannuation for their heirs. The Abbott government is looking at whether a reduction in the rate would give self-funded retirees confidence that their funds would not run out during economic downturns.

Mr Cooper said if the option was implemented, “like all policy changes it creates unintended consequences”.

He said there wasn’t clear evidence about whether people would spend the money or save it, but if retirees did bank up tax-free funds to later bequeath, it may then result in alternative policies such as a death tax.

“We need to be careful what we wish for,” Mr Cooper said. “They [the government] then may say, ‘well if you haven’t spent it by the end, we will hit you with a tax at the end [of your life]’, like they do in the UK.”

In Britain there is a 40 per cent “inheritance tax” on legacies valued above 325,000 ($583,000).

Mr Cooper said minimum withdrawals created a lot of heat during the financial crisis, but the bigger question was about risky investments.

During the financial crisis, the former Labor government temporarily reduced the minimum withdrawal amount. “These account-based pensions were so smashed up in the crisis that they needed the government to change the rate,” Mr Cooper said.

He said retirement products were “letting people down”. “It’s been widely said that the risk settings that people in retirement have are way too high and that’s why they blew up [during the crisis].

“If you have an account-based pension that has roughly 70 per cent of growth assets sitting in it and you have a major downturn, maybe that’s the problem.”

Mr Cooper called on the Abbott government to better sell its policy to increase the retirement age to 70. He said the average age of death was now 87, and one in 10 women currently aged 65 would live past 100.

He called for a campaign to educate people about this reality and the impact it would have on federal revenue.

“Without a campaign… the government’s idea of pushing the pension age out to 70 is operating in a vacuum.”

Mr Cooper also slammed the way Treasury estimated the cost of superannuation tax concessions to the federal budget Treasury predicts superannuation tax breaks will cost $36.25 billion in 2014-15. It said the super concessions would cost $171 billion over three years.

Mr Cooper said this figure was inaccurate and Australia needed to come up with a better way to measure the revenue impact. The debate could then move on to how the super system could meet the needs of an ageing population.

“We need to come up with the proper model for what the super system is costing us,” he said. “The sooner we move on from all this bickering about $30 billion, which is not real, [the better].”

Highest leap for iron ore since August

Iron ore’s largest one-day gain in nine months has pushed the bulk commodity back to levels seen before March’s “flash crash”.

Improving emerging market sentiment and increased hopes of stimulus in China saw iron ore lift 4 per cent overnight The benchmark iron ore price, a measure from the port of Tianjin in China, has risen 5.7 per cent in the last week, now sitting at $US116.90 ($126.22).

Iron ore, emerging markets and riskier assets, in general, have had a strong run in the last week, Deltec chief investment officer Atul Lele said.

The MSCI Emerging Markets Index has jumped 4.2 per cent in the last week.

Cheap valuations in emerging markets, hopes of stimulus in China and hopes of further liquidity injections globally, are all supporting iron ore and riskier assets, Mr Lele said.

The recovery in iron ore comes after a “flash crash” three weeks ago, which saw the metal plummet more than 8percentinone day. The fall was attributed to financial arrangements which used iron ore as collateral being unwound. However, analysts said investors should not expect a return to levels above $US130 per tonne.

“At present, none of the indicators suggest that we’re going to see a strong resurgence in the iron ore price. But that’s not withstanding any stimulus that comes through from China aimed at fixed asset investment” Mr Lelesaid.

Expectation of increased investment in infrastructure from the Chinese government to prevent the economy from slowing were reflected in the jump in iron ore and steel prices.

China rebar steel futures gained 1.1 per cent overnight and have added 3.7 per cent in the last week.

Liquidity concerns over commoditybased finance deals in China have eased and iron ore is returning to fundamentals, CLSA analyst Andrew Driscoll said. “Most important over the last couple of weeks, and there was a data point yesterday, steel inventory at the mills has been ticking down,” Mr Driscoll.

“The mills are selling steel into the market and the steel price is holding up OK,

suggesting that the demand is there for the steel.” On top of the hopes of stimulus, expected seasonal upturn in steel consumption was helping the iron ore price, ANZ head of commodity research Mark Pervan said.

“The gains were despite a further rise in port inventories last week; however,

the 38 kilo tonne build last week was the smallest in several weeks,” he said.

“Talking to the industry in the last couple of weeks, these guys are now thinking we’ve probably hit the bottom of the iron ore market and are looking to reposition. However, they’re probably waiting for slightly better seasonal demand to kick in.” Any increase in iron ore prices will need to be backed up by a jump in steel consumption. Infrastructure and property are the biggest consumers of steel in China, accounting for around 67 per cent of consumption.

China boosts growth with infrastructure

Shanghai | China’s government has approved a raft of infrastructure projects, including five new rail lines, and outlined plans to spend more on irrigation, agriculture and social housing as two new manufacturing surveys confirmed the economy’s slow start to the year.

Economists have cautioned investors not to expect a big-bang stimulus package like the one rolled out in response to the global financial crisis. However, there is increasing evidence the government has started to boost public spending in an effort to keep growth at its target level of “about 7.5 per cent”.

The state-owned China Securities Journal ran a story on its front page on Tuesday outlining the measures the government was likely to take to boost growth, emphasising this was “fine-tuning” rather than a big stimulus.The newspaper said the measures would include more spending on affordable housing, agriculture, irrigation, rail projects and environmental protection.

The National Development Reform Commission recently approved two coal mining projects in InnerMongolia as well as five rail lines. One analyst said some of those rail projects had been slated for next year but were brought forward. All up, the spending would be more than 150 billionyuan($26.5bil]ion).Officials from the NDRC, China’s top economic planning agency, also said there would be more spending on agriculture infrastructure projects at a press conference last week.

This year they expect to spend 70 billion yuan on the projects, which are mainly focused on irrigation.

Meanwhile, Premier Li Keqiang said over the weekend the government was committed to its policy of transforming shanty towns into social housing with projects to build more than three million new homes already underway.

It is unclear how much of this money is additional spending or part of China’s normal budget allocations. “There has been a little bit of stimulus activity on the quiet” said Macquarie’s Shanghai-based commodities analyst Graeme Train.

“But we think some in the market are getting too hopeful for a big stimulus.” The government has been under pressure to step in and rev up the economy following a run of weak economic releases. Exports, domestic spending, activity in the property sector and industrial production have all been lower than expected.

A government survey released on Tuesday showed that business activity across the manufacturing sector picked up only slightly in March, which is typically a strong month for factories as they ramp up production after the Chinese New Year holiday at the start of the year.

The official Purchasing Managers’ Index (PMI) rose to 50.3 from 50.2 in February, a smaller increase than in previous years.

The HSBC/Markit PMI, which surveys smaller firms in the private sector, painted an even bleaker picture, showing business conditions at their worst in eight months, as firms shed jobs and new orders fell. The official PMI gives a broader view of the manufacturing sector as it includes the big state-owned firms.

Westpac economist Huw McKay said in a note “the combined surveys make for unhappy reading”. The manufacturing sector “is experiencing a pronounced soft patch that has some months to run”.

Still, the small bump in the official PMI suggests that economic activity may be stabilising and that international demand is picking up. “While conditions in the sector remain subdued, they haven’t deteriorated as fast as some have feared,” said Capital Economics China economist Julian Evans-Pritchard He said that was supported by preliminary data on electricity output, which according to the NDRC – grew by 8.5 percent year-on-year during the first 24 days of last month, up from growth of 5.5 per cent in February. “Meanwhile, domestic weakness has been partly offset by healthy foreign demand,” he said.

Kcv points Government has been under pressure to step in and help the economy.

Measures include irrigation, rail projects, affordable housing and agriculture.

RBA switches jawbone from $A to houses

The Reserve Bank of Australia has dumped its overt strategy of talking down the dollar and has ramped up warnings about steep rises in property prices.

As the central bank’s board left the cash rate at a record-low 2.5 per cent for an eighth straight month, governor Glenn Stevens pointedly declined to describe the currency as “uncomfortably” high – a term he used in December when the dollar was several cents lower than US93U:, which it hit on Tuesday.

Mr Stevens said the currency’s recent gains reduced the benefit to the economy. At the same time, low rates are expected to boost economic growth, helped by a surge in new home construction.

The shift in tone is a significant acknowledgement recent attempts to “jawbone” the dollar lower have floundered and threaten to undermine the bank’s credibility.

In January board member Heather Ridout said that she would like to see the dollar closer to US80<t.

Mr Stevens signalled in an interview with The Australian Financial Review in December that the dollar should Continued p6 * Philip Baker Silence a nudge to SA p28 ”

From page 1 RBA switches jawbone: $A to houses be closer to US85<t. Instead, the dollar has appreciated by almost 5 per cent since early February, when the bank indicated its two-year interest rate cutting cycle was over and that the next move would be an increase in official rates.

The board now faces an awkward balance between a high currency that it admits is damaging export industries and borrowing costs so low they threaten to unleash a housing bubble.

“It’s a bit schizophrenic,” said Stephen Walters, chief economist at JPMorgan Australia.

“The terms of trade are going down, so I would have thought it was a good opportunity to talk the dollar down.

“Jawboning usually works when the fundamentals are supportive, and I would have thought they are support

ive, with the terms of trade going down and the US Federal Reserve talking about tapering.” Figures published late on Tuesday by the Reserve Bank showed Australia’s most important commodity prices slumped 2 per cent last month, taking the decline over the past 12 months to about 13 per cent By contrast, the dollar rose 3.3 per cent in March, and traded at US92.64<t late on Tuesday after briefly touching a four-month high of US93.04* in the wake of the Reserve Bank’s postmeeting statement Mr Stevens said in the statement that while the dollar’s fall from its highs of a year ago were helping the economy adjust to the end of the resources boom, that support had lessened because of recent gains in the exchange rate.

“The RBA finds itself in a tricky situation on the currency front” said Su-Lin Ong, chief Australia economist at the Royal Bank of Canada.

“Silence is viewed as a green light for

the $A to move higher, while any jawboning lower has become increasingly hollow amid stronger growth and a shift in its bias.

“Today’s small change may well reflect some of the different views among board members as the currency continues to move north.” Another interpretation is that policy makers are increasingly reluctant to jump at shadows in the currency market and are seeking to avoid

twisting and turning their rhetoric according to every move in the dollar.

While the currency remains higher than would be ideal, and interest rates are potentially too low, the combination of both is starting to pay dividends across the economy.

Signs cited by the Reserve Bank that its two-year cycle of rate cuts is starting to spur growth as the economy adjusts to the end of the mining boom include improved

consumer spending over the summer, rising exports and business confidence.

Recent data “foreshadows a solid expansion in housing construction,” Mr Stevens said, as he also softened warnings about an expected deterioration in the labour market “This shift suggests the bank is now less concerned about near-term weakness in the labour market as a proximate driver of policy,” said Commonwealth Bank senior economist Matthew Hassan.

Offsetting those positives were

ongoing concerns about the lack of any strong rebound in investment outside the resources sector and the looming federal budget in May.

Mr Stevens reiterated that the board expects to keep interest rates unchanged “for a period”.

However, many analysts are starting to question how long that period is likely to be, not least because of booming property prices.

Figures released as policy makers met in Melbourne showed property prices surged by a record 2.3 per cent last month, the biggest increase since the series began in 1996.

Sydney led the surge, with prices now almost 16 per cent higher than a year earlier, followed by Melbourne up 12 per cent Mr Stevens – who last week escalated warnings to investors that they shouldn’t assume prices can only go up – said on Tuesday that house prices had gained “significantly”.

He also noted for the first time that credit was “slowly picking up”.

This shift suggests the bank is now less concerned about near-term weakness in the labour market as a proximate driver of policy.

Matthew Hassan, Commonwealth Bank senior economist

SMSF: Can you afford not to have a corporate trustee?

With a do-it-yourself super fund administrative penalty regime certain to come into effect from July 1, there is a new reason why DIY funds should have a corporate trustee.

The way the new penalties will be imposed, says AMP SMSF technical specialist Peter Burgess, adds further weight to the benefits of DIY funds having a corporate trustee rather than individual trustees.

Another way of looking at this is DIY funds with individual trustees just over three-quarters of the estimated 515,000 funds – having an extra incentive not to commit any breaches of super rules and regulations that will attract administrative penalties.

If a DIY fund has a corporate trustee with directors – fewer than one in four funds – and the trustee becomes liable to pay an administrative penalty, it will be levied on the trustee as a single entity. However, if the fund has individual trustees, each is likely to be liable to pay the penalty.

For example, says Burgess, if a fund with a two-director corporate trustee fails to prepare financial accounts, a $1700 penalty could be imposed on the body corporate, which the directors must pay between them. But if the trustees are individuals, each individual trustee could incur a $1700 penalty.

Where a fund has two individual trustees, they will be up for a total $3400.

Furthermore, it will be a personal liability on the trustees, which cannot be paid for or reimbursed from the assets of the fund.

As far as the directors of the corporate trustee are concerned, they will also be personally liable for any penalty but they can share the penalty. That said, if one can’t pay for any reason then the other is liable for the lot

The new regime, says Burgess, will have the greatest effect on trustees who have been serial offenders against the super rules. Many have been able to get away with it mainly because of a reluctance by the DIY super regulator, the Australian Taxation Office, to take the court action necessary to impose penalties for breaches.

As far as the administrative penalties that trustees will be up for, there are four that trustees will face, each with fines of $10,200 per trustee.

They will be imposed for such offences as trustees failing to notify the ATO of an event that can have a significant adverse effect on the financial position of their fund, and trustees lending fund money to a member or relative of a fund member or providing any other financial assistance using the resources of the fund. Other major offences with similar $10,200 penalties are trustees borrowing money in an arrangement that fails to satisfy the requirements of a limited-recourse borrowing arrangement and trustee breaches of the in-house asset rules where a fund allows the value of investments to related parties like members and relatives to exceed 5 per cent of the total fund value.

One significant related-party rule that wasn’t introduced in the administration penalty regime, says Burgess, is deliberate actions to breach the rules. Where a trustee intentionally acquires an asset from a related party, knowing the 5 per cent rule will be breached, they could be up for penalties of up to $220,000 or a jail term of up to one year.

The rules for intentional acquisitions provide some flexibility where trustees may have acquired investments that breached the rules unintentionally. They may have, for instance, acquired shares from a related party that were not listed on a stock exchange under a mistaken belief that the rules that allow shares listed on a sharemarket to be acquired from a related party also applied to unlisted shares.

Among offences with $3400 administrative penalties are any failures to comply with the prescribed operating standards for super funds. Examples of this are breaches of the contribution rules where they have to ensure they only accept contributions when allowed to, along with breaches of the rules that require benefits to be preserved until a member satisfies a condition that allows them to be released. Such conditions include reaching the age of 55, where benefits can be taken under the transition to retirement rules, reaching 60, where benefits can be taken when a member retires, and 65 when super can be taken freely with no preservation restriction.

Trustees failing to notify the ATO that the fund has ceased to be a selfmanaged super fund is a another $3400 offence.

There are six offences with $1700per-trustee penalties for major administrative failure, like not preparing financial statements for the fund and retaining records for five years, failing to keep and retain minutes of trustee meetings for 10 years, and not keeping records of changes of trustee for 10 years.

An important $1700 offence for new funds is trustees failing to sign a trustee declaration within 21 days of becoming a trustee, then retaining this declaration for 10 years. Not retaining copies of member reports for 10 years attracts a similar $1700 penalty, as does not retaining elections as required for certain preAugust-1999 investments for the same time.

Breaches that attract penalties of $850 are failing to appoint investment managers in writing, failing to comply with an education direction issued by the ATO, failing to provide information to the ATO in the approved form, and failing to provide statistical information to the ATO when instructed.

Burgess says the aim of the new regime is to impose penalties more appropriate than the current very strict rules where the regulator can declare a fund non-complying, and trustees liable to being banned and funds stripped of half their assets in tax penalties.

Another current major negative is the ATO having to go through a timeconsuming court process to penalise any trustees. The new penalty regime will not require court action, although the ATO will still have to show why trustees will be penalised.

The new regime will have greatest effect on trustees who have been serial offenders.

The Great Developer Wall of China

After the boom following years of explosive growth the economy is slowing down, and there will be casualties.

Shanghai Thousands of small Chinese property developers are expected to collapse over the next two years, as slowing apartment sales and tightening credit markets force rapid consolidation in the once booming sector.

The property slowdown is being mirrored in the steel sector, where the largest private mill in Shaanxi province has reportedly been shut down after failing to repay banks loans.

The prospect of widespread loan defaults across China has spooked global markets in recent weeks and comes as a property developer in the eastern city of Ningbo said it was struggling to repay $US567 million ($626 million) in debt

While analysts believe a cleanout is under way in China’s property and steel sectors, there is no sign at mis stage of credit markets freezing up or rapid home price declines.

“In the last five years, 20,000 property developers have gone broke. I think another 20,000 need to go,” said Hayden Briscoe, the head of Asia Pacific fixed interest at AllianceBernstein.

“It’s another phase of consolidation but I’m not worried about it”

Mr Briscoe said higher interest rates had led to slower property sales, which had placed some developers and steel mills under financial pressure.

The China economist at SocGen, Wei Yao, said continuing loan defaults would not lead to a systemic economic melt-down, as Beijing had the tools to prevent a collapse.

“[The defaults] are a sign that the economic system has problems and economic efficiency has declined,” she said. “But in China the government has the tools to intervene.”

Government efforts to guide property prices lower appear to be working.

A Reuters survey on Tuesday found home prices grew at an annual rate of 8.7 per cent in February. This was slower than January’s 9.6 per cent rise.

The cooling in prices has resulted in slower sales and construction activity.

Home sales across China fell 5 per cent in January and February from a year ago, while in Beijing, sales slumped 46.3 per cent Despite headline grabbing defaults and weak economic data, credit markets in China remain relatively stable.

While volumes in the inter-bank market have dropped away slightly, the benchmark “seven-day reporate” was trading at 2.8 per cent on Tuesday, only slightly higher than 12 months ago.

But volatility has increased. The reporate spiked above 11 per cent in June and then above 8 per cent in December, before settling back below 3 per cent The clean out in the property development sector is being mirrored across the steel industry, helped along by the government’s push to clean up the environment and tackle overcapacity in the economy.

Earlier this month, it was reported that Haixin Steel, the largest privately owned mill in Shaanxi province, failed to pay back its bank loans.

House prices to rise again, says Fitch

Australian house prices have grown faster than in any other major economy and are forecast to match growth in 2014 even in countries recovering from the global financial crisis. But low interest rates, high incomes and only modest employment declines mean Australian houses are still relatively affordable, says credit ratings agency Fitch.

Australian house prices have more than tripled since 1997, accelerating past other countries as the crisis hit in 2009. Prices fell about 7.4 per cent between late 2010 and May 2012, but have grown 11.8 per cent since then. Growth in the past 18 months has been more rapid in parts of the United Kingdom but much slower growth in other regions there mean it has not matched Australia’s recent growth.

Australian houses are the second least affordable after the UK on both house price -to-income ratios and compared with per capita gross domestic product. But Fitch expects both economies to support further house price growth, rising 4 per cent in Australia in 2014 and 5 per cent in the UK.

“Australian cities appear expensive relative to those in other countries,” says Fitch’s Global Mortgage and Housing Outlook. “The ratio has, however, been in the same range for over a decade.”

But it expects affordability to get worse as prices outpace income growth.

A separate consumer sentiment survey out on Wednesday is less positive about the outlook, with the influence of house price rises on confidence wearing thin. The Westpac Melbourne Institute Survey of Consumer Sentiment found expectations income would rise in 2014 fell 2.5 per cent this month. “The household sector is currently experiencing the weakest labour income growth in a decade,” JP Morgan economist Ben Jarman said.

The Fitch report shows much of the resilience in Australian house prices has not been driven by high rates of lending in recent years, with home loan growth relatively flat until the past six months. Instead, the main influences have been a relatively buoyant economy, and housing supply not keeping up with population growth.

Several other countries are also experiencing house price hikes, particularly resource -rich countries such as Brazil. Record low interest rates as economic conditions improve is driving others such as the UK. But worries about overheating property markets appear more acute than in Australia.

The lift in house prices in the southeast of England, which is paralleling growth in Australia, is also driven by a lack of supply as well as super -low interest rates. But the report says affordability is deteriorating fast there as incomes have quickly been left behind. Canada, which like Australia has benefited from the resource boom, has had a sustained rise in house prices over a decade, but this is tailing off due to over -leveraging.

While home lending dropped sharply in many countries. In Canada there has been no let -up. The debt to disposable income ratio in Canada is about 180 per cent. In Australia it is about 134 per cent.

Financial Review – 23 Jan 2014

 

FIN Review: Threats to our LNG future

Australia was not the first mover in selling liquefied natural gas to Asia. Indonesian, Malaysian, and Middle Eastern shipments to Japan, South Korea and Taiwan were all well-established by the time Australia started exporting gas to Japan in 1989. But Australia is set to end up as the biggest player at the table. It has transformed the world’s sixth largest reserves of gas into the biggest export presence, growing from 7 per cent of the market in 2000 to 25 per cent by 2018 to displace Qatar from the top spot. Gas-based projects now make up the vast bulk of the remaining spending on the now-receding Australian resources boom. Out of $268 billion worth of resources investment still under construction, $205 billion is in energy, according to the Bureau of Resource and Energy Economics.

LNG is the most fascinating of supply chains. Billions of dollars worth of engineering in undersea wells, pipelines, giant liquefaction plants and specialised ships -just so that somebody can boil a kettle in Tokyo or Guangzhou.

Australia’s problem is that it has also made itself the most expensive builder of supply chains of this sort, and that is now threatening its future place in this crucial part of the world energy industry.

Just as with iron ore, massive investment in creating a worldscale supply industry has also pulled in huge uncontrolled costs in its wake. Some of the investment growth recorded in LNG is actually $20 billion in accumulated cost blow-outs, not extra value. Chevron Australia head Roy Krzywosinski says Australia has a window of only 18 months to two years to make itself competitive again, or risk being frozen out of the next wave of LNG development set to be worth another $150 billion.

Gross underestimates of project costs are nothing new in the global LNG world. But disturbingly, consultant McKinsey predicts that for the next round of investment, Australia is already 30 per cent more expensive than rivals, much of it for self-inflicted reasons of labour cost, tax and greentape regulation.

The Australian dollar, pushed up partly because of the resources bonanza itself, is a problem but hardly the only one. As the investment has poured in, labour productivity has not matched it, with output per dollar falling well below the US and Canada. The antics of unions such as the Maritime Union of Australia in extracting ridiculous concessions from contractors on energy projects cannot be allowed to survive into the next round of LNG investment or it might be the last. Moreover, Australia will not have the pricing power over gas supplies that it has had in the recent past to cover up indulgences on costs.

Brand new projects built from scratch onshore are already considered to be too expensive to do again. Future projects will either be expansions of existing facilities which can use existing infrastructure, or else floating plants that can be built to a standardised design and moved on to new developments later.

But if Australia wants to keep getting even such projects, it must get its house in order. No less than Shell’s global boss, Peter Voser, said on Monday getting the tick for future investment means getting tax and regulation right. New energy minister Gary Gray also conceded, given the scale of spending on LNG, “unreasonable” pay increases not linked to productivity could not go on. But the complacency of ministerial colleague Anthony Albanese in dismissing warnings on investment, and pointing to what we already have, shows some in the federal government do not get it. One of the benchmarks for any new government in Canberra after September 14 will be whether they can create the settings that will keep our LNG boom going through another cycle. There will be more competition. The Americans will have to turn to exports to justify more investment in their faltering shale gas boom. They will not be shy of a bit of gas diplomacy, and using energy supplies as extra carrots in wider trade deals that we’ll have to be sharp to match.