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The Mercury Real Estate Guide : May 15th 2009
MERCURY Friday, May 15, 2009—61 FINANCE AND CONVEYANCING It’s time to home in on the future Itwasnever reallya secret: the greatboom wasfuelled by household debt. THISnation’s greatest unintended lesson for the world’s developed economies can befound in the stimulus debate betweenKevinRudd andMalcolmTurnbull.Onefavours ahandout up-front to revive consumerconfidenceandspending; the other seeks thesameendviaa permanentreduction inincometax. Asithappens,wehavejusthad whateachleader wanted:atax cut fromlast July,andtwowadsofcash inDecemberandagain recently.But aquicklook out thewindowtellsyou neitherformofpaymenthas encouragedpeople togoshopping again. Theonlynumberthathas consistently risen in the national accounts in the pasttwoquarters is thehouseholdsavings ratio,whichis at its highest level in 20 years. Householdconsumption—themain aimof the stimulus debate—remains flat. Whatis obviousfromthe data so far is that Australian households will take every extra dollar the Governmentgivesthemstraight to the bank, to reduce theamount owingonthemortgage or credit card, or tomakeadeposit. TheRuddGovernmentis, in effect, allowing the FederalBudget to plunge into deficit so household budgets canbe repaired. It is notapretty picture because it suggests years of eye-popping Budget deficits to come,because the debts that Australian households carried into thisdownturnhaveno precedent. In the past, the job of makingit easier for families to see past their loan obligationsandbegin spending againwasleft mainly to monetarypolicy,through lower interest rates. Butfiscal policy is sharing the load now,with handoutsbeing delivered ahead ofanyofficial confirmation of recession. Thathouseholdshave chosen to save the entire value of their windfalls so far is not necessarilyabadthing.Butit is not whatpoliticianswantthemto do, so acouple of telling questions arise. Arethe handoutsbeing wasted? If they are, theRuddGovernmentmay need to consider letting the downturnrunits course rather than gambleonaneven deeper Budget deficit withoutanobvious pay-off in consumerdemand. Alternatively, is the real job of governmentto help households return to the position they enjoyed for the best part of the 20th century, whenthey saved roughly $10 in every $100 of disposable income? If theansweris yes,thenthe public mustbraceforarathermessybargain withtheGovernmentwherebythe Budgetdeficit continues to balloon until theeconomyturns the corner. Atthat point, theGovernmentmust hit taxpayers for the interestwitha wind-backof middle-classandgrey- powerwelfare. Theargumentaboutwholit the fuse for the global recessionmust nowinclude the household sector. Thereasons weren’t apparent late last yearwhenthe financial system wasfreaking out because the culprits wereobviously at the topendoftown andin theUSCongress. It wasn’t untilconsumersclosed their wallets aroundthe worldin theDecember quarter that the panic in shareand credit markets hit the real economy. Policymakersmusthavewondered whatmadehouseholds feel so vulnerable. Theclue is inwhatdidn’thappen in previous crises.FormerReserve Bankgovernor Ian Macfarlane has listed ‘‘seven significant financial shocks in the deregulation era’’ obvious from the data . . . is that Australian households will take every extra dollar the Government gives them straight to the bank ‘ That is anotherwayof saying they hadless responsibility—the middle classes could afford to keep spending because they hadn’t bet their future onever-rising property prices. ’ Household debt exploded everywhere. Australia’s household savings ratio, for example,wasin the red for the first timeonrecord in the Junequarter in 2000whenhome buyersweretrying to beat the introduction of theGST.Formuchof the next six years, the figurewould remainin the negative, with the all- timelowofminus3.9 per cent in the second half of 2003. Australia, of course,hastroubles theUSwouldlove rightnow.The BushadministrationranaBudget deficit inaboom,so the deficitBarack Obamaneedsnowto stabilise the Americaneconomyisdouble thatand likely tobemorebefore the recession is over.YetAustralia is alsoonthe roadto troubling deficits.Ashortfall of $50 billion-plus for 2009-10 is unavoidable.Thedeficit isafunction oftwothings: Labor’s handouts,and the Coalition’s decision to cut taxes andincrease spendingin its final termwithoutseeking offsetting savings. BRASS IN POCKET: Household consumption remains flat. between the early 1980sandtheend of 2006.Twoof the seven led to world recessions, at the start of the 1990s andagain in 2001.Butitwashard to blamethe middle classes forwhat wereclearly failures of regulation. Australianshaveonlyapassing memoryof the latter shock, the so- called hi-techwreckof 2000, because weavoided theworld recession of 2001. This time, though,consumers feltadirect connection to financial shock because theyhadspent the first decade of thenewmillennium ontheirowndebt binge. Thehousehold sectors in developed economies suchas theUS andAustraliahadbeen net savers throughout the ’80sand’90s.So consumerswerenot as easily panickedbythe first seven financial shocksMrMacfarlane identified. Theunintended lesson Australia offers its friendsandtrading partners is governmentsthatdolittle with therevenue they raise in good timesandwholook the otherway while householdsborrowtoconsume can’t use fiscal policy inadownturn to quickly reignite consumption. Oncethat is grasped, fiscal policy will needto be rethought, if only to makesure the debts governments are takingonare in the interests of households. What is Hedge funds surge through April HEDGE funds rose 4.2 per cent in April, according to data tracker Hedge Fund Research. Managers betting on further falls in stocks suffered badly while bullish managers gained as much as 30 per cent on last month’s market rally alone. The present market rally, if it maintains its impetus, could put pressure on bearish managers to change tack. David Einhorn, ofNewYork’s $US5.1 billion ($6.6 billion) Greenlight Capital fund, with a more positive stance, helped the fund gain 4.4 per cent in the first quarter of 2009. In his investor letter, Mr Greenlight said: ‘‘Wrongfooted longs become smaller problems in market declines, while wrongfooted shorts become big- ger problems as the market bounces.’’ Short sellers face unlimited losses when stock prices rise. Equity-focused funds, which account for the largest group of hedge-fund managers, have fared better than average, up an average 6.1 per cent this year. Crispin Odey, of London- based Odey Asset Management, gained about 30 per cent in April in his European equity fund thanks in part to bets that shares in British banks would rise. 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