“What a time to be taking annual leave!” we wrote in an email to Dan Denning last Tuesday. The US market had just fallen by 7%.
“Have some cocktails and hit the beach” he replied. Not wanting to ignore sensible advice, we did. But we do confess to watching far too much of Sky Business Channel and CNBC.
Not that we learnt much from watching them. Apart from appreciating how much nonsense is being talked about the Credit Wobble.
Will Your Mortgage Get Cheaper?
Don’t expect to get any mortgage relief tomorrow. That’s the message from the Government. The banks are being coy. They can afford to be as everyone else is arguing on their behalf.
We’ve written before that we aren’t in the habit of telling people how to run a business. So we won’t break that habit. The individual banks should be in the best position to know what is and isn’t affordable for them to do.
But, it does seem as though they have been given a free kick. The expectation is that the banks won’t lower interest rates tomorrow if/when the Reserve Bank of Australia (RBA) cuts the Cash Rate by either 0.25% or 0.50%. Chances are that the banks will pass something on. It probably won’t be the whole lot.
The interest rate markets have priced in a 95% certainty of a 0.50% rate cut.
But considering all the talk of them potentially passing on nothing, a cut of 0.12% will be dressed up as extreme generosity by the banks.
Don’t get us wrong. We have questioned for some time how wise it is for the RBA to be cutting rates while inflation remains so high. Does the RBA really need to cut rates or is it just pandering to the share market?
An Interest Rate Cut That Won’t Make a Difference
We are a little bit confused about the rationale for cutting rates. Is it to reduce the funding costs for banks? Or is it to prevent the economy from falling into a recession?
Either way we can’t see that it is going to do anything to address the problems. Supposedly the problem in the credit markets is twofold. First is that banks are reluctant to lend to each other and to clients. Second is that they cannot get an accurate price for various credit securities held on their books.
An interest rate cut by the RBA wouldn’t seem to be the solution to either of these issues. Sure, it has the potential to give them access to funding at a marginally lower rate, but unless the banks are prepared to take on more risk by writing new loans then all it does is add to the banks’ bottom line.
Are banks prepared to take on additional risk? Anecdotally the answer seems to be no.
Considering we have been told by the banks, regulators and government that Australian banks are superbly capitalized then cutting rates would hardly likely to have much impact.
Even German Efficiency Can’t Avoid the Credit Crunch
For all the predictions that have been flying around, there is one thing which no-one seemed to predict – The impact on European economies.
The graphic below, from the BBC website shows the relative size of the recent bailouts. The graphic doesn’t include the European banks which have fallen over or have been propped up – Fortis, Dexia, Irish banks, Danish banks and now the German mortgage lender Hypo Real Estate. The Hypo bail out is calculated at approximately $90 billion.
The intriguing point here is that while house prices have sky rocketed in the UK, US and Australia over the last thirty years, in Germany they have barely kept pace with inflation. During the last ten years they haven’t even done that.
There are some idiosyncrasies in the German market. One of those is controls which dictate how much rent a landlord can charge. This doubtless means that German property investors have to be more constrained when buying a rental property knowing that they cannot increase rents to cover the cost of a higher purchase price.
Despite this, Germany’s largest mortgage lender is relying on a massive cash injection from the German government.
The reason we bring this up is that it goes to show that despite the heavy hand of government intervention that has contributed to a stifled German property market, it hasn’t prevented Hypo Real Estate from getting into strife.
We’ll take another look at this story tomorrow.
Cheers.
Kris