How are Things in Cincinnati, Son?


Ric Battellino and his friends stalk John Howard in his nightmares. The Reserve Bank Deputy Governor is just as macho as his boss, the Bank’s Governor, Glenn Stevens, when it comes to raising interest rates.

The last thing Howard needs on the eve of an election is another rate rise. If it occurs, that rise would be the sixth since Howard promised, before the last elections in 2004, that interest rates would always be lower under his Government than they would be under Labor.

But as Oscar Wilde once noted, the truth is rarely pure and never simple.

Howard would never admit it but thousands of young home buyers in Australia are now paying bigger interest bills than their parents did when home loan interest rates hit 17 per cent under Labor in the 1980s. And interest bills on new loans are typically bigger now than they were when Howard took office in 1996.

The great Australian dream… in Cincinnatti

That’s because sharply rising house prices have forced buyers to take out huge home loans to purchase even a modest home. And they are the lucky ones. As rents have risen sharply too, many young families have been left effectively homeless. They are living with their own parents or on friends’ verandahs; wherever they can. The one house/two family situation, not seen in Australia since the acute housing shortages of the immediate post-war years, is back with a vengeance.

Understandably, Howard is touchy on this subject. Tackled on the rampant Australian housing market in Parliament, the Prime Minister said he’d had very few complaints from people who had become richer as house prices rose. That was just another wedge from the Hopoate of Australian politics. Howard was dividing the mostly older homeowners who have indeed become richer, at least on paper, from their adult sons and daughters, who are now starting families of their own.

There is an escape from all this, but it’s not the traditional one of buying a house in the outer suburbs or a country town, where property was once affordable. Homes there are already well out of the reach of thousands of young Australians. The trick these days might be to move to one of the less fashionable cities in the United States, where house prices have fallen sharply over the past year or so as a result of repossessions arising from America’s sub-prime mortgage crisis, which is now rattling world financial markets.

A typical mid-price house in Cincinnati, for example, now sells for about $AU178,300. That’s the price one real estate agent has on a pleasant three bedroom, ranch-style house with two bathrooms and a double garage. It’s on a quarter acre block, too a model of the traditional Australian dream home.

Prices are even lower in Cleveland, where the mid-level price for a house is now slightly less than $AU157,000. Detroit, of course, is even cheaper, but with the US motor industry stuck in reverse you might find it hard to get a job there. With any of these choices, though, it would be tough getting back to Mum’s place on a Sunday for a lamb roast.

There was speculation last week, after the Coalition picked up a few points in the Morgan poll, that voters might be moving back to Howard, because they believe he would be better than Labor at managing the economy in tricky times. The wild rides Australians have had in the housing market during Howard’s reign suggest it ain’t necessarily so. Especially considering Howard is easily the biggest taxing and the biggest spending Prime Minister Australia has had since World War II. Gough Whitlam’s performance looks paltry by comparison.

Howard is expected to call fresh national elections as soon as this week’s APEC meeting in Sydney is out of the way. Technically the election could be held as late as 19 January next year, but it will be before that. Prime Ministers simply don’t call elections when most voters are lounging on the beach during their annual holidays.

The Reserve Bank has already shown us that it meant what it said when it declared that it is prepared to raise rates in an election year. And Battelinno has left Australians no room to believe that it will get cold feet now, if it feels the urge again, in the weeks ahead.

Speaking to retail financiers in Sydney last week, the Deputy Govenor was eager to crush any notion that the US Federal Reserve’s decision last month to cut its discount rate would herald any general cut in rates. He noted that the Fed and several other central banks including Australia’s Reserve Bank had pumped billions of dollars into their domestic financial markets to offset fears flowing from the US sub-prime mortgage crisis. But Battellino added a warning: ‘None of these measures was intended as a change in monetary policy settings and no central bank has reduced its interest rate target.’.

Got that? The Fed hasn’t cut US interest rates, and we won’t be cutting ours, either.

So what exactly did the Fed do? Battellino spelt that out, too. ‘The Fed … cut the penalty rate on its discount window from 100 points to 50 points in order to lessen the cost of emergency funding to banks,’ he said.

Why was Battellino so keen to make this distinction? As the Reserve Bank itself has explained several times recently, price pressures in Australia are still high and the Bank might have to pull its interest rate trigger at least once more to puncture them. Oddly, one of the most troublesome price rises at the moment is that of money itself.

Major lenders, including the ANZ Bank, have warned that they might have to increase their home loan interest rates, even if the Reserve Bank decides to leave official rates on hold for a few more weeks. That’s because it is now having to pay more to get the money it lends to home buyers.

The big question all this leaves is will Australia’s house prices tumble, in sympathy with those in many parts of America? It could happen: the housing market in Australia shows all the signs of a classic bubble, and bubbles do get pricked, eventually.

Will the bubble be pricked soon? Well, if I could tell you that I wouldn’t be slaving over a computer. I’d be on a beach somewhere in the South of France with my feet in buckets of champagne.

Australia ‘s most influential post-war politician, Bert Kelly, once said that’s how the experts who really know about these things live.

Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.