Why you shouldn’t bet against the Australian economy

Two huge injections of free money will keep the property market rolling along.

At some point the bill for all the ‘free’ money will come in.

The boss of the ANZ Bank said Friday we faced the best economic conditions in at least six years. The NAB boss backed him up and the boss of our biggest bank the CBA said as much the day before.

Now a cynic – or just an ordinary realist – would reasonably respond; well they would say that wouldn’t they?

The main business of an Australian bank – of every Australian bank except Macquarie – is to lend money to the average punter to buy a home to live in or to invest in, and you do the second anyway when you do the first.

And the banks have never had it better. They are able to shovel out almost free money – ‘generously’ charging only 2 per cent or less to owner-occupiers and not much more to investors – because they are literally getting the money to lend for free.

Thanks to the Reserve Bank they are getting the money they lend to you at an interest rate of just 0.1 per cent. That’s as free as you can get without actually going to zero.

Without boring you with the details, this is the money they get to lend on the most usual home loan – the variable rate loan. It gets a little more complicated and a little more expensive for fixed-term loans.

The Reserve Bank of Australia is helping with free money.

The point is that the bank gets its money at 0.1 per cert and lends it to you at around 2 per cent. Critically, if at some point in the future it had to pay, say, 2 per cent for its money, well, then it would be charging you 4 per cent. At least, 4 per cent.

The ‘variable’ basis of the loan means it can always keep that 2 per cent margin between what it pays and what it charges. And that’s no bad thing; it keeps the bank in business, and reasonably sop.

But it does mean it really can’t lose; and right now it – all of them – are creaming it. They are shovelling the money out the door; and the seemingly ever-escalating rise in property values builds in an immediate and growing buffer on the loan.

Say the bank lends $600k to a couple to buy a $1m house. Almost as soon as they’ve bought it that $600k loan is secured by a house worth, say, $1.1m. And within six months the security has leapt in value to, say, $1.3m.

The housing market is booming.

No wonder the ANZ’s Shayne Elliott and NAB’s Ross McEwan said times were great. Now true, McEwan wasn’t only talking about home loans; he said the bank’s business customers were also doing well.

That might surprise, until I remind you about JobKeeper.

Yes, the program was good, great and fundamentally necessary. But it is also now very clear that it poured billions into the pockets of canny business owners rather than workers.

About $90bn was paid out in JobKeeper. The impression that the money went to the big end of town is false: only $2.5bn went to the 300 biggest companies and nearly $1bn of that went to Qantas.

The vast majority of the $90bn – over $87bn went to SMEs, small and medium businesses, which are mostly not listed on the stock exchange and are not in the public eye.

Thank you, by the bye, Dean Paatsch of Ownership Matters for the data.

Yes, it kept many of those SMEs alive and their workers in jobs. But running down to Christmas and into the March quarter when all the lockdowns were over, it was taxpayer money for jam.

NAB chief executive Ross McEwan. Picture: Aaron Francis

So we’ve had two huge injections of free money – near-zero interest rates mandated by the RBA and the $10-15bn of free JobKeeper cash that went straight to the profits of SMEs

No wonder the bankers are smiling.

Well, that was then and is now: what about tomorrow?

The outlook for the rest of 2021 and into 2022 looks great. The free JobKeeper money has ended but the free money from the RBA keeps flowing.

The property market will keep rolling along – and the treasurer has just, sensibly, extended HomeBuilder into the 2021-22 year.

What’s happening in Australia is underwritten ultimately by the boom on Wall St and the multi-trillion dollar big spending of the Biden administration.

Yes, we might all wake up with big headaches in one, five or ten years time – although, I have to say, I’m still waiting for the real bills to be presented from the GFC.

But right now it’s all cylinders revving, especially in the property market – until we run out of buyers.

Remember though, all booms last until they stop lasting; but you only find out when after they’ve stopped. And China remains the big, big unknown.

But right now it’s pretty clear that a very good 2021 is all-but locked in.

Originally published as Why you shouldn’t bet against the Australian economy