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Property crash fears downgrade Australian banks

By Joe Montero

Fears of an Australian crash in property prices have been around for quite a while.  Regardless, property prices have continued to rise.

But in the last month or so, they have stabilised and even gone down a bit in Melbourne and Sydney, the two places that are at the heart of the price bubble. Nevertheless, they are not crashing, as they have in some other countries.

The reason for this is that Australia has some unique factors that makes our housing bubble a special case.

Because of the existence of a generous negative gearing provision, housing stock has been turned into an attractive investment option, not so much for the home buyer, but for the corporate buyer seeking a higher return in a lack lustre investing environment.  Consequently, it is not those buying a home to live in that are keeping up the price. It is the corporate investor, able to do this, thanks to the generous handout of taxpayers’ money,on the basis of recompense for loss of potential rental income. This is guaranteed to keep up the price. And it has gone up by 250 percent since the 1990’s (OECD figures)

A second consequence of negative gearing is that for the corporate investor with a large stock, it is more profitable to take the property out of the rental market. This is why Australia’s two biggest cities have about 80,000 vacant residential properties each. This is replicated proportionally around the country, creating an artificial shortage that pushes rents up. This also buoys up property prices.

corporate investors also enjoy write offs on the Capital Gains Tax.

Buying residential property has become an attractive proposition in its own right and it is useful as a means to transfer funds from other business activities to minimise company and personal tax obligations.

A further factor is the nature of Australia’s financial market. It is heavily dependent on investment from overseas. This means that it reacts to changes in the global financial market and the national financial markets from which this investment comes from. The two main ones are the United States and Great Britain.

If the investment climate in these countries worsens, investment funds will turn up in Australia, which tends to run on opposite short and medium term cycles. Some of it turns up in the housing market. The greatest part of corporate investment in Australian housing property comes via companies registered in Singapore, but using funds that traditionally mostly originate from Great Britain. Some up to date research is needed on this. Nevertheless, enough is known to see the pattern.

Investment in assets that come with the guarantee of government payouts is attractive to foreign investors in an uncertain global market and an Australia that for now is relatively stable.

Without these factors coming into play, it is doubtful that property prices would have kept on rising for so long. It still will not last forever, because there is one inescapable fact. Sooner or later, the price becomes too high for too many people to afford and the market will start to cave in. We are close to this point, and this is why it is starting to get a little shaky.

Enough for the ratings agency Standard and Poores to downgrade Australia’s financial sector, because of a belief that “economic imbalances” caused by soaring private-sector debt and property prices, are leading to a potential precipice.

“Consequently, we believe financial institutions operating in Australia now face an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses,” the agency wrote.

High housing costs is the major reason why Australia’s personal debt level is the highest in the world. This is not sustainable. The longer the property bubble continues, the large the level of personal debt and this suggests that a crash could be in the making.

The Standard and Poores downgrade follows a March report by OECD warning that soaring house prices and ever-rising household debt had exposed the Australian economy to “extreme vulnerability”.

The rating downgrades applied to 23 financial institutions, including AMP, Bank of Queensland, and the Bendigo and Adelaide Bank.

The notable exceptions were the ‘Big Four’ (AA-) and Macquarie (AA), which kept their ratings, but only because the agency presumed they would be bailed out by the government in the event of any catastrophe.

The financial institutions are on the one hand heavily exposed to risk with the level of debt tied up to housing loans. They are even more exposed with the level of debt owed overseas.  The collapse of the real estate bubble could place their ongoing survival at risk.

As defaults multiply, This would mean the spread of the crisis through the whole economy.

Bernie Fraser and John Edwards say increase taxes on wealthy

 The following from Elysse Morgan (ABC 17 May 2017) shows just how widespread has become the rejection of increasing the income of those at the top, at the cost of those lower down, as the means to economic recovery has become. When people with backgrounds like Bernie Fraser and John Edwards feel compelled to speak out, there may just be something in it. They go so far as to support increasing taxes for the rich.
Financial heavyweights Bernie Fraser and John Edwards are united in calling on the Government to increase taxes if it wants to balance the budget.

Both believe there are flaws in Treasurer Scott Morrison’s assumptions of a surplus by 2021 and say some radical changes are needed to address future spending.

Taxing the rich more and hitting all Australians with the Medicare levy is the only reliable way the Federal Government will reach its surplus goal, according to Dr Edwards, former Reserve Bank board member and leading economist.

He also welcomed Opposition Leader Bill Shorten’s plan to take the tax rate for those earning more than $180,000 to 49.5 per cent permanently, an idea slammed by Dr Edwards’ former boss Paul Keating, who labelled it a punitive tax gouge.

“I don’t think a change of 2 cents in the dollar on very high incomes is going to make quite that much difference,” Dr Edwards told The Business.

The bank levy does not trouble him and he praised the Government’s “courage to recognise we need tax increases”.

“I think they should scrap the corporate tax cut as well and we’d get to surplus a little more reliably and little more rapidly,” he said.

It is on the bank levy that the two men part.

“It looks like a populist policy based essentially on the unpopularity of the banks and it’s an easy target for the Government to raise revenue,” Mr Fraser, a former RBA governor, said.

“It won’t hurt the economy in any obvious way but it won’t lead to a sustainable society that politicians talk about wanting, a more prosperous and fair society.”

When put to him that the Government believed it was fair the banks should pay a levy particularly given the taxpayer support they receive, Mr Fraser suggested the tax should be across the board.

“If Scott Morrison believes it is OK to chase big profits, then it should also look to pharmaceutical, mining, technology companies to name a few,” he said.

“If there is this kind of capacity there that the Treasurer thinks that there is in the banks [to pay more tax] then it is elsewhere, and a fair tax would not be discriminatory on the unpopularity of the banks but would actually pursue [them all].”

He suggests a progressive company tax, similar to the income tax system, where the more a business earned the more it paid.

“It’s at least worth thinking about, we already have two rates of tax for business based on turnover,” he said.

He backed former Treasury boss and now NAB chairman Ken Henry’s calls for an inquiry into the bank levy, if the reports that the Government did not consult with industry or regulators were true.

“If there hasn’t been appropriate consultation, that’s a no, if the Government wants to make significant changes to taxation, if they don’t consult adequately with all the stakeholders before they determine what they are going to do … that is a serious mistake and governments run a real risk in getting things wrong,” he said.

Mr Fraser dismissed the argument the levy would even up the playing field for smaller banks, saying that would only happen if the big banks increased their lending rates dramatically as a result, which he did not believe would happen.

The temptation for future governments to raise the bank levy to plug budget holes would be too great to resist, Mr Fraser said, because there was nothing to stop them.

“There is no clear coherent framework for determining budgets, for determining government spending and revenue measures, and that’s the problem — everything is ad hoc, in large part driven by ideologies and lobbyists,” he said.


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Press freedom is under attack and in Australia too

This article, which was first published in the latest issue of The Walkley Magazine, is from a journalist and member of the Media Entertainment and Arts Alliance.

When this t-shirt re-appeared at a Trump rally last November, there were reports that it had been quickly withdrawn from sale. Not so. For just $29 plus shipping it can still be yours via a San Francisco-based online design outlet.

It seems like it’s been open season on journalists for years. More than 3000 of us have been slain in targeted killings and cross-fire incidents since 1990; 93 killed just last year. 

Indeed, Australian law enforcement agencies have demonstrated they are not prepared to vigorously investigate crimes against our colleagues.

Nine Australian journalists have been murdered in the past 42 years and still not a single killer has been brought to justice.

Now it seems it is open season on journalism itself. Scrutinising the powerful, reporting the truth and informing our communities – these are all being mocked and assaulted by those who seek to deceive for their own ends.

Journalism is being criminalised. The act of reporting in the public interest can lead to imprisonment. We know that’s the case in Turkey, in Egypt, in China… Add Australia to the list.

Australia’s parliament passed section 35P of the ASIO Act with bipartisan support, allowing for imprisonment for five or 10 years for a journalist reporting on a “special intelligence operation” – but because SIOs are secret, a journalist wouldn’t necessarily know if an operation was an SIO.

After MEAA and others spoke out, the Independent National Security Legislation Monitor, Roger Gyles (who later quit his post 14 months into a two-year term), made a modest recommendation since enacted: a defence of prior publication. But there has been no change to the penalties. Any journalist “recklessly” publishing a legitimate news story could still face lengthy jail time.

So being first with breaking news can get you up to 10 years in the slammer. How’s that for a “chilling effect” on journalism?

Now Attorney-General Brandis is considering extending Gyles’ recommendation to Australian Federal Police “controlled operations”. So will journalists face jail for being first to reveal a botched AFP investigation?

Section 79 of the Commonwealth Crimes Act provides jail terms of six months to seven years for “receiving” a leaked official document (“any sketch, plan, photograph, model, cipher, note, document, article or information”). Multiple AFP raids about NBN leaks are not unknown.

Meanwhile, in February ASIO director-general Duncan Lewis hinted that the first Journalist Information Warrants to be issued under the new metadata retention laws (an odd own goal: disclosure of the existence of a warrant is punishable with two years’ jail). These warrants allow 21 government agencies to trawl through two years’ worth of journalists’ and media organisations’ telecommunications data in order to discover our sources. It’s all done without our knowledge, so we’ll never know how many contacts and news stories have been compromised.

Are we now being spied on because of our journalism?

The government still refuses to reveal what goes on at sea under the military veneer of “Operation Sovereign Borders” or what takes places in asylum-seeker detention centres. While health professionals were exempted in October, other “entrusted persons” face two years’ jail for revealing the truth.

While there are some whistleblower protections available in the public sector through the flawed Public Interest Disclosure Act 2013, Fairfax Media’s reports show that private sector whistleblowers are routinely harassed, threatened and punished in revenge for having exposed corporate fraud, illegality, dishonesty and threats to public health and safety. Journalists must stand up to protect our sources, who risk so much in order for the truth to be told. MEAA has made a submission to the parliamentary inquiry.

Defamation laws continue to be used to harass, intimidate, muzzle and punish journalists and media outlets. The uniform defamation regime is used to assuage the hurt feelings of the rich and powerful, who don’t have to prove their reputations have been harmed in order to win massive payouts.

The ongoing failure of lawmakers in Queensland, South Australia and the Northern Territory to introduce shield laws allows plaintiffs to subpoena a journalist to compel them to cough up the identity of a confidential source. If the journalist maintains their ethical obligation to always protect the source’s identity, they risk a fine, imprisonment or both, plus a criminal conviction for contempt of court.

If the outrageous use of suppression orders is any guide, the courts aren’t of a mind to do the fourth estate any favours. In Victoria, an average of two suppression orders are issued every working day. Fortunately, Victoria is reviewing its Open Courts Act 2013, which has failed miserably to rein in judges who suppress information on spurious grounds for periods of up to five years (MEAA’s submission to the review notes that judges regularly fail to meet the requirements of the Act).

The public’s right to know is mocked and blocked.

With fake news on everyone’s lips, it’s worth remembering the Pizzagate incident when a man entered a restaurant in Washington DC with an assault rifle because he wanted to “self-investigate” fake news websites’ claims that a paedophile ring was being run from its basement by Bill and Hillary Clinton. The allegation was false. The three shots he fired were real. The gunman later said: “The intel on this wasn’t 100 per cent.”

So this is where we are now. The public’s right to know is mocked and blocked. Governments either enable attacks on press freedom or initiate them. Some 259 journalists were imprisoned last year. Our colleagues are killed for doing their job and, in death, are denied justice. Legitimate news organisations are described as purveyors of fake news and enemies of the people. Armed vigilantes “self-investigate” by packing an assault rifle.