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Tuesday, 15 April 2008

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Not reading The West Australian

The last thing Australian banks need right now is for house prices to slump as they are in the United States and Britain so the ANZ Bank economist Alex Joiner can be forgiven for playing down the likelihood of that happening. High interest rates would deter anxious buyers from pushing prices higher, Mr Joiner confidently predicts, but strong demand from aspiring home owners would also prevent prices from falling. "We might see some of the steam and the frenetic activity come out of some housing markets, but in aggregate we do not expect prices to drop."

There are plenty of recent Australian homebuyers with borrowings of 90% or more of their purchase price who will hope his forecast proves correct but the evidence is mounting that things might not turn out so benign. In Western Australia , where real estate prices really boomed over the last four or five years, the downwards correction is already well under way. The Real Estate Institute of WA says 17,584 homes and blocks of land are listed for sale, up from about 5000 just 18 months ago and the highest number of homes on the market in 12 years. Institute President Rob Druitt says the 2.7 per cent fall in the median house price for the March quarter from $470,000 at the end of last year to $457,000 was caused by the combination of interest rate rises, a drop in overall consumer sentiment and the record number of listings.

Australian Property Monitors certainly disagrees with the ANZ Bank view. APM general manager Michael McNamara was reported in The West Australian saying that that drop in median prices of 2.7% over the last three months was the beginning of a trend, with the value of all houses expected to fall at least 10 per cent and houses in the mortgage belt likely to plummet more than 20 per cent.

These people, of course, are just giving their opinions and who knows what the future actually holds. What we do know is that to date people are not inclined to blame the new Labor Government for the increasing economic uncertainty. A Westpoll published this week shows support for the Coalition has dropped by 16 percentage points to a two party preferred 38 per cent when compared with the 54 per cent recorded at the election back in November when WA was the only state where the Coalition actually won a seat.

Let the paying of the bribes begin

When politicians wander around the country on election campaigns they like to have some goodies they can hand out to the voters to show what influential and nice people they are. This largesse at taxpayers' is dressed up with a grand title designed to make the little bribes a little more respectable and hence the Safer Suburbs Plan of the Labor Party. It promised $15 million to address crime and anti-social behaviour “by establishing important community safety measures including closed circuit television and improved street lighting”. With the election run and won the time has come to hand out the money and Minister for Home Affairs, Bob Debus yesterday began the process which will see CCTV installed in 25 communities. Not that there will be any money wasted mind you. Mr Debus assures us that organisations earmarked to receive funding will work closely with the Attorney General's Department which will be seeking detailed project proposals from nominated organisations. Proposals will need to demonstrate good practice in crime prevention and mesh with other crime prevention activities in relevant locations. Upon acceptance of the proposal, the Department will work with organisations to develop a funding agreement. Mr Debus gave no estimate of how many millions all this bureaucratic paper work would add to the $15 million of election bribes.

Paying the bankers

The Chairman of the Australian Prudential Regulatory Authority John Laker will not have been surprised that the international body of regulators like himself, the Financial Stability Forum, has decided that the way bankers are paid has contributed to some of the current bout of problems in the international financial system. The Financial Stability Forum has advised finance ministers meeting in Washington that “compensation schemes in financial institutions that encouraged disproportionate risk-taking with insufficient regard to longer-term risks” were a problem. “These risks,” the Forum reported in a paper , “were not subject to adequate checks and balances in firms' risk management systems.” That sounded a lot like Mr Laker when he addressed a seminar held by the Australian Reserve Bank back in August when he said:

Executive compensation that helps to deliver strong risk-adjusted returns on capital over time and rewards genuine out-performance of competitors does not raise prudential issues of itself. For a prudential regulator, agency risk issues arise if compensation arrangements encourage management to focus on a shorter term horizon than the long-term approach that would also be in depositors' best interests. Incentives to drive up the share price more rapidly than competitors can tempt management to pursue aggressive growth strategies or to ‘hollow out' the institution by paring back capital buffers or cutting costs, particularly in middle and back offices where risk management functions reside.

As a prudential regulator, APRA does not involve itself in the details of executive compensation arrangements. These are matters for boards and shareholders. Nonetheless, growth strategies, the size of capital buffers and the resourcing of risk management areas are major elements of APRA's supervision of banking institutions and form crucial inputs into its risk-rating system, discussed below. Moreover, boards of banking institutions seeking accreditation to use the more advanced Basel II approaches must sign-off that performance assessment of, and incentive compensation for, senior executives with profit centre accountability take into account the amount of risk assumed and the management of that risk.

Perhaps the only thing Mr Laker would want to change now is not involving APRA in the details of executive compensation arrangements. The disclosure of the ANZ Bank's strange funding of brokers with their risky margin lending is clear evidence that boards cannot be trusted on their own.

The Daily Reality Check

If it wasn't for John Howard this would be a politics free morning on the internet news sites' most read stories lists unless you count the Queensland Premier having her two bob's worth on whether a Christian school has the right to stop a homosexual couple attending a school formal. At least we know that the ABC attracts sweet tooths. The most read story there reported the decision of Cadburys to stop tours of their Tasmanian chocolate factory.

The Pick of this Morning's Political Coverage

It takes a difference of opinion to make a leadership contest and the various News Limited sites gave us that this morning. The Courier Mail, covering the Australian comeback speech of John Howard at a fund raising tribute dinner in the paper's home town, had a gracious former leader offering to quietly help his besieged successor Brendan Nelson. A duumvirate from The Australian interpreted the same speech by Mr Howard quite differently. In their version the man who led the Coalition to defeat last November was prepared to quietly help the Liberal Party while initially being reluctant to support Dr Nelson. Which left the rewrite journalist at the news.com.au website where they pick and choose from the coverage of all the papers in the group with something of a dilemma – was Mr Howard offering to help Dr Nelson or not? It was the national daily which won out with the combined version opting for a reluctant John offering Brendan support. Which will surely irritate Alexander Downer - a Liberal who knows all about being an unpopular leader. Michelle Grattan, keen to be covering a real story after being on tour with a Prime Minister, in her leadership story seized on remarks by Mr Downer accusiong unnamed frontbenchers of destabilising Brendan Nelson by briefing the media against him to change the leadership.

Howard offers Nelson a hand – James O'Loan, Brisbane Courier Mail

Howard slow to offer helping hand - Sean Parnell and Patricia Karvelas, The Australian

John Howard reluctant to offer Brendan Nelson support – By Staff Writers, news,com.au

Downer blast over sabotage bid on Nelson leadership – Michelle Grattan, Melbourne Age

Visa review welcomed, but warning on free trade – Kate Hannon, Canberra Times

WA home prices ‘to fall 20pc' – Daniel Hatch, Perth West Australian

More pain on the way – Michelle Singer, Australian Financial Review

Spotlight on ASX at inquiry meeting – Patricia Durkin, Australian Financial Review

Premier welcomes gay debate: School formal stance on gays sparks widespread debate – Robyn Ironside, Brisbane Courier Mail