The Guardian 1 October, 2008
$4 billion for housing — or is it?
Anna Pha
Times are tough, and more cuts are on the drawing board as the federal government discovers taxation revenue for the 2007-08 may fall below expectations. Despite this, Treasurer Wayne Swan seems to have had little difficulty in finding $4 billion to purchase mortgage-backed securities (MBS) in the non-bank home loan sector.
These mortgage-backed securities come in various structures. Essentially they entitle their owner to a certain share of principal repayments and interest payments on home loans. They are purchased from an intermediary, in this case a non-bank home loan company, who then lends the money to the purchaser of the home and organises the mortgage, etc. MBSs can be bought and sold in much the same ways as shares in a company; purchasers do not own part of the company. In effect they are purchasing loans (debt), which are backed by mortgages.
Treasurer Wayne Swan has gone to great lengths to differentiate his government’s package from that of the whopping $US700 billion bail out just negotiated in the USA under which the Bush government is relieving some of the largest financial institutions there of bad debt. The Australian government is buying AAA rated debt (rated as carrying minimal risk of default) which it hopes to be able to sell later when market conditions have stabilised. It portrays the purchase as an investment which will help home buyers.
"This is a temporary initiative that responds to highly unusual conditions in international capital markets and their impact on Australia’s mortgage lending market", the Treasurer said when announcing the debt purchase.
There is another important difference to the situation in the US; the housing market has not collapsed in Australia and the relative number of people defaulting on home loan repayments, although rising and serious, has not reached the same proportions.
Investors pulled back
Developments in the US over the past 12 months and recent increases in defaults and "mortgage stress" have frightened off investors in mortgage-backed securities in Australia. The rise in interest rates meant that returns being made on securities were often no more attractive than interest rates being offered on fixed term deposits, at the same time as carrying far higher risks.
Since mid-2007, the amount of securities issued each quarter had fallen from $18 billion to $2.5 billion, leaving the banks to enjoy greater monopoly power (pricing of loans) than ever. The credit squeeze by banks did nothing to help the lack of liquidity.
During that same period the banks regained most of the market share that they had lost to other home lenders since the 1990s when companies such as Aussie Home Loans grew by offering far more competitive loans.
Under the relatively more stable financial conditions these securities provided the home loan companies with capital to lend and the mortgaged property offered security if the purchaser defaulted.
Treasurer Wayne Swan says that the $4 billion injection (2 tranches of $2b) will help ensure strong and effective competition. The industry hopes that the government’s actions will attract others back into providing capital for home loans. It is not clear to what extent the $4 billion is needed by the industry to sustain existing home loans, where existing investors withdraw their money.
The government is carefully avoiding the use of the term "bail out" to describe the $4 billion, preferring to describe it as "reinvigorating" the housing market. Regardless of the name given to the exercise and whether or not it is ever recovered, in essence $4 billion of public funds is being handed over to private financial companies for them to exploit.
No solution to housing crisis
The housing industry is in crisis, mortgages and rental payments are prohibitive and totally out of proportion to the wages of most workers and the paltry incomes of unemployed, pensioners and other recipients of welfare benefits. This $4 billion will not make any radical change in the cost of a mortgage (based on current interest rates), nor make housing more affordable in a market where there is a huge shortage.
Rents will continue to remain as unaffordable as ever — they are being kept up by a huge shortage of rental properties and indirectly by interest rates which the banks have already indicated will not come down in line with any further reductions by the Reserve Bank of Australia.
The $4 billion is in effect a massive loan or handout of taxpayers’ money to the private sector. This money could and should have been spent on public housing. Its purpose and impact will be similar to the more than $4 billion that the federal government pays out every year through the Private Health Insurance rebate.
This handout, in the form of a 30-40 percent subsidy for private health insurance premiums, amounts to theft from the chronically under-funded public hospital system while it keeps the otherwise unsustainable, private hospital system afloat.
The public housing system is in crisis; its privatisation has been under way for some time, and successive state and federal governments have wound back spending on that area, instead giving welfare beneficiaries and some on below poverty level incomes grants to help them pay for private, for-profit rental.
The government cannot argue now that there is not enough money for public housing. Four billion dollars could have built many thousands of new homes — and the government already has plenty of suitable land at its disposal. At present the land is being held to be released at a pace that will not lead to a fall in the price of other homes, and governments have plenty of developer friends waiting in the wings to get their hands on it to churn super-profits.
Public first
Public always comes out on top in any comparison between public and private, for-profit provision of services. The engine driving the private system is the making and accumulation of profits. This automatically means that the service will cost more because of the built in layers of profit.
Fifty years ago, governments had public works departments that built houses, roads, bridges etc. This not only resulted in cheaper services and infrastructure but also was of benefit to the workers they employed to build and maintain them. They were also large employers of apprentices. The purpose of public housing was to house people, to meet people’s needs.
There is a conflict of interest between the needs of people and the drive for maximum profits. Under private enterprise, housing becomes a vehicle for churning out profits. Private greed rules, short-cuts are taken to cut costs, even though these might affect health and safety.
The decision to hand over fistfuls of money to the private sector rather than to properly fund and develop the public system is a conscious choice on the part of government. It is an ideological position which puts the interests of private profits before those of the people.
There is no way that the profit-driven, private "markets" can solve the housing crisis. It requires an about-turn in policy, a reversal of whose interests the government is meant to serve, and that will not happen without a mighty, united struggle on the part of the trade unions, left and progressive forces in co-operation with the broader community.