If you’ve been reading our Investment Trek posts thus far, you’ll know that we’re making an effort to visit as many central banks as possible on our journey. Central banks rule the world and their actions have significant impacts on the investment environment. Our discussions with central banks around the globe have deepened our understanding of the unique issues they’re grappling with and the policies and approaches they are taking to navigate the high stake game of global economics.
I arrived for my meeting at the Reserve Bank of Australia (RBA) earlier than I anticipated. Traffic wasn’t nearly as bad as I thought it might be, the trains all seemed to be waiting for me at each stop… so I was fortunate to travel quickly. One unanticipated benefit from this early arrival was the opportunity I had to spend some time in the Museum of Australian Currency Notes, which was conveniently located on the ground level of the RBA building. I’ve always been a lover of currency and I’ve tried to collect notes in my travels over the years, so the museum was right up my alley. The experience is likely far better in person than through descriptions in a blog… so let’s just say it was a great way to spend a “found” 30 minutes. If you’d like to have a virtual tour, click here.
After the currency museum, I had the opportunity to meet with Chris Alymer, Head of Domestic Markets at the Reserve Bank of Australia. Chris began the conversation by thanking me for reaching out to arrange a discussion and wondered why more people simply don’t ask. Monetary and fiscal policy may not be casual conversation topics for most, but in the investment world, understanding the outlook and actions of central banks is critical for success.
Chris noted that Australia is an open and small economy that must remain very flexible to survive. He noted that Australia floated the dollar in 1983 and that Australia has a strong dependency on foreign capital.
Regarding the recent deficits that Australia is running, Chris commented that it’s not the deficit that gives him significant pause, but rather, ensuring the RBA employs the right policies to keep the economy healthy. He noted that getting the policy right is key, “or the markets will really punish you.”
We talked about China (again, a recurring theme in every meeting I had in Australia). Chris noted that with China’s weakening demand for iron ore, Australia demonstrates its flexibility by shifting from a mining focus to exports which take advantage of a weak Australian dollar.
Regarding the low interest rate environment, Chris noted that RBA “lowered rates because we wanted interest rate sensitive sectors to respond... and they’ve done exactly that.” Low rates brought up another recurring theme in my Australia meetings – housing. I wondered what Australia may have learned from the housing boom and bust the United States experienced several years ago. Chris said the issues are different in Australia and the dramatic increase in real estate values are largely a function of limited supply. The limits in Sydney are geographic – there’s only so much land on which to build. Sydney is boarded by water to the east, the Blue Mountains to the west, and protected nature preserves on the north and south. The value in the Sydney basin is in the land and skyrocketing prices reflect just how eager different groups are to get their hands on the land. I captured this image as I was walking from Observatory Hill down through the Barangaroo neighborhood (near Darling Harbor) where significant real estate development is currently underway. The image captures the frustration felt by some in Sydney as the limited supply of land creates pressures for some and opportunities for others.
Chris also noted that banks have tightened lending standards in recent years as the housing market has heated up. Another topic related to mortgage lending I found interesting is that there are no fixed rate mortgages in Australia. Everyone who borrows to purchase real estate does so in a variable-rate environment. Accordingly, Australians at large pay close attention to the rates set by RBA because their mortgage payments move in lock-step with the rates established by RBA. Chris reiterated what Shaun at SSgA said about mortgage default rates in Australia – they are virtually non-existent. In addition to the social suicide that a default represents, Australia uses “full recourse loans.” Full recourse means that if a borrower defaults on a mortgage loan, the lending institution has the right to go after any other assets the borrower may have to satisfy the outstanding debt. According to Chris, what’s important in the whole mortgage discussion is that people have jobs so they have the ability to pay off their mortgages. Because of full recourse, people just don’t walk away from their mortgage obligations. They’ll sacrifice many other things before they’ll default.
We spent the remainder of our time talking about Super Fund, government pensions, and fiscal reform. It was a very informative meeting and I’m grateful to Chris for taking the time to meet with me.
A few articles that may be useful:
Special thanks to Brennan Staheli, Devin Lindley, and the Lunt Capital team for their contributions to this report.