Doorstop Interview

Treasury Place, Melbourne

Saturday, 18 August 2007

12.00 noon

SUBJECTS: Developments on international markets, housing.

TREASURER:

Overnight the US Central Bank, the Federal Reserve, cut one of its key interest rates by 50 basis points, 0.5%. This is a very welcome move.  What this means is that for those institutions that need it, they will be able to get credit at a lower rate.  This has put a lot of confidence back into the US financial system and that confidence has flowed back into stockmarkets and exchange rates around the world.

We welcome this decision because it shows that those institutions which otherwise may have had difficulty getting credit will be able to get it on a lower penalty interest rate.  And that’s been a confidence building measure, that’s good for the US economy and the benefits have flowed on to other markets.

It does appear of course that there will be some weakness in the US economy coming out of these recent events and we will have to watch it closely and global economic developments closely. 

I can say that I have been in touch with all of the key people here in Australia this morning and the Australian institutions are in strong shape, there is no reason whatsoever for the banking system to pass on any additional costs to Australian borrowers.

JOURNALIST:

Do you think this is more in line with helping mortgage markets than equity markets?

TREASURER:

This move was to basically say that in the United States those institutions which needed credit could get it and could get it from the Central Bank at a lower penalty interest rate than previously applied, so that they wouldn’t be caught short to the degree they would have been caught short otherwise.  And that’s been a confidence building measure.  It has already shown itself in equity markets and it’s shown itself in the exchange markets around the world.

JOURNALIST:

Will it be needed here for companies like RAMS struggling to get credit?

TREASURER:

Well let me make it clear that in terms of getting credit in Australia there is no reason any of the institutions should have difficulty.  The credit market in Australia is not affected in the way that the sub-prime market has affected the United States.  The only effect you could have here is for those institutions that are raising money in the United States, there are some, they may find it more difficult to raise that money and they may have to pay a higher price to raise that money and as a result they may pass on some of that cost back to their Australian borrowers.  But that is not the Australian banks.

JOURNALIST:

Mr Costello, how do you respond to the news that Glenn Stevens hasn’t ruled out a rate rise just before the election?

TREASURER:

Well, I responded to that yesterday, and I will say what I said yesterday, that our assessment of the Australian economy is that the economy is strong, it is not dealing with the problems that for example Americans have, our financial institutions are strong and our interest rate, considering where we are, has been targeted at inflation which considering where we are is within the band and low for a 4.3 per cent unemployment rate.

JOURNALIST:

What’s your assessment of housing affordability in Australia at the moment?  There are some saying that there’s an increase of what they are calling mortgage stress.  What do you make of that?

TREASURER:

Well the fact of the matter is that because unemployment is low, because more Australians are at work than ever before, there are more Australians that have confidence in taking out a loan and more Australians that are in the buying market.  As you would expect that has an effect on prices.  But prices in Australia have risen because the economy is strong.  Prices in America are falling because the economy is weak.  It is much better to have an economy which is strong where you see that reflected in confidence than an economy which is weak.

JOURNALIST:

Treasurer there is an article today in the Daily Telegraph with Aussie Home Loan boss John Symond saying that struggling home owners would be better off selling than holding on to their property in the hopes their property values will increase.  What do you think about that?

TREASURER:

Well the reason people buy a home is to have something to live in.  A home is not like a share that you buy or sell in order to get a financial return.  The people why people buy homes is to have a place to live in and to bring up their families and I would say to people that that is the most important outlook to have on the housing market.  We have more Australians in work than ever before, as a consequence of that, more Australians who have the confidence to borrow, and our housing markets as a consequence have been strong.  And if there’s been a complaint it’s been that prices have been rising not that prices have been falling.

JOURNALIST:

On that basis why wouldn’t you get rid of negative gearing?

TREASURER:

Well if you got rid of negative gearing what you would do is you would get investors exiting the housing market, and as a consequence of that rents going up.

JOURNALIST:

Then you would free up houses for others to buy?

TREASURER:

I don’t want rents to go up.  If you got rid of negative gearing you would be putting up rents for all of those people are renting in the market and I don’t think that would be good policy at all.  Okay.  Thanks.