Business Now | 1 October

0:00This is Business Now with Edward Boyd. Hi and welcome to Business Now. Thanks to your company today, I'm Edward Boyd. Coming up for the program, Reserve Bank says roughly 1% of borrowers are in negative equity, but this could increase fivefold if property prices keep plunging. We'll discuss Australia's fracturing housing market with property expert Cameron Kusher in just a minute. Global bond markets have taken a battering in September spurred on by the deterioration in US 10-year Treasury bond yields, which have soared to their highest level in 24 years. We'll explain what this means for Australia with Thomas Matthews from Capital Economics. Plus, Australians are switching to electric vehicles in record numbers due to costs of living pressures, soaring fuel prices, and the market being flooded with cheap Chinese made cars. That's all coming up on today's show. Other stories today you should know about.

1:00Rio Tinto's Bell Bay Aluminians Smeltor in Tasmania has received a $200 million bail out from the federal and state government, bringing total government financial pledges for Rio Tinto's smeltors to almost $5 billion. Today's funding deal will save roughly 550 full-time jobs, and indirectly support another 1200 roles in northern Tasmania. Under the arrangement, state-owned hydro-Tasmania will continue supplying electricity to Bell Bay for another five years, until the end of 2031. The bail out of Bell Bay comes after Rio's Tomago, Tomago, sorry, Aluminian Smeltor in New South Wales, received a $2.5 billion bail out in August, and Rio's boymed smelter in Queensland received about $2 billion in March. That brings the total government support for Rio Tinto to $4.7 billion or so. We have the biggest pro-manufacturing package of any government in Australian history.

2:00While it looks old from outside, there is some of the highest quality, most modern aluminium smelting and processing capability inside this facility. The job doesn't finish today with the announcement of this deal. We will keep working with Rio Tinto and the Tasmania government to deliver more industrial investment in Tasmania. Despite yet another bail out for Rio Tinto, its shares did drop today finishing down 2.44%. The Reserve Bank says if property prices plunged 20% in Australia, then roughly 5% of all borrowers would fall into negative equity, which means the value of their home loan is worth more than their property. The RBA released its Biannual Financial Stability Review today, where it estimated that less than 1% of borrowers are currently in negative equity due to falling property prices. Recent buyers and those who took out high loan to value ratio loans are more likely to be in negative equity.

3:01This includes first home buyers participating in the Australian Government 5% deposit scheme, the bank said. While downside risks to housing prices remain, the RBA's Securitization System Data suggests that even in a scenario involving a large uniform fall in housing prices of 20% from current levels, only around 5% of mortgages would fall into negative equity. The RBA said borrowers in negative equity often can still afford their mortgage repayments, so it does not necessarily trigger a loan default. The Prime Minister was asked about this earlier today before the RBA's report was released. What I say is that there are less people in negative equity now from the latest figures than there were under the former government around 2000 and during the last decade. So the truth is that people are investing when you invest in your home. It's an investment in long term. It's an investment in the security that comes from a roof over your head.

4:02The Commonwealth Bank will spend $140 million on improving its branch network this year, and as pledged to keep its 281 regional branches open until at least December 2030. The money will be spent on upgrading branches with fresh layouts, improving accessibility, technology, staffing and waiting times. We hear from our people and the communities that we serve all the time how important our branches are. We know that Australians are changing how they bank, but in lots of parts of the country, including in regional Australia, face-to-face banking is still very much valued. And this ultimately in support of what we're trying to achieve regionally, we've got great business in regional Australia and when regional Australia does well, the whole country does well. Let's see how the market finished up for the day. Local market, it got smashed, dropping to a four month low. All sectors were in the red, six out of 11, all falling more than 2%. ASX 200 finished the day down basically 2%. That was its worst day since March, so in six months.

5:03Drone parts and metal detector maker Coden, it lifted again, property-repeat-land lease up as well, along with Regis healthcare, drone shield and the investment group WAM Capital. There weren't many top performers though. Lithium stocks got crunch led by lion town down 15% there. Rare Earths produced as lioness and Iperian X down as well, along with the insurer SunCorp and the coal mine operator Yang Cole, which was one of the top performers yesterday. Hunter Valley operations joint venture received approval to basically remain operating for another 19 years. Look at some of the larger caps, hearing implant maker Cochlear and healthcare giants CSL both dropped. Energy producer Woodside down as well plus the major banks A and Z and AB. Well National property prices have declined for six months in a row and with the Reserve Bank raising rates this week it's likely we could see further falls for Australia's property market in the coming months. The latest home price report from PropTrak shows prices slumped 0.2% in September, property values now 3.3% lower than their March peak.

6:09This is a Melbourne of fall in 5.7% since their peak Sydney down 5.5% and Perth down 4.2%. Separate data today from totality shows prices fell 1.1% in September taking the cumulative decline since March to 5.2%. So let's bring in here Cameron Kusher, chief economist at property valuation business Heron Todd White. Cameron, great to see you. Are we in a genuine downturn or is this just a little blip after so many years of really strong price growth. Well thanks Ed, I think it really depends what your definition of a downturn is but you know the largest downturn we've seen in the last 45 years is prices falling about 8% and if you go off that totality data the fall is actually now 5.2% PropTrak showing a little bit more of a moderate fall but we're clearly in a downturn. The market's been falling for 6 months. The prospects of a recovery in the market seem like they're a fair way away at the moment and I fully expect that we're going to continue to see price declines over the coming months, especially given that we have seen an interest rate high earlier this week.

7:17Yeah, the RBA today mentioning there are more buyers falling into negative equity. I mean how vulnerable are those highly leveraged recent property purchases at the moment, especially prices do keep falling. Well, there are any vulnerable if they actually have to realize those losses and we still got pretty low unemployment rate but the expectation is that the unemployment rate is going to rise from here. I guess the challenge for a lot of these people that bought especially with the home guarantee scheme is that they really did buy at the peak of the market and then we know that the tax changes that were announced in the federal budget have contributed to the weakness in the housing market we're seeing right now. So ideally the ordering of those two things would have been changed if you wanted to introduce both of those policies. The other I guess challenges interest rates are rising if people with very low equity like the people that have access this home guarantee scheme want to refinance and they're in negative equity. It's going to be very difficult for them to do so. So they're not even going to be able to access better mortgage rates when they are available because of their equity position.

8:21Yeah, we've obviously seen the RBA raise rates this week bringing the cash rate up a full percent since the start of the year. There are plenty of economists that think they might go again in November. What are you expecting the reserve bank to do here with inflation where it's at? Look, inflation is still too high. I was a bit surprised by the reaction to the market to the inflation data yesterday by the market that obviously the Australian dollar fell and the expectations of interest rate cuts also fell. I think it's very likely that we do get another interest rate hike in November. And if it's not November, I think it will be early next year. I can only see that inflation is going to be persistent and it's going to take at least another interest rate hike if not several more to get it back under control. Yeah, we just had the rate high codes there on the screen showing their pricing and a rate increase for next year. But the prices around the country are obviously still falling. Could that actually present an opportunity for some buyers and bring them back into the market or are those rising mortgage costs just reducing borrowing power too much and sort of canceling it all out?

9:28Yeah, I mean the borrowing capacity for interest rate hikes this year, borrowing capacity has fallen about 10%. That's larger than the decline in home values we've seen so far this year. So the fall in borrowing capacity is certainly impacting on things. I also think there's been a big decline in transaction numbers. Cotality was reporting they're down about 15% from the same time last year. So that's a real challenge for the market as well. People don't tend to see the housing market when prices are falling as a buying opportunity. They tend to wait for evidence that the markets recovered. So I think there are opportunities there, but I think a lot of people are actually just trying to wait until the bottom of the market. The problem with that is picking the bottom of the market is very hard and you usually don't get evidence that the bottom of the market has happened until several months after it's occurred. Yeah, do you think part of those less volumes right now in the property market is due to property investors sort of withdrawing and taking a few steps back after those changes were announced and the federal budget?

10:28Well, property investors were about 40% of demand in the market. So I think there's definitely been a big pullback in property investment going on in the market. And I think that's likely to continue for some time. But we also saw the latest lending data. There was a pullback in owner occupier activity both from a first home buyer perspective and an upgraded perspective as well. So I just think at the moment there's not a lot of confidence. I think the people that do want to buy thinking to themselves, well, why would I buy now where if I wait a few months, I can probably get that property cheaper. And that's really the conundrum because that has the bigger economic impact when few people are buying, you know, obviously agents suffer, but there's all those businesses that rely on property transactions that are also hit when people aren't buying and selling property. And the lending indicators numbers, are we seeing much of a change in refinancing? I know you mentioned the people on the 5% deposit scheme obviously would find it really hard, but more broadly is there much refinancing going on at the moment.

11:28refinancing has been trending higher. It's still I think it fell slightly over the quarter, but given that we've now had another interest rate hike, I wouldn't at all be surprised to see a big ramp up in the level of refinancing going on. We know that there's still quite a lot of competition in the mortgage market at the moment. And people that are in a position to do so I expect they're going to be shopping around trying to get the best deal they possibly can. No one wants to be paying more on their mortgage than they have to. So if you can get a better deal, it's certainly a smart idea to try and do so. Yeah, it seems like the banks are really fighting pretty fiercely right now. That they certainly are. There's a lot of competition. You know, there's some of the smaller players are eating lunch of the larger pride players as well. So there is a lot of competition out there in the mortgage market. No, I think that's a feature that's going to continue, especially as volume struck because people are going to want to find that new business. And they're probably going to have to compete on price to get it. Camera and Kusher from here and told what thanks so much for coming on the show. Thanks for having me, Ed. After the break, the global bond market had a pretty tough September with US Treasury yields rising to their highest level since 2002.

12:33Capital economics are up next. Welcome back, the global bond market had a tough month in September with yields rising across the world led by 10 year US Treasury's which saw just overnight to a 24 year high. So where does the bond market go from here and how do US bonds influence us in Australia? Let's bring in Thomas Matthews, the head of markets, Asia Pacific at capital economics. Thomas, thanks for your time. First up, US bond yields. I mean, are there still reasons for optimism? Could things turn around here? Yeah, look, I mean, I suppose the fundamental reason that risen this year is about oil prices and the Fed really the Fed response hiking rates to those inflationary pressures. So if you're looking for that to unwind, probably what you need is for oil prices to fall back or at least stop rising. You probably need some sort of agreement in the in the Middle East between the US and around. And then you probably need the Fed to not deliver maybe on quite so many hikes as it's priced in.

13:35And all of those things are pretty plausible. I mean, that's the state of the world that we ran even a couple of months ago. In fact, I think that's quite possible. You know, the reality is the market's pricing in a lot of tightening now. And it's quite possible that the US economy will slow before we get there. So so far being optimistic, I would say look, you know, there's so many tight hikes priced in now that really, you know, you're running out of room and maybe there's maybe this room to be a bit optimistic that they won't deliver that. But yeah, look otherwise, as you say, there's a lot of risk there too. Yeah, has it been unusual seeing US Treasury Secretary Scott Besson sort of intervening in the bond market to try and push yields down a bit? Yeah, I don't know if you'd say too many things about this administration or unusual at this point. It's just half of the course. But yeah, yeah, look, it is, it is a bit of a surprise, I suppose. I mean, having said that Japan did something similar about a year or so ago now in response to a big rise in yield. And actually it was pretty successful there. They were concerned, especially about those bonds at the sort of 20 and 30 year point effectively. They're really it's just a faster way to adjust the maturity of their issuance and they did it was successful.

14:38And I think probably Besson was looking at that and thinking maybe we could have a crack too. And and ultimately it didn't work there. You know, probably the US administration doesn't have as much credibility with the marketers would like sometimes. Maybe the moves weren't large enough, but yeah, look, I don't think those things are necessarily out of the question for future as well. And it's not necessarily guaranteed that they they'd fail again. Go big enough and probably they could bring long in yields down a little bit. Yeah, obviously US debts at around 40 trillion American dollars. But if US yields keep rising, are there any assets around the world that are looking kind of attractive right now? Yeah, I mean, look, the obvious boring answer is cash, you know, but the less boring way of thinking about that is that spreads over cash are actually narrow, you know, almost across the board now risk premier equity risk premier corporate bond spreads. You know, those are all tiny. So the opportunity cost of holding cash compared to what it used to be is actually looking pretty good. So that's one thing. I think the other place to look if yields keep rising, you know, and I had to invest in bonds or something like that.

15:38I'd be looking at places where inflation isn't too much of a problem and maybe places where fiscal policy isn't too much of a problem now because for all that the rise and yields this year has been about oil prices and that sort of thing. I think the further they rise, the more investors are going to start to take another look at government that have got too much debt that have got too large deficits. The US is one of those. And we've already seen as well, France's bonds have come under a bit of pressure to so, you know, inflation, good fiscal policy. Well, actually, there's a lot of places like that in nature. Japan's fiscal position is good, despite what a lot of people seem to think careers isn't too bad Chinese bonds. If you can get them, you know, those fiscal policy, fiscal position is pretty good to be honest in the scheme of things. And no, those countries have the problem with inflation that we have some of them have seen pickups in it, of course, but, but, you know, there's a case that those bonds would fear relatively well if you're to keep rising and in fact Chinese ones and Korean ones to some extent already have. So that's where I'd be looking at some of those places, but look, the reality is you can't really hide anywhere. This was spread out across the world. And if you really did get a US fiscal crisis, unfortunately, probably a case where everything sells off.

16:42Yeah, I mean, how much of the recent movement in the Australian government bond yields is really being driven by developments offshore, particularly the US Treasury yields? Yeah, I think obviously as you know, a lot of it's about oil, which is an offshore development. There is obviously this domestic policy story about the RBA that I think, you know, having to tighten, in fact, they would have had to tighten, of course, even if this hadn't kicked off in the Middle East. So that's part of the rise in yields here too, but certainly I think more recently, maybe over the last couple of sessions, maybe over the last month, where you're starting to see that rise really be concentrated at the long end of the curve again. That's been true in the US. It's been true in Australia as well. I think that's probably a sign that some of those problems in the US markets are transmitting to Australia. And also things, by the way, like corporate bond issue, and these big tech companies borrowing to fund the AI Capix roll out, you know, those things are substitutes to some extent for Australian bonds. And so, frankly, the spreads over safe assets are those things are pretty small. So investors could easily be looking at that to an alternate source for them to park the cash and all that sort of thing just puts pressure on the long end of the Australian curve.

17:47And I think certainly over the past few weeks, that's been the dominant story much more so than domestic inflation or oil or things like that. Thomas Matthews from Capital Economics. Thanks so much for coming on the show. After the break, soaring petrol prices are encouraging Aussie to buy electric vehicles in record numbers, motoring expert David McCown, newscorp is up next. Welcome back. Electric vehicle sales in Australia, more than doubled in the past year, really thanks to soaring petrol prices, which have encouraged buyers to take up EVs. Electric vehicle council says the pace of growth reflects a combination of greater vehicle availability and improved affordability. So to chat EVs, I'm joined by newscorp's motoring content, directed David McCown. David, thanks so much for your time. Is it really all about oil prices and people seeing two or three dollars a liter at the petrol pump that's encouraging them to buy an EV? I think that's a big part of it, but there's also so many EVs on the road now that everyone knows someone with an electric car and so many people have had positive experiences about how much money they've saved and how they haven't really been stuffed around too much with charging and things like that.

18:57It's encouraged people to take the jump. You know, 10 years ago or five years ago, EVs were very expensive. It was mostly Tesla. You had to really, you know, you might have to get a big bank loan or whatever to buy one, but they seem to be much cheaper now. Yeah, two things have really happened there. Definitely there's a lot of competition in the space. Now there's about 150 different electric cars on sale in Australia today, which is 50 more than last year or there about. So essentially there's a new EV launching in Australia each and every week, which means there's a lot of competition. There's a lot of new choices. But also, yeah, the government's EV discount leasing promotion has been incredibly successful basically with people using a... ...their fringe benefits tax discount and a no-vated lease system to get hold of an EV quite cheaply. In some cases, well under $200 a week. It used to be all these fears about running out of charge, running out of range, not being able to drive XYZ distances. Is that all just sort of going away due to these high-oil prices or what is it? I think people are weighing it up. Certainly there is more and more charging infrastructure again every month or so.

19:59So there's more coming on board. I mean, business news this week, Ampoule today announced that they just bought up the EV charging network, the EVIE charging network. So these big companies are really investing in this sort of stuff as well. There's more and more charging infrastructure. And the cars are getting better too. I mean, Tesla announced a car today, a basic version of the Model 3 that costs $45,000 and has nearly 600 kilometres of range. That's not bad if you can spread it a bit more. BMW's got an IX3 now that's more than 800 kilometres of range for... A little bit more money, about $90,000. But if you want it, you can get it. Yeah, you know, going back five or ten years, people would buy them because they wanted to be environmentally friendly and things like that. Is there a bit of a consumer shift there as well? Because it's been a massive consumer shift. I think that early adopters did definitely have a green conscience. And they were probably trying to really project that sort of image about themselves and their cars part of their identity. I think now people are really looking to save a dollar or two and they've recognised that if you're not paying for petrol, if you've got a solar panel on the roof, you can really charge quite cheaply with these EVs.

21:02In some cases, even come out ahead. Yeah, according to the ElectroVickel Council, one in four cars now being sold are EVs. I mean, what are some of the sort of the really top selling brands right now that we're talking about here? Yeah, the big one is Tesla. They are doing really well. They're the third high selling brand in the country with BYD as number two. BYD does have a pretty big mix of hybrids in there with their EVs. Tesla really are, you know, they have been the leaders for a long time, but there are a lot of brands that are chasing them. That's why they are having to cut prices and make their cars more affordable. This one that they launched today, they have cut so much out of that car. It doesn't even have a radio. There's no AMFM radio in the car. You can just listen to your phone connected with Bluetooth and maybe sing along to yourself. It sounds like an old school like Toyota Land Cruiser, where you get nothing. Just like the pricing as well. I mean, how cheap are we talking now for a basic sedan or something like that? For a basic sedan, yeah, around the $50,000 mark you can get a Mazda 6C, a Kiara EV 4 or a Tesla Model 3.

22:04For about 50 grand drive away, that is pretty punchy. I mean, that's pretty much what you'll pay for something like a Toyota Camry. So that's quite competitive. If you want to go smaller, the cheapest car in Australia today is an EV. It's a little hatchback by BYD that costs just under $20,000 drive away. And what's the rough range of that? Well, it's just over 200 kilometres, best case scenario, but in the real world, you might need a hitchhike after that. David McCown, thanks so much for your time. Welcome. And that's all for today's show. Thanks so much for your company now. It's time for the Kenny Report with Steve Price. You