PRIME MINISTER
E 0 E PROOF ONLY
JOINT PRESS CONFERENCE WITH THE PRIME MINISTER, THE TREASURER AND
THE MINISTER FOR HOUSING AND CONSTRUCTION 2 APRIL 1986
PM: Ladies and Gentlemen, as you have seen the Cabinet has,
after detailed consideration of the prospects of the housing
industry, made a series of decisions which is calculated to have
the housing industry continue to make an important contribution
to the level of economic activity. I don't want to go through all
the details of the decision. I will make two or three points
about it and then I will ask my colleagues to make their
observations. I think these points are important to understand,
and that is that no one who presently has a loan will be faced
with increased repayments. The ceiling will be retained in
respect of existing loans. We have faced a situation where, on
the best information available to my colleagues that has been
made available by the banks, that we would have been in 1986/ 7
looking at a situation of 100,000 or less new starts which was a
position which was not acceptable to us. On the arrangements that
have now been negotiated, we will be able with confidence to look
in 1986/ 7 to a minimum of 135,000 starts. Now in terms of the
level of activity in this country and employment prospects, it is
important to understand what that means. Roughly each 10,000
starts represent, in direct and indirect terms, about 15,000
jobs. So the difference between what we in the absence of a
decision would have been looking at is 100,000 starts, now
135,000. You can see that we are talking about something like
50,000 jobs. Now obviously if we could have reached that position
in other ways, that would have been desirable. But we were not
going to allow a situation to emerge where the housing industry
was going to substantially disintegrate and that 50,000 as you
can see would have been not just at risk, they would have
disappeared. And we believe in the circumstances the decision
that has been taken protects, as I say, all those with existing
loans to ensure the existence of high level activity in the
housing industry and will ensure that they, the 50,000 jobs,
don't disappear in this industry. And that was a situation that
we were not prepared to tolerate or contemplate. Paul..
KEATING: I think the only other thing to add Bob, is the fact
that we were facing two problems. The first one was to maintain
the existing stock of profits which underpin the existing
mortgages with savings banks. Now not only was there, on the part
of some banks, a total incapacity to lend to new borrowers, in
fact some said in the June quarter they would not be lending at
all any new landings. But their existing deposits which
underpinned their existing mortgages were haemorrhaging
tourniquet that flow out of the existing deposit base. And we
have the subsidy which is mentioned here. It is a subsidy which
goes to underpinning with the banks playing their role in
underpinning that deposit base. At the moment banks have been
paying about 16% for deposits on the commercial market and then
on lending them for 13.5%. The subsidy which is implied there is
coming from their trading bank operations, is one that they have
entertained, in fact accommodated since the latter part of last
year. But in the current climate the loss of deposits is such
that the problem isn't just an absence of new lending or very
little new lending or an insufficient rate of new lending but a
loss of deposits with base. So the proposition goes to two
things. It goes to that and by allowing the banks to bid at
market rates for the against which new lending could be
accommodated they are in a position to guarantee funding to level
of around, as the Prime minister said, $ 6 billion which would be
commensurate with an annual rate of about 135,000 starts which
would broadly meet the underlying requirements. So they are the
two major elements along with changes which we announced in this
statement of the Commonwealth/ State housing arrangement which my
colleague, Stewart West, will refer to in a moment and also a
nominated....... which the States have had available to them at
different times and at different rates for public sector housing.
So as a package we think it achieved an excellent result that
meets our commitment to existing borrowers. It importantly
ensures that home loan funds are available and we have got a
continuing and solid responsibility to make sure that housing
finance is available to people to house themselves. And we have
ensured that that activity in housing, such an important part of
activity in the economy, will be maintained through 1986/ 7 and
the banks will be doing all within their power to pull the rate
of lending up as rapidly as possible in the June quarter
commensurate and moving up towards that target figure of
$ 6 billion.
PM: Stewart.
WEST: Thanks Prime Minister. Just to recapitulate what has been
said. We will be protecting the existing borrowers who are on the
13.5% limit with the savings banks. And of course new loans will
be deregulated. But we would expect that following further
negotiations with the banks that low start loans will be
negotiated which will protect to a certain extent the early
repayments of people who may be paying increased interest rates.
The fact is that we may have been looking at a total of about
$ 3,000 million per year for 1986/ 7 instead of $ 6 billion which
will now be available as a result of this package. And as the
Pri * me Minister has said and the Treasurer has said, this will
mean that we will have a number of starts which is almost, in
1986/ 7, which is almost commensurate with the underlying
requirement of between 140,000 and 145,000. And we will protect
the existing employment base in the industry and see up to 50,000
more people employed than otherwise could have been the case. I
do want to pick up the point that the Treasurer opened up, that
is the future of CSHA funding. We have decided to maintain our
1985/ 6 effort in real terms which will mean that the States, as a
grant, will obtain approximately $ 700 million in 1986/ 87 and that
further the States will be allowed to nominate up to 60% of their
3
total loan council borrowings at the concessional rate of
repayable over 53 years which is a pretty good deal. And at the
moment only South Australia and western Australia would have been
able to nominate 60% of those loan council borrowings in 1986/ 7
and the other States would have been restricted to 30%. So we are
allowing them all to go up to 60% and that will mean that in
addition to the $ 700 million as a grant for CSHA funding that if
all the States pick it up they are entitlements are approximately
another $ 700 million further would be available for public
housing. The press statement also says that the Government will
be further examining means of extending further funds to the
States who on lending, through their existing lending authorities
such as co-operative and state banks and ministries, funds for
low income loans and that is to be further examined. I think I
should leave it there and I am sure that we can answer any
questions. JOURNALIST: Do you have any understanding with the banks as to
the ruling rates of interest for new loans or will the market
competition simply determine that?
KEATING: I think their judgment would be Peter, that they would
be approximately around, in the current climate, and the current
climate of course has been one of recent times of....... interest
rates. But in the current climate of around 15.5%.
JOURNALIST: Why couldn't the ceiling be lifted two weeks ago?
What's changed?
PM': We have had a clear position that if it were possible to
protect the level of activity and the level of starts in another
way then we would have preferred to do that common ground. But
it's become clear, in the discussions which my ministers have had
with the relevant sectors of the industry, including the banks,
that we were facing a situation that savings banks were going to
virtually cease to function in this area. Now that would have
meant a disaster. It would have meant, as I put to you in
employment terms, a loss of 50,000 jobs. If starts in 86/ 87 had
gone down to 100,000 or perhaps less, as they were talking of
lending in the June quarter Paul, of less than $ 3 billion, about
$ 2.8 billion, which predicated housing starts of less than
100,000 in 1986/ 87. We were not prepared to tolerate that
outcome. And in those circumstances we have been able to
negotiate an outcome which will do these things. It will give a
level of housing starts, as my ministers have said and as I've
said,-which will meet the basic underlying demand and will
maintain a level of employment in the industry and activity which
is necessary not only for the industry itself, but you all know
how important housing is for the level of economic activity as a
whole. And as part of the package that we've negotiated we have
also ensured that in the area of public housing actions will be
taken which will ensure an appropriate level of activity there.
JOURNALIST: Mr Keating how long will the 13.5 per cent celing
stay on for existing borrowers?
KEATING: Well that's grandfathered in.
PM: For the period of the loans. That's what grandfathering
means for the period of the loan.
JOURNALIST: Mr Hawke are you confident the Caucus will accept
the package in total?
PM: Yes.
JOURNALIST: And I take you put your prestige on the line?
PM: I never throw my prestige around it's too precious a
commodity. I mean it's always there. My answer is in a brief,
unqualified term that I gave it to you.
JOURNALIST: Do you expect all your ministers to support it?
PM: Yes.
JOURNALIST: Prime Minister it was only a fortnight ago that you
didn't draw any distinction between new and existing loans. Do
you feel any embarrassment at all about the fact
PM: No. I would have felt embarrassed because I had said well
that's the Government's commitment and understanding that
position. If I had then become aware on the advice of my
ministers that an adherence to that position would have meant
50,000 less people in employment and 35,000 less starts, my
embarrassment would have consisted of saying, because of some
statement I made that I am not going to face that current
reality, and I'm going to allow 50,000 people to be unemployed
and 35,000 less starts, that would have embarrassed me.
JOURNALIST: But Mr Hawke why make the statement that the
Government remains committed to the retention of the ceiling on
housing interest rates in the first place and have two ministers
make as well. Mr Keating said that he wasn't proposing any
change in the ceiling at all. Mr West said the same day as you
that the housing ceiling would be retained. why have three
ministers say this within two days then a week later, two weeks
later come back and change your position?
PM: Well in respect of existing loans no change. And that's
very important. What I'm saying to you, and I repeat-again, is
that what has become, now, completely clear out of the
discussions that my ministers have had is that if there had not
been the step now taken that the savings banks would have
completely dried up as a source of new lending. Weiwould have
had a position where, as I and the Treasurer have indicated, a
level of spending in the June quarter of the order of less than
$ 3 billion. Now that was not something then finally that we
could accept.
JOURNALIST: Mr West, you've been adamantly committed to
retention of the ceiling, publicly, over the last couple of
weeks. Did you find it idealogically difficult to accept this
package today?
WEST: Lets say I would have found it more idealogically
difficult to face up to the loss of 50,000 jobs in the industry.
Now look, just be aware of the changes that have been occurring
with the-banks projections of their expected lending. Several
weeks ago my Indicative Planning Council expected that the banks,
and were told by the banks, that the savings banks would be
lending something like $ 5 billion in 86/ 87 right. Now we're
faced with projections of something like $ 3 billion by savings
banks. Now that's a very sharp reduction. I was looking at,
several weeks ago, putting to Cabinet a position that based upon
those projections to Professor Gruen's IPC that we would need to
push about an extra billion dollars for 86/ 87 and that's where
that magical figure came from, to keep up respectible lending by
banks. Now we were faced with a base from which we should
expand, not of $ 5 billion of $ 3 billion. So what we've attained
here, as a result of the figures mentioned here, in terms of
subsidies to the banks and the removal of the ceiling for new
lending, is an expansion from $ 3 billion up to $ 6 billion. And
that's the base from which all significant lenders will then take
off from and provide our 135/ 145,000 starts.
JOURNALIST: Mr West are you saying you were converted then, to
what Mr Keating sought as a solution, before you went into
today's Cabinet meeting?
WEST: I'm saying that what we've done is to protect the 13.5 per
cent ceiling for exisiting borrowers and accept the fact that
unless we took some further action, regarding subsidies to the
banks, the deregulation for new loans, the offering of loan start
loans to those who can't afford the increased interest rates for
new loans, in return for the offering of $ 6 billion in funds for
housing by savings banks in 86/ 87, that I believe that that is a
pretty good deal from which to operate. Particularly when I have
to be responsible also for low income earners and to protect the
funds to the states for public housing, which I have done today.
JOURNALIST: Mr Keating, if these measures don't achieve the
goals that you've set for them, would you consider lifting the
ceiling on exisiting loans?
KEATING: I've got total confident that they will.* If the banks
are in a position now to bid in a competitive way in the market
for funds and they are not constrained by a ceiling for new
loans, there's no reason why they cannot be effective in getting
the active volume of funds. So I just don't think the position
arises. we think it is one of the prime social responsibilities
of the Government for people to be able to house themselves and
to have housing funds available to them. At the moment they're
simply not available. For many people they're just simply not
available. And if one looks at the current cocktailing which is
going on between those few lucky people who have been able to get
a savings loan in recent times, and topping them up with expenive
financing, this is by far the best outcome. It means more people
will have finance availbie at rates which will guarantee a
continuing flow of funds into housing.
JOURNALIST: Mr Keating, if they are going to lend at 15.5 per
cent will they be able, do you think
KEATING: I'm saying they'll be lending at 15.5 per cent. That's
for the banks to determine. That is the indication. I should
think in the current climate that would a sort of a maximum
number, a maximum figure. They may do better than that. I hope
they do.
JOURNALIST: Will they be able then to attract the funds they
need? KEATING: Yes, I think So. The lending ceiling puts a ceiling
effectively on the deposit rate. The deposit rate is governing
the amount interest rates
JOURNALIST: Could we clear up the matter of the ceiling on
exisiting loans. Are you saying that you've got an understanding
with the banks that no borrower, who has an exisiting loan at
13.5 per cent at the moment, will pay more than that in the
future? KEATING: Yes.
JOURNALIST: Given that Australians, the average mortgage is paid
off over seven years, are we not talking seven years down the
track about total deregulation?
KEATING: We're not talking about somebody who started a mortgage
which lasted seven years they have no problems about the burden
of the security of higher interest rates in the context of our
external position, or of the reasons for which the Government
tightens monetary policy. And they are being effectively
shielded from that burden. If they discharge their mortgage then
their out.
JOURNALIST: Mr Keating, by how much do you think savings banks
will be able to lift interest rates on their deposits?
KEATING: Well that's for them to make a judgment. Obviously I
think at the sort of rates I've mentioned they'll be competitive.
I mean they have different deposit influence and they will
fashion them to the market to which they have particularly
directed themselves. They are all quite different and
distinctive in the way in which they attract funds for lending.
JOURNALIST: The banks have been lobbying you on this issue for
months. Now if their lending projections were so much worse
yesterday than they were a few weeks ago isn't it possible that
they'll just revise them down in trying to get the sort of result
we have today?
KEATING: No, I don't think so. I think it's a genuine
reflection of their trading position. It's a genuine reflection
of their underlying position.
JOURNALIST: How are the interest rate subsidy
KEATING: Well the subsidy is calculated across an average of
about one per cent on the bank's deposits of which they carry a
third. So the Commonwealth will carry about .6 of a per cent
across the average of their deposits. Not all of their deposits
are so effected. Many people will continue to keep savings
investment accounts, statement accounts and passbooks. To the
extent that they have to lift their deposit rates in this current
climate for some deposits by frontend loading subsidies on a
quarterly basis, we allow for a maximum capacity to get the
attractiveness of the deposits up in the current climate. And
then in the context over time of changes with the interest rate
regime. The subsidy will go down. Now we will be able to see on
a quarter by quarter basis whether the subsidy needs to be
maintained across the year. If it does there's a maximum of
about $ 120 million, if it doesn't there will be less.
JOURNALIST: It is a pretty expensive subsidy for a budget that
is looking pretty tight already?
KEATING: I think one hasAtrace the whole problem of the
dramatic decline in the terms of trade which Australia
is now experiencing. We are experiencing a terms of trade
decline probably that we have not witnessed since the deptession.
And we have had to make domestic policies adjust to that,
monetary policy has been one of those prices. And that Jas
had an effect on, obviously, the banking system. And to A extent
that the budget carried some of that cost, it will obviously
mean a diminution of government services elsewhere, which is
part of the adjustment by the nation to that decline in our
trading position.
JOURNALIST: How late in the process did you come to the
conclusion that: partial deregulation was the only solution?
PM: The Treasurer and I have been involved in these discussions
from the beginning. I haven't been on any road to Damascus.
JOURNALIST: But two weeks ago you had a different view
obviously from what you were saying publicly?
PM: I have already addressed myself to that question. I have
said, Michelle, and I repeat that we all would have preferred
a position, if we could, of having a lid there on it. Now,
it-became clear in the most recent discussions that we were
facing a dramatic deterioration. The difference between
what was Ql prospect of 100,000 new starts at the most, and
now a guarantee of 135,000. It is dramatic not only in terms
of housing starts, but the 50,000 difference in employment is
the order of the figures we are talking about. Now, when you
are faced with that stark situation, and not any qualification
about it, then you have got to make the decision which is in
the best interests of the community. And I make this point
if I could just pick up what your question Russell , ifollows
logically this observation, that if you look at, in budgetary
terms, if in fact you had 50,000 less people employed in the
building industry as a result of adherence to a position that
was referred to before, just look at the budgetary impact of
that.
JOURNALIST: Mr Keating, is it a case of I told you so?
KEATING: No,* not at all. One deals with problems as they
unfold. And the Prime Minister already made it clear if the
banks had remained competitive, well the problem wouldn't have
arisen. But we were, of course, interested to monitor their
state of competitiveness, which deteriorated markedly in the
last few weeks, in the last months indeed. But particularly
in the last few weeks. Y04
PM: If I could just remind Aof that figure that Mr West
referred to. And the figures are these. Just a matter
of a few weeks ago the IPC was talking on the basis of
4.9 billion dollars, savings banks, that is what we are talking
about, 4.9 billion. Now, the figure as of the beginning of
this week, is that they were looking at less that 3 billion.
PM cont: Now that is just in a matter of literally four weeks.
And it makes a very, very big difference.
JOURNALIST: Mr Keating, is this an indication that interest
rates are going to stay up?
KEATING: It makes only a commentary about the existing burden
which the deposit costs are carrying in the banking system. It is
directed to that. It is in fact a commentary more on the history
of interest rates than the future.
JOURNALIST: Mr Keating, you were speaking earlier about the
existing 13.5 per cent ceiling for loans that were already
out, grandfathering for the life of those loans. Can you
guarantee that someone who has a thirty year loan will always
have,! through the banks, will always have that 13.5 per cent
ceiling no matter what change of government there might be or
what may deregulation
KEATING: I don't think I could go that far.
JOURNALIST: You said before that grandfathering
KEATING: Well, they. are in for the period of the loan.
JOURNALIST: Mr West, the fact that you have been able to
reach this accommodation with the banks, does this mean that
you no longer position of a month or so ago when you said
the banks were making so much profit that they could easily
afford to subsidise the housing industry far more than they are?
WEST: Well, if you look at the stiatement you will see we are
going to put a maximum of 60 million dollars, over the 12 months,
to match our 120, if indeed we have to go to 120. We may not have
to go 120, so the banks may not have to go as far as 60. That
will depend upon the level of interest rates in the future.
But maybe, if we are only subsidising the 48 million for the
first quarter, that is the June quarter. But no, I said
that the banks could afford to pick up a share of the burden
and that is in fact what they are doing in this statement.
JOURNALIST: To your satisfaction?
WEST: Well, I am never satisfied with anything.
KEATING: Let me make this point, that the deposits There is
about 24 billion deposits in the banking system. And to the
extent that the ceiling might have prevented the banks from
charging what would otherwise have been a higher market rate*
of interest, even in terms of the kinds of figure that I
mentioned, indicative figure of 15 and a half percent, on
24 billion two per cent is going to cost the bank profits of
about 480 million. Now we are talking here of a subsidy of
120 million which is a subsidy contingent upon the continuing
competitiveness of the deposit instrument in the contemporary
interest rate environment. So it may not be 120 million.
JOURNAL~ IST: Mr Keating, will some of that 120 million be
financed by 40 million savings from the underspending on the
FHOS? KEATING: Underspending on the FHOS Scheme is again an
instance of the fact that we have the FHOS Scheme paying
a subsidy on, helping to subsidise loans. But the reason
for the underspending is of course that there were no loans
to match the subsidies. There just weren't enough loans.
That just highlights what will happen with the availability
of loans, those savings on FHOS will have to be factored down.
JOURNALIST: Will there be any change in the FHOS?
KEATING: Not in the decisions in this package.
JOURNALIST: Mr Keating, would you be approaching the States
with a view to relaxing the lending restrictions on building
socities? KEATING: Building societies have got to make their way in
the market the same as banks. And the States will have to make
their own judgements. Some of the States have already deregulated
even to existing borrowers, building society rates. Indeed, some
of the state banks are already paying a market-oriented rate
of interest. So that is a matter for their judgement.
JOURNALIST: Mr Hawke, why did it take the Cabinet so long
to reach a decision?
PM: Two reasons. Firstly, the issue, as I think will be agreed
by everyone, is an exceedingly complex one. And there were
a variety of views, but the longer the discussion went on, the
more there was of drawing towards this general position. The
second point, Mike, is that we were concerned with, not just
looking at the question of the savings banks and what we
were doing there. But we were also concerned with considering
a range of proposals, those put up by the Minister for Housing,
as to what could be done other than just the interest rate
area to try and ensure that this Government did everything it
could to try and help in the area of low income housing. So
there were a range of proposals which went to that issue. And
we had to do two things in that area. We had to examine each
one in terms of its effectiveness, how it would best be targeted.
And second we had to consider budgetary impact. Now, all those
things, if you are going to deal properly with them, naturally
took a fair bit of time.
JOURNALIST: Mr Hawke, just to clarify. Are you saying the
full gravity of the situation, the crisi ' s confronting the
housing industry, only became apparent to the Government
this week?
PM: No. We were aware of a grave situation earlier. That
is why, in fact, the Minister for Housing earlier put, prepared
a sub~ mission. why, when we first considered that, the Treasurer
was authorised to have discussions with the banking system.
And it was then following our consideration of that, and the
Treasurer's discussions with the banking system, that we
then got the measure of what we could be looking at in
86-87. We knew it was going to be bad when, I repeat what
I said before, the IPC figures were not looking too good.
PM cont: I think the suggestion of something of the order
of 122,000, and that was based on 4.9 billion by the savings
banks. Now within a matter of just, as I said before, about
four weeks, that figure of savings banks camne down from 4.9
billion to, what the Treasurer was told just this week of
possibly less than 3 billion. And that was in a matter of
the order of four weeks. So it was a grave situation. But
the extent of it, and may I say not only the extent of it
but the attitude of the banks as to their capacity to maintain
the savings banks' operation came to us in all its gravity
as a result of the discussions the Treasurer had-this week.
KEATING: I think you are probably looking at really a radical
change in the nature of savings banks and thrift institutions.
And I think you will be seeing a fundamental change that might
have otherwise taken place
JOURNALIST: I was just trying to establish when the Government
first became aware that the loss of 50,000 jobs was a real risk
unless urgent action was taken. The 50,000 figure seems to
absolutely critical.
PM: I think with firmness t~ his week. The Treasurer was faced
with a situation which he reported to me that really what
we were looking, Peter, was the possibility of savings banks
virtually closing down operations in regard to new lending
in the housing area. Now, when you consider the importance
that they have in the total lending situation then it was
clear that if that figure was right, then we are certainly
looking at a maximum of 100,000. We were aware, as I said
earlier, we were aware before that that it was bad. I don't
think we became entirely convinced of the absolute ravity of
the situation, of 100,000 or less, until this week.
KEATING: The Commonwealth Savings Bank has an enormous
portfolio of existing loans, so they have got a massive
of repayments which would have been available for lending
this year. So in a sense, in this diminished picture
of lending, the Commonwealth BAnk would have had an even
task which would have said quite a lot about the diminution
in the level of activity of the other banks. which had not had
of course the same saving bank and housing history as the
Commonwealth Savings Bank has. So, the figures mask somewhat
a more dramatic decline for the other banks. And I think
that also is a factor.
ends