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Eric Johnston
March 18, 2009

COMMONWEALTH Bank of Australia has cautioned that the Federal Government’s sweetener on the first home buyers grant should not become an open-ended offer because it could encourage some into the housing market who may not be able to afford home ownership.

Chief executive Ralph Norris also warned that the Australian economy was likely to deteriorate before it improves, but said the banking sector would emerge through the downturn stronger than rivals in the US or Europe.

“There’s no doubt that the toughest period in the Australian economy still lies ahead of us,” Mr Norris told a Finsia business lunch. “Unfortunately, the unemployment rate will rise and defaults will increase.”

His comments came as board minutes released by the Reserve Bank of Australia yesterday revealed the key reason behind the central bank’s decision to keep interest rates on hold this month was to allow time to assess the impact of the fiscal and monetary stimulus on the economy.

The board minutes revealed the domestic banking sector remained strong while banks were passing on the large round of interest rate cuts to borrowers, particularly households.

Mr Norris also warned against governments reacting to the turmoil with heavy-handed regulation in Australia, noting the existing system has served the banking sector well.

This also extended to the first home buyers grant, which late last year was doubled to $14,000 for people buying established homes and trebled to $21,000 for those buying new homes.

“The first home buyers grant has provided a stimulus to this point, but we have to be careful that this doesn’t become a situation where this is an open-ended offer,” Mr Norris said.

He noted the subprime lending woes in the US had largely come about because people who could not afford to borrow were encouraged to.

“All of us have to make sure we’re lending responsibly to first home buyers,” he said.

Australian banks – particularly the big four – have benefited from a range of government measures that include a universal deposit guarantee and funding support.

The Federal Government’s AAA credit rating has helped banks raise more than $65 billion in wholesale funds in the face of tight credit markets. For the big four banks, this represents more than 70 per cent of their funding needs for the year.

Mr Norris said it was too early to tap global funding markets under his bank’s own AA credit rating; however, it could be a matter of months before local banks no longer needed the higher government-backed rating to raise funds.

Mr Norris also said the global financial crisis was moving to the next wave with highly leveraged infrastructure projects in Europe coming unstuck.

While no plans were in place for job cuts, Mr Norris said he could not guarantee staff numbers would not be cut given the unpredictable environment. CBA has left the door open for a possible dividend cut at its full-year results.

http://business.theage.com.au/business/subprime-warning-on-first-home-grants-20090317-912h.html

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