We’re now seeing a full-blown crackdown on home lending, with the Australian Securities and Investments Commission following hot on the heels of the Australian Prudential Regulation Authority to bring lenders (and mortgage brokers) to heel.
With data yesterday from CoreLogic showing house prices surging at unsustainable levels, there’s a real question about whether the regulators’ intervention will be enough, or whether it is too late. House values rose 1.4% across Australia in March, pushing annual price growth to 19% in Sydney and 16% in Melbourne. CoreLogic said house values in Sydney were now growing at their fastest yearly rate since November 2002, while growth across all capital cities is at a seven-year high of 12.9%.
There’s still the Reserve Bank, though: its board meets today, and home lending, not interest rates, will be the big area of interest, especially its view on home lending and housing in Sydney and Melbourne.
On Friday, APRA wrote to banks establishing a new limit on interest-only loan lending when the borrower needs more than 80% of the value of the property (and warning that loans for over 90% are a major red flag) and demanding that banks make sure they are “comfortably below” APRA’s previously established “speed limit” of 10% growth in housing investor lending.
Yesterday, ASIC also took aim at interest-only loans, announcing it would be setting out to “identify lenders and mortgage brokers who are recommending high numbers of more expensive interest-only loans”. ASIC will also require lenders to:
“… individually review cases where consumers suffer financial difficulty in repaying their home loans, and determine whether they have been impacted by shortcomings in past lending practices. Where appropriate, consumers will be provided with tailored remediation, which may include refunds of fees or interest.”
Which sends a message to banks that if someone can’t repay a loan, the banks themselves might be on the hook for it, not the borrower.
Why target interest-only loans? APRA believes they’re higher risk loans (they also cost more, over the life of the loan), reflecting borrowers for whom a traditional principal-and-interest loan is too expensive in the short run, and they currently make up nearly 40% of new loans. You can bet a lot of those are for properties in Sydney and Melbourne, where prices are skyrocketing.
Will these measures, plus whatever efforts the RBA brings to the table, be enough? As we’ve been noting in recent days, this isn’t the first time regulators have had a crack at this. ASIC announced in December 2014 that it was looking at interest-only loans as part of a broader review by regulators into home-lending standards — because interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5% in the September quarter of 2014.
The same day in December 2014, APRA wrote to the banks indicating the growth in loans to property investors should not exceed 10%. APRA said that to ensure that new borrowers were able to service loans when interest rates rise, banks should use a 2% interest rate buffer and a “floor” lending rate of 7% when assessing borrowers’ ability to service their loans.
That produced a slowdown in lending that lasted from mid-2015 into the latter months of 2016. But in December of last year and January of this year, investor loans easily topped the 10% limit, while interest-only loans headed back toward 40%. Now the regulators are using almost exactly the same language to complain about the same problems.
In 2015, ASIC was also unhappy with the efforts the banks are making to establish a potential borrower’s actual living expenses and thus their capacity to repay at both current future rate levels. It conducted a review that “found examples of practices that place lenders at risk of breaching responsible lending obligations” but now professes itself to be happier with things after banks had overhauled their practices.
So why the failure after 2014, and will the current moves have any more luck? Will we just be back here in 2020 with housing investor lending getting out of control again? The RBA has given us a clue who it thinks is to blame for the eventual failure of the 2014 measures, in the wording of the key paragraph in the minutes in the February and March minutes.
In the February minutes the final sentence read:
“Supervisory measures had strengthened lending standards and some lenders were taking a more cautious attitude to lending in certain segments.”
That was shortened in the March minutes to read:
“Supervisory measures had contributed to some strengthening of lending standards.”
So no lenders were “taking a more cautious attitude to lending in certain segments”, the references to “strengthening” became qualified. Why did the regulators miss the build up in investment lending and wait until this year to move?
That doesn’t absolve the lenders involved (nor does it excuse the cupidity of Coalition governments, which allowed super funds to borrow, especially self-managed funds, and their refusal to address the way negative gearing and capital gains tax concessions subsidise property investment). If handled badly, a property collapse and the damage it inflicts on consumers and banks could end a quarter century of economic growth. The stakes are accordingly very high for the regulators getting it right this time.
Too little, too late.
Why are interest-only loans allowed at all? Why were they ever allowed?
Basic financial prudence tells you that the value of an asset can rise AND fall…so only servicing the interest component of the debt is a very high risk. That risk is multiplied by the exponential increase in LVRs driven by “equity” (ie: paper value determined by the even bigger interest-only loan being given to the next “greater fool”).
It has always been recipe for financial catastrophe. Yet these loans have been handed out like confetti under the nose of “regulators” for decades.
Meanwhile Bernard still hasn’t twigged…these loans, along with the “wealth effect” they created, ARE Australia’s “record growth”.
The emperor has no clothes.
Indeed. Too too little, too too too late. Best. Clown. Show. Ever. Not.
Gee, cuz…y’know, like…I thought it was all about supply side issues!!! But see me, I’m Teh economically illiterates, me is. Duh.
The Ponzi fix is long in. Tinker, tinker, tinker away. Too late, too late, too late. The housing tax scam Ponzi winners will take to their equity parachutes as the rest of the economy falls off the cliff. The taxpayers – those who actually pay tax, as opposed to those who sidestep it via negative gearing, CGT discounting, and especially SMSF bare trust mechanisms (not to mention family trusts, not to mention SMSF dividend imputation fiddles, not to mention offshore accounts, oh, on and on goes the rich man’s tax cheating…) – will bail out/underwrite/the banks, the super funds, our ballooning structural deficit.
Ponzi stooges, the lot of us. We’ll survive. A lot broker.
The real victim though is productive investment. Long term growth building. What’s the Reserve gunna do, slice bank rates (to what, negative?) with one hand while imposing macro controls on ‘housing’ in isolation with the other? Good luck with that!
What a mess. What a fiasco.
The Responsible Political Centre? You want me to keep voting for the same bipartisan centrist clowns who built this bloody disaster? The ‘main game’ grown-ups, the self-declared ‘hardheads’…the political-economic policy ‘experts’????
*Utterly contemptuous, derisive peals of bitter laughter*
But hey. Take my penalty rates, boys. Hack welfare. Cut corporate tax some more. Yeah, that’ll balance your books!
Politics of envy? Class war? Hatred of the self-serving rich, and their biddable democratic manservants, the political ‘scum of the middle class’ of both Lib and Lab?
Sure. If that’s what you want. I can give it you in bloody spades.
Sure. If that’s what we all want.
Well said Jack, covers it off pretty well.
This is going to end very badly for a lot of people, some very innocent, some less so. the impacts of a fall in house prices are significant, and yet it is the medicine that is needed. Very homeopathic, requiring the pus to ooze out of the system before it gets better.
The hopes for a soft landing are now long past. Fools.
Dog’s, thank you as ever. I am about as obnoxious and ranting a pest as any that poor Crikey and its readers have to suffer these days, and it is greatly appreciated that anyone is still willing to nod, even, to the muttering nut at the far end of the bar. Bless.
My language, my tone, my constant (metaphorical) rage these days…it scares me more than it does anyone else hereabouts, I can assure you. I pay the rent by looking after vulnerable people – offline I’m about as gentle as the spring moon is still and calm. I don’t want to be rich, or famous, or powerful, or influential. All I want is what most of us want: to be governed sensibly, fairly, consistently, strategically, to be governed in good faith, according to the long-advertised economic principles and workplace demands made of me, by those who have their hands on the relevant policy levers. I’ll shoulder my share of the tax burden, I’ll be democratically engaged, I’ll be civically responsible. I’ll be governable, I’ll play my part.
I accept the role of the market in sound economic management, in fact I welcome it. I understand the need for budget rectitude, again, I welcome it. I’m thrifty and prudent with my own money, which is not that much but is more than enough to live a good life with, and thus all I really want. And I ‘get it’ that global realities are imposing economic changes, challenges. I’ll work until I drop and I’ll have a go at anything (I have had about 30 different jobs in 34 years of working life). I’m a good citizen, and feel lucky to be born in a country which, from the start, has had its economics underpinned by that great, that hugely under-recognised, structural innovation (in historical terms): our progressive taxation system. In the end, what makes the ‘fair go’ a real thing has been our society-wide understanding that progressive taxation underwrites the optimum ‘all for one, and one for all, is best for all, and best for each’ ethos of nationhood. Even our filthy rich get this, or used to get it. You pay your tax, and you pay a manifestly reasonable, fair amount…and you be SEEN to pay it. The rest is up to you. Go ahead, make a billion. Go ahead, nick off surfing on the minimum wage…your choice. Just as long as you pay a fair, progressive amount of tax, it’s all good.
The truly destructive aspect of neoliberal economics has not been about the privatisations, the casualisation of workplaces, the opening of markets, the advent of competition, the erosion of centralised wage-fixing, the (mercurial, uncontrollable, lots/little) international investment…none of that. It’s been the deeply-corrosive, accumulating delegitimisation of the notion of progressive taxation, as the fundamental fiscal glue of our decent, mutually-caring New-Nationhood-Experiment-at-the-bum-end-of-the-old-world. We used to be a tribe that understood that everyone in the tribe had to pay a fair relative share, to keep the tribe extant and functioning for the benefit of all, rich and poor and middling alike. Tax now? It’s like a tribal taboo, or an angry god to be kept away – it’s like an invoked curse. We are at the point now where many wealthy individuals (‘entrepreneurs’) and companies alike genuinely believe – think they believe – that ‘providing jobs’ (or ‘growth’, ‘infrastructure’, ‘services’, ‘opportunity’, etc) for others in the tribe is itself both an act of contributory civic virtue and, alone, sufficient kitchen kitty chip-in. (I don’t pay in ‘tax’, I pay in ‘jobs’). It is the natural endpoint of the user-pays ethos, I suppose, and perhaps of (a wholly delusional) dash of libertarian ‘self-sufficiency’ (of the IPA ilk).
Tax? Oh no, no. no. Only the poor pay tax, as Leonie Helmsley once put it.
That noxious idea has taken deep root, and become manifest in all our fiscal policy debates, our discussions. Our pollies are white-knuckle terrified of the tribal taboo word that Shall Not Be Uttered, let along be uttered as a desirable civic virtue, a citizenly privilege, even. And this felt aversion pustules its toxic way into manifest made-executive-policy no more disastrously than in housing: in the sense of tax-break ‘investment entitlement’ (not to mention, by now, legally-watertight permanence, I’ll bet) that has evolved across multiple bipartisan governments, into our current repulsive suite of housing tax policies.
Dog, there is now a generation of property investors who seriously argue that messin’ wi’ da existing market tax break distortions in any way – tweaking NG, phasing out CGT discount, tightening SMSF rules further etc – would actually represent a ‘distorting market intervention’. And they believe it. It’s beyond insanity.
And it is especially ironic – Rundle has written about this often – that even as they have always proclaimed (and continue to do so) the centrality to the Coalition’s philosophical platform of owning your own ‘family home’ – redolent of family values, of individual property self-sufficiency, of local community engagement, of thrift, prudence, keeping your white picket fence ‘nice’, of Neighbourhood Watch and cleaning up street rubbish, of kids’ cricket in the streets and helping the bloke up the road (your friends) fix his fence… – in reality, since Howard/Costello that party has spearheaded the transformation of housing into just another rich oik’s speculative/tax dodge. Like olive groves, llama farms, and really bad Australian movies.
It’s this rank strategic economic hypocrisy, the economic-ideological double-standards, that drive me to lunatic screeching at blameless websites. At the same time they impose market-ideologically justified regressions on me, on my take-home discretionary pay, my conditions…they give themselves license to go on suckling on the interventionist teat. It’s the political betrayal, the piss-take, that irks most. As if I’m a gump, too thick to see the street hustle in play in broad daylight. I am, probably, a political and philosophical conservative, and sure, a bit of a hillbilly, from the scrub, never quite felt at home in the progressive milleaus (such as hereabouts). But I know an oik scam, a spiv con, when I see one, and it drives me batshit mad to see it come most blatantly from home territory, from an allegedly conservative place.
So at some point when you’re getting ripped off, if you’re going to engage at all and stick up for yourself, it becomes ‘civic’ to scream, very uncivically. It becomes ‘responsible’. as a citizen, to (metaphorically) throw bricks through windows, to set the streets alight. It becomes ‘polite’ to swear, ‘decent’ to be unapologetically rude, constructive to be destructive first. Because the first thing the slick rip-off merchant suckers you into doing is…playing by his rules. The suits always want to be ‘be polite’, ‘mind your manners’, not make an unsophisticated hillbilly fool of yourself. That’s the only way they can skin you alive. But the pathway to genuine anarchy, to blood, is invariably lined with their endless ‘civil’ platitudes, their ‘reasonable’ debate, when re-examined in the rear view mirror, from the smoking rubble.
Anyway, that’s why I am such a horrible contributor to Crikey, when I am these days. I’m not going to play their or anyone else’s ‘mainstream’ game. Fuck you all: we are being fucking conned, and it needs to be screamed daily in their faces, in exactly those terms. So I just wish the people who should be fighting this stuff, from their positions of influence and profile, WOULD fight. Fight exactly like that. Like people who are being scammed on the street. Like Sally McManus. Like Mark Latham used to, before he went crazier than even me. Like Razor. Like Margo Kingston. Fight like they mean it. Not just to fill another column, to secure their ‘place in the media’, not just to fire off another doorstop soundbite, or get a return invite to Q&A, score another passing point at a Wheeler Centre soiree. I just wish powerful, influential people of a progressive bent – or a real conservative one – would stand up and fight, fight, fucking fight this hypocritical, disastrous, double-standard cherry-picking of their – the happily $$ entrenched, the authentic $$ elites – own economic ideology.
Anyway, thanks again Dog. Always reassuring to hear your voice, and the many other decent and intelligent voices here – even if mine is not so much of either any more, and has probably long worn out its welcome.
Best regards.
An exceptional rant. I’ll fight alongside you brother.
Be proud to, man. Thank you.
Appreciate your passion Jack.
You’ve correctly diagnosed the source of most of our economic ills, but as tempting as it is to give into anger it will not make things any better when the collapse comes.
Rather than throwing out the baby with the bath water by embracing extremist ideological politics, I believe the Left needs to plan for a post-crash campaign that is honest about where the blame lies, and embraces the hard truth that we need more areas of public policy to be protected from the fickle whims of…the public.
Progressive taxation is always low hanging fruit for talkback radio populism – “MY tax dollars” etc. It inevitably becomes a political plaything exploitable by anyone willing to play to the worst aspects of human nature. Tax cuts/breaks are promised = you win the polls. Tax rises = you lose.
We have a constitution which enshrines core values, and I strongly believe our democratic egalitarian capitalist/socialist combo could be salvaged if the opportunity is seized to embed progressive taxation and tax rates into our constitution, beyond the reach of talkback whingers and poll-driven electoral bribery.
There may be a narrow window of opportunity for change coming as the electorate look beyond their innate selfish instincts after the next economic crash. We need to prepare now.
Rather than throwing out the baby with the bath water by embracing extremist ideological politics, I believe the Left needs to plan for a post-crash campaign that is honest about where the blame lies, and embraces the hard truth that we need more areas of public policy to be protected from the fickle whims of…the public.
No, this is completely arse-about-face. We need more democracy, not less.
The people are not innately selfish. If you look at surveys, most are in favour of social democratic principles like progressive taxation and strong public services. Don’t have such contempt for your fellow citizens.
The problem we have had for the last few decades is that Labor has been comprehensively (and in my opinion, irretrievably) captured by neoliberalism. For most of that time there’s been barely daylight between Labor and the Coalition on most issues (Labor has happily supported flattening and reducing the progressive taxation system, for example, and the wannabe privatised pension system that is Superannuation).
The solution for this is not taking power out of the people’s hands, it is putting more in so they can voice their opinions more frequently than once every 3-4 years, and more specifically than picking between Tweedledum and Tweedledee.
Aye, Smithy. We’ve been conned into acquiescing to the ‘main game players’ for too long – into being ‘sophisticated’, and ‘ironic’, and ‘cool’ about democratic politics. Eff that. We need more ranting hillbillies like moi..:-).
Best, bra. Looks like they are finally catching up to us on housing ‘ishoos’…:-/
Thanks Damien. Nah, I’ll never ‘give way’ to anger. I love this country, and life, far too much. But anger can be political Viagra, too. Sometimes, anger is exactly, completely, utterly what’s needed.
Our pollies think far too much. We elect them for their full and authentic emotional range. They should trust in themselves to deploy it.
Damn Jack . . . . You shine through!
Heya grays…aye, like a moonlit shaft of hot piss from a midnight outhouse!
Good to see your handle still hereabouts. Bless.
LOL. The time to act against the Australian property bubble was fifteen years ago when it was starting to ramp up.
What troubles me is that much the same mob that landed us here (under Howard for almost 12 years) are back “in charge” – refusing to consider what they’ve done wrong then and addressing it now : putting things off in the hope they’ll correct themselves; or turn to shite under someone else’s watch.
And we’ll be left with the cleaning up, again.
Looks just like the US in 2008. This is the result of tw0 decades of misdirected funding into something utterly useless. We need housing, we do not need ever bigger housing for ever smaller families and we should not be supporting this. Negative gearing be stuffed. Capital gains tax relief for the family home after a substantial period of ownership and no foreign housing unless we can buy their land and it is harborside mansion maybe. Enough of these money laundering Chinese crooks, I am picking on China because it is corrupt and has no rule of law, as well as spending a lot of very dubious money here.