It’s difficult to know exactly what the Liberal Party stands for. Since the last term of the Howard government, they have lost any semblance of fiscal responsibility, a position embraced by Tony Abbott at the past election with his widely criticised parental leave scheme and $6 billion worth of unfunded promises. Shadow Treasurer Joe Hockey yesterday morning upped the ante and suggested banks be prevented from increasing interest rates outside of interest rate moves by the Reserve Bank.

Hockey, like many politicians, see banks as such as easy target. Sadly for Joe, while the highly profitable banks have much to be criticised for, he got his accusations completely wrong. Banks should be condemned is for the amount of money they have been willing lend to borrowers (especially residential home buyers), rather than the interest rate they are charge. Banks could also be rightfully accused of gouging fees from clients who are unable to easily change financial service providers, but that is a completely different issue.

This however, wouldn’t fit in with the Liberal Party’s apparent, “no aspirational home buyer left behind” policy.

Hockey suggested on ABC radio yesterday that the government utilise “the raft of levers that are available” to prevent banks from upping rates outside the RBA, demanding:

… a social compact between the banks, the community and the Government that focuses on delivering affordable credit to Australians and does not disadvantage unfairly people who are borrowing money to buy their home.

Hockey, like many populists, appears to believe that borrowing money to buy a property is some sort of divine right that one receives simply because they are Australian. It is this mentality that had led to mortgage debt in Australia skyrocketing. In 1997, the ratio of mortgage debt to GDP was about 30%, today that ratio is 90%. Relative to national income (which itself has been boosted by borrowing), debt to acquire homes has tripled in little more than a decade). The result, unsurprisingly, has been a substantial reduction in the affordability of housing and a massive drop in yields from housing investment.

A period of low interest rates after the 2001 downturn, spurred by a global credit glut led to banks lending too much money to residential property buyers. The big Australian banks, led by the CBA, now have upwards of 60% of their balance sheet in the form of loans for residential property. (This was partially the result of the Basel II requirements, which place a lower risk weighting on residential property lending than business lending).

In bygone eras, when banks used shareholders and depositors funds to lend to borrowers, this would not have been as serious a concern. But in the past decade, the banks’ hunger to increase lending (and essentially, sales and profits) has led to them sourcing wholesale funds from offshore investors. About 30% of the money that banks lend out to local borrowers is itself borrowed by the banks themselves from offshore entities. The problem is the amount banks pay to these offshore investors is completely irrelevant to what the Reserve Bank believes is the appropriate cost of money (interest rates) which should be applied.

Hockey can’t have it both ways.

On one hand, he claims that banks should deliver “affordable credit” to allow Australians to “buy their homes”. To do that, the banks need to borrow from offshore. At the same time, Hockey wants to fully regulate the cost of that money.

If Hockey wants to ensure that upwards of 70% of voters own their own home (funded largely by borrowings), then he can’t set a price for the cost of those borrowings.

If the interest rate that banks could charge was strictly regulated, then banks would have no choice but to stop borrowing offshore and reduce the amount of money they lend to Australian home buyers. No rational bank would go to the trouble of sourcing funds offshore if they were forced to lend those funds out at a loss. If that were to happen, banks would either reduce the loan-to-valuation ratios or stop lending to home buyers entirely. The exact opposite of what Hockey intended.

The man who should be Opposition leader, Malcolm Turnbull, immediately saw the foolishness of Hockey’s claims, telling ABC radio that “I’m not aware of any precedent for the federal Parliament regulating interest rates, at least in recent years, but you really — you should speak to Joe about that.”

Meanwhile, respected former ANZ chief economist Saul Eslake noted that it appeared “a little surprising that a party that purports to be in favour of private enterprise is advocating the Government dictate to private companies how they price their products”. However, it seems that the Liberal Party has long given up supporting private enterprise.

If Hockey wanted to bash the banks, he should have suggested regulating the fees that banks can charge customers, especially when those fees bear little resemblance to the banks’ actual costs. Or even limiting the amount of debt banks lend to individual borrowers (most banks are willing to lend home buyers up to 95% of the cost of a residential property) and prevent the massive moral hazard that exists because Australian banks remain too big to fail.

But poor Joe just doesn’t get it.

Peter Fray

Fetch your first 12 weeks for $12

Here at Crikey, we saw a mighty surge in subscribers throughout 2020. Your support has been nothing short of amazing — we couldn’t have got through this year like no other without you, our readers.

If you haven’t joined us yet, fetch your first 12 weeks for $12 and start 2021 with the journalism you need to navigate whatever lies ahead.

Peter Fray
Editor-in-chief of Crikey