The Reserve Bank has significantly strengthened its warnings about the housing property market in Sydney and Melbourne, using today’s Financial Stability Review to draw attention to how an “unbalanced” housing property market may place the broader economy at risk and potentially threaten the financial services sector via commercial property.

The FSR, released twice-yearly, again goes further than previous warnings, continuing the recent tradition of the Bank steadily increasing its alert level over the rapid growth in property prices, primarily in Australia’s two largest cities.

“The low interest rate environment and, more recently, strong price competition among lenders have translated into a strong pick-up in growth in lending for investor housing — noticeably more so than for owner-occupier housing or businesses. Recent housing price growth seems to have encouraged further investor activity. As a result, the composition of housing and mortgage markets is becoming unbalanced, with new lending to investors being out of proportion to rental housing’s share of the housing stock. Both construction and lending activity are increasingly concentrated in Sydney and Melbourne, where prices have also risen the most.”

The bank has previously warned that housing price growth poses a risk to the broader economy (rather than the stability of lending institutions) because of the impact on consumer behaviour in the event of a sudden and significant fall in housing prices, and it repeats that warning today, noting that an amplified property cycle “can affect households more widely than just those that are currently taking out loans: the households most affected by the declines in wealth need not necessarily be those that contributed to heightened activity”.

The bank also says the surge in investor housing is also starting to impact on the commercial property sector, which has traditionally been the area where Australian banks suffer huge losses from their property lending, and it is talking with other regulators about tighter controls on lending standards, especially to investors.

The FSR asks some hard questions of our major banks:

“.. a crucial question for both macroeconomic and financial stability is whether lending practices across the banking industry are conservative enough for the current combination of low interest rates, strong housing price growth and higher household indebtedness than in past decades. Moreover, lending to investors is expanding at a fast pace, which could be funding additional speculative activity in the housing market and encourage other (more marginal) borrowers to increase debt. Lending growth is varied across geographical markets and individual lenders, which may suggest a build-up in loan concentrations and therefore correlated risks within the banking industry.”

The RBA also warned banks not to loosen lending or property valuation standards or rush into new markets or products, and to make sure borrowers would be able to service their debts in conditions significantly less benign than the low interest rate environment currently applying, or if unemployment grows significantly. Such warnings from the RBA, coupled with similar ones from Australian Prudential Regulation Authority, which has increased its scrutiny of lending, indicate there are concerns that the banks may drifting into unsafe lending practices. The RBA revealed it is discussing with APRA ways of tightening rules “to reinforce sound lending practices, particularly for lending to investors.”

There was another significant and fascinating shift today, this time from the Financial Services Council, the front group for the big banks and AMP, who control the retail super sector. It now appears the government’s absolute determination to revoke Labor’s Future of Financial Advice reforms earlier this year, at the behest of the FSC, while the Commonwealth Bank’s culpability in financial planning scandals, and the utterly inept response from the Australian Securities and Investments Commission, were being publicly aired, has turned into a huge own goal for the sector and thus the government.

As The Australian Financial Review revealed today, the FSC is now calling for greater regulation of the financial planning sector with the establishment of a new government body to oversee financial advice standards and planners’ adherence to professional standards. In urging government regulation, the FSC has leapfrogged the Financial Planning Association, which has been pushing a professionalisation agenda within the profession, but driven by self-regulation. Clearly, the banks and AMP have decided they need the cover of government regulation and supervision (which they can help manipulate) to lay off some of the blame and pressures for greater transparency, higher standards among planners and cost reductions, which the banks and their mates would have had to wear in a self-regulatory environment.

It’s also a humiliation for ASIC, which among its many tasks is enforcing basic educational standards among financial planners. And the plea has exposed Mathias Cormann’s ideological and ham-fisted assault on FOFA, designed to serve special interests rather than consumer needs. The FSC has belatedly realised that consumer trust in financial planners and the big banks that employ many of them has been wrecked, and Cormann took away consumer protections at exactly the wrong moment. Now they’re running to the government for cover.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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