It’s a good time for the nation’s gathering of financial regulators to release their post-meeting statements: the greater insight into what the Council of Financial Regulators (the Reserve Bank, APRA, ASIC, Treasury) is thinking comes at a time when there’s plenty of misinformation, hysteria and self-interested commentary running on key financial issues.
As we’ve repeatedly noted, there’s plenty of apocalyptic reporting about house prices — even the ABC’s 7.30 weighed in with its own contribution this week — most of which, because it comes out of the Sydney media (usually) or Melbourne, gives the impression that the Australian housing sector that is at risk, when significant (and very welcome) price falls are confined to those two cities. Even then, it’s not an issue for the whole housing market of those cities, but those last in and with the least equity in their mortgaged home who are at most risk. For people with small mortgages, or who are debt free, a fall in house prices and a tightening in lending criteria by the banks is not going to impact their finances. Indeed, for those with money to invest, it may enhance the appeal of property investment, especially if they can get in ahead of Labor’s negative gearing changes.
Another issue that has attracted more interest in the business pages than on the front pages is the purported credit squeeze, blamed partly on APRA’s macroprudential tightening of 2015-16, but mostly on the royal commission and its unwanted attention on bank lending standards and dodgy incentives for mortgage brokers. There are commentators who opposed the royal commission just waiting to leap out and declare “I told you so” about the alleged impacts of the hearings on credit conditions and the willingness of major institutions to lend.
So what did the CFR have to say on these vexing issues? The regulators met on Monday at the Reserve Bank in Sydney and the statement suggests there is indeed a rising level of concern about the impact of the royal commission on lending by banks that seem to have been shocked into tightening their standards (standards that should have been in place all along).
Members discussed the tightening of credit conditions for households and small businesses. A tightening of lending standards over recent years has been appropriate and has strengthened the resilience of the system. At the same time, members agreed on the importance of lenders continuing to supply credit to the economy while they adjust their lending practices, including in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Members discussed how an overly cautious approach by some lenders to incorporating relevant laws and standards into loan approval processes may be affecting lending decisions.
“Overly cautious approach”. It’s conservative language, but the concern is unmistakeable. Even so, they note, “the decline in average interest rates for owner-occupier and principal and interest loans suggests that there is relatively strong competition for borrowers of low credit risk. Credit to owner-occupiers is continuing to grow at 5 to 6 per cent.”
Moreover, APRA is removing its macroprudential restrictions because it is satisfied lending standards have improved. However, non-bank lending is also rising: “non-ADI lending for housing has been growing significantly faster than ADI housing lending and there is some evidence that non-ADI lending for property development is also increasing quickly.” The regulators want more information on the shadow bank sector.
On house prices, the concern is much more caveated: “Members discussed recent developments in the housing market. Conditions have eased, but this follows a period of considerable strength in the market. Housing prices have been declining in Sydney, Melbourne and Perth, but are stable or rising in most other locations. The easing in the housing market is occurring in a period of favourable economic conditions, with low domestic unemployment and interest rates and a supportive global economy.”
In other words, much of the hysteria we’re seeing the press has no rational basis. But that doesn’t get the clicks or TV ratings.