Elysse Morgan reported this story on Wednesday, September 11, 2013 18:25:00
MARK COLVIN: Some analysts fear that Australia could be heading for its own financial crisis as the overheating property market pushes banks toward lower lending standards.
The financial regulator has given a signal that it's increasingly concerned about this. Today it warned lenders against letting standards slip. It also warned non-bank lenders that it's watching them closely.
Finance reporter Elysse Morgan has the story.
ELYSSE MORGAN: Australia's economy now has the three key ingredients that sparked the financial meltdown in America and crippled the global economy.
MARTIN NORTH: First is, house prices are historically very high, secondly interest rates are artificially low at the moment, third one is that people want to get back into property and there is a significant demand.
ELYSSE MORGAN: Martin North, a leading banking analyst, says it's not going too far to draw the similarities between the US housing bubble which led to the GFC and where Australia is now.
MARTIN NORTH: I do think that the analogy to the US is really quite important. One of the main seeds of disaster that were sown was that interest rates were down very low but then quite quickly they started to move up, and what people found was that as interest rates started to move up, defaults started, and that triggered the global financial crisis.
ELYSSE MORGAN: Today's report from the Australian Prudential Regulation Authority shows it's got the very same concerns, imploring lenders to ensure that "new borrowers are able to service debt now and when interest rates inevitably rise."
The report is a shot across the bow of lenders, says banking consultant Scott Hamilton.
SCOTT HAMILTON: I think they're trying to actually warn banks to make sure that they actually don't lower standards so they can actually get mums and dads in that can't really service the debt they've actually been given.
ELYSSE MORGAN: But there is strong temptation for banks to tweak their standards. For years they've struggled to grow their loan books, which are key to growing profits, and now with the property market flooded with people itching to take advantage of low interest rates, lenders other than banks are getting in on the frenzy.
They're called non-conforming lenders, and they generally give money to people banks wouldn't because they haven't got big enough deposits or guaranteed income.
The banks are keen to see off this competition. Martin North says it's creating a perfect storm.
MARTIN NORTH: At the moment banks are pretty conservative in terms of the criteria they use for their lending, and they take account of interest rates moving up. If other players come into the marketplace and are more willing to lend - particularly non-conforming lenders - the question then will be will the banks ease back on their credit controls to be able to try and grab a share of that very profitable market that's out there?
ELYSSE MORGAN: Data released late last month by APRA (Australian Prudential Regulation Authority) suggests that there is more high risk lending going on, but the Bankers Association's Stephen Munchenberg says there's nothing to worry about.
STEPHEN MUNCHENBERG: It's important to note APRA's also said there's no system-wide problem: they're just concerned that we need to be alert for future problems and I think the banks are.
ELYSSE MORGAN: The figures show a steady rise in loans with a loan-to-property-value ratio - or LVR - above 90 per cent. It means that they have to borrow 90 per cent of the value of the property, and it's viewed as a riskier loan.
But the Bankers Association says there's no need for Australia to cut down on this - like what New Zealand has just done, capping the amount banks can loan to customers with high LVRs.
STEPHEN MUNCHENBERG: The sort of loans that APRA's raised concerns about are exactly the sorts of loans that first home buyers need to be able to get into the market.
ELYSSE MORGAN: But analysts believe today's report shows APRA might be heading that way, and it's also warning customers that it's their responsibility to borrow within their means.
MARTIN NORTH: It's a little bit of warning to consumers as well, because they might lured into thinking this is a great time to buy with interest rates being so low, but remember house prices in absolute terms are very high, interest rates are artificially low at the moment, they won't always be there, and therefore both from a consumer perspective and from a broader bank perspective it's probably a timely warning.
Now add in a little Sumo mud wrestling and I think that you will have nailed it.
Shadow
12 Sep 2013, 03:02 PM
Of course, over on Macrobusiness they have completely misinterpreted Joye's article (or read it through their permabear prism).
They think Joye means prices could crash from current levels.
Peter pointed out that Joye actually means there is a risk of a boom/bubble developing from here, and prices could then crash from the top of this new boom.
David Llewellyn-Smith called Peter a spruiker for pointing this out. Just in case there is any doubt...
What you seem to be suggesting (or perhaps CJ is suggesting) is that this some kind of year zero and that some madness might be afoot that will end in tears but will only take us back to year zero.
Sounds a bit neat to me.
Joye is not saying there is no potential for overshoot. All he seems to be saying is that there is the potential for a boom followed by a crash.
Others have pointed out (quite correctly) that the crashes following booms rarely go back to the levels before the boom started. But it's not impossible.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Of course, over on Macrobusiness they have completely misinterpreted Joye's article (or read it through their permabear prism).
They think Joye means prices could crash from current levels.
Peter pointed out that Joye actually means there is a risk of a boom/bubble developing from here, and prices could then crash from the top of this new boom.
David Llewellyn-Smith called Peter a spruiker for pointing this out. Just in case there is any doubt...
I can see where you are coming from with that but then why would Joye make the below comment?
"I am concerned about what lies around the corner – and here, I am talking months, not years."
Why would he be 'concerned' about a boom beginning in a couple of months?
This can really be read two different ways. Either the way that you have read it, or that he is actually worried about a bust happening "in a couple of month", although this is unlikely without some sort of catalyst.
It could be argued that you yourself are reading this through your permabull prism whilst the bears read it through their permabear prism's. Only Joye himself could explain exactly what he means anyone else is just putting their spin on it.
I can see where you are coming from with that but then why would Joye make the below comment?
"I am concerned about what lies around the corner – and here, I am talking months, not years."
Why would he be 'concerned' about a boom beginning in a couple of months?
This can really be read two different ways. Either the way that you have read it, or that he is actually worried about a bust happening "in a couple of month", although this is unlikely without some sort of catalyst.
It could be argued that you yourself are reading this through your permabull prism whilst the bears read it through their permabear prism's. Only Joye himself could explain exactly what he means anyone else is just putting their spin on it.
I can see where you are coming from with that but then why would Joye make the below comment?
"I am concerned about what lies around the corner – and here, I am talking months, not years."
Why would he be 'concerned' about a boom beginning in a couple of months?
He's been on the record as saying that the boom has already started in Sydney, so I guess he is worried that the already existing trend will accelerate and spread.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
He's been on the record as saying that the boom has already started in Sydney, so I guess he is worried that the already existing trend will accelerate and spread.
Catweasel say it can be a concerned and a delight at same time.
Now add in a little Sumo mud wrestling and I think that you will have nailed it. yes I think they made a subtle misinterpretation of CJ's point.
Perhaps it will be better understood tomorrow. I'm sure that CJ will have sent David an email to clarify that point.
Of course I could be spruiking.
Well he did say that there were potential problems in the very near future, months - not years. I doubt there is time to build a bubble from scratch in a few months.
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