In the wake of the Royal Commission
What do you have when a central banker pleads for a high-ranking government official not to make any changes on how banks lend money?
You have a problem.
A problem so large that powerful central banks have to grovel to authority institutions not to upset the status quo in the country.
A problem so enormous, the slightest tweak in laws could destroy the entire lynch pin the Aussie economy rests on.
A problem that is too big to be allowed to fail.
It’s this closed door meeting that tells us what we really need to know.
The Aussie property market is much more of a mess than the mainstream want to think.
The bad news
The slide in property values began in the middle of last year.
From July 2017 to September this year, the average national house price has decreased 2.7%.
Sydney and Melbourne had some of the biggest declines, down 6.1% and 3.4% respectively. Although that’s no surprise, given that those two cities make up 60% of Australia’s house market value.
But then, we’ve had a bunch of reports come through this week to add to the doom and gloom of the property market.
This week alone, I’ve seen reports from the International Monetary Fund (IMF) and research from PIMCO and Moody’s, all citing the precarious state our property market.
Or, more specifically, the mortgages attached to our property market.
The financial stability report from the IMF warned that house values and debt levels are an area that could ‘reveal financial vulnerabilities’ if something were to change, saying:
‘Household leverage stands out as a key area of concern, with the ratio of household debt to GDP on an upward trajectory in a number of countries, especially those that have experienced increases in house prices (notably Australia, Canada, and the Nordic countries).’
A day later, PIMCO warned that most Aussie mortgagors wouldn’t pass the stress test if interest rates rose 2%.
In other words, a 200 basis point increase would result in a jump in pre-tax income being spent on mortgage repayments. Right now, PIMCO estimates that on average, 38% of pre-tax income goes towards a mortgage and that would rise to 48% of household pre-tax income if rates increased.
However, the key part of that analysis is that PIMCO used ‘pre-tax’ income to reach that assumption.
The reality is, the majority of us pay off our mortgages with ‘after-tax’ income.
So it’s highly likely that a much smaller rate increase would trigger severe mortgage stress.
Then of course, there’s Moody’s adding to the overall dreary picture yesterday.
Moody’s analysis says mortgage delinquency rates differ by location. Arrears payments further out from the city are almost double that of ones closer to it.
In fact, their research shows that mortgage delinquency rates are 1% within 5km of a major city and a whopping 1.9% 30-40km out.
Meaning those on the city fringes are much more likely to experience mortgage stress first.
Keep those lending machines lending
This might be news to you and me, but turns out, the delicate state of mortgage debt isn’t news to our central bank.
Just last week, there was a closed door meeting between some of the folks at the Reserve Bank of Australia and our very own Treasury department.
According to the Australian Financial Review, both parties discussed the dangers of potential knee jerk reaction policies in the wake of the Royal Banking Commission, writing:
‘The Reserve Bank of Australia and Treasury have privately cautioned the Morrison government that any regulatory response to the financial services Royal Commission must be careful to avoid putting the brakes on lending to home buyers and businesses.’
‘The advice from two of the country’s top financial policy agencies appears to partly explain why Treasurer John Frydenberg has signalled he must balance cracking down on nefarious misconduct in the industry and ensure credit keeps flowing to borrowers to grow the economy.’
Well, ain’t that a pickle.
The Royal Banking Commission showed us that our banks would do anything for a buck.
The $75 million enquiry revealed banks were charging dead people. Turns out a large number of loans were based on fraudulent documents.
Oh, the terrifying fact that banks would drastically underestimate the cost of living all to ensure a customer could get the ‘maximum’ amount of purchasing power.
And let’s be clear here. The bigger the loan, the more money the banks make.
In spite of this multi-million dollar dog and pony show, nothing can change.
The stability of the Aussie economy is dangerously tied to the health of mortgage repayments and issuing more loans.
It turns out, Aussies can’t risk regulatory changes to mortgages nor anything that would slow home lending down.
The flow of credit from bank to people is too precious and must be maintained so nothing topples over.
The lending machines must keep lending at any cost.
And the RBA has begged our government to make sure of that.