Stop talking, RBA, and do something

By Leith van Onselen

The Reserve Bank of Australia’s (RBA) Financial Stability Review, released yesterday, contained at least three unambiguous warnings that Australian lenders should not seek to relax lending standards in a bid to increase market share and boost profitability:

“With demand for credit likely to remain moderate, a challenge for firms in a competitive banking environment will be to resist the pressure to ease lending standards to gain market share in the pursuit of unrealistic profit expectations…”

“While there is little evidence over the past year that they have been imprudently easing lending standards in a bid to boost their credit growth, they are seeking ways to sustain the growth in their profitability, including, in some cases, through cost cutting. Such strategies will need to be pursued carefully to ensure that risk management capabilities and controls are maintained…”

“…it would be undesirable if banks responded [to low credit growth] by loosening their lending standards or imprudently shifting into new products or markets in a bid to boost their balance sheet growth…”

Following the RBA’s warning, it is interesting to note that low-doc lending appears to be making somewhat of a comeback:

HIGHER-RISK pre-GFC-style lending practices are flooding back with non-bank lenders scrambling for their share in the burgeoning sub-prime lending market.

Non-bank major lender Resimac has embarked on a campaign to capitalise on the growing sub-prime sector and is offering low-doc loans to borrowers of up to 90 per cent of the value of a home.

Others, such as Rams, a subsidiary of Westpac, are lending borrowers up to 97 per cent of a property’s value, after adding in lender’s mortgage insurance premiums…

Now Westpac, St George (owned by Westpac) and the CBA will lend to borrowers holding just a 5 per cent deposit, lending up to 95 per cent of the value of a home…

Resimac is offering the 90 per cent loan-to-valuation ratio for low-doc loans of up to $1.5m to self-employed people who are unwilling or unable to provide tax returns and other information usually required for premium loans.

“We see more and more borrowers falling outside of what is considered ‘traditional’ lending guidelines,” Resimac chief operating officer Allan Savins said in a recent advertisement for the group’s sub-prime products.

“This may be due to the borrower themselves having a credit-related issue or simply because lending policies and lenders’ mortgage insurance guidelines have tightened.”

Let’s recall that it was the entry of non-bank lenders into the mortgage market in the early-1990s that led to the introduction of “innovative” (read risky) loan products such as low-doc loans and no‑doc loans. Naturally, Australia’s banks responded in kind by reducing deposit requirements to 5% or less (from 20% previously) and significantly increased the amount that they would lend on a given income.

My question then is as follows: If the RBA is concerned about underwriting standards, then why doesn’t it do something about it?

After all, “financial stability” is stated explicitly in the RBA’s mandate. The RBA also sits on the Council of Financial Regulators (CFR), along with the Australian Prudential Regulatory Authority (APRA), the Australian Securities & Investments Commission (ASIC), and the Australian Treasury.  Why doesn’t the RBA work directly with these agencies – APRA in the case of banks, building societies and credit unions, ASIC in the case of the non-bank lenders, and Treasury as the gatekeeper – to implement macroprudential tools, such as higher minimum deposit requirements, tighter loan servicibility requirements, and debt-to-income requirements, that work to limit high risk lending and mitigate the credit cycle?

Simply stating over and over again that you don’t want lenders to relax standards is not enough. Blind Freddie can see that interest rates are going to fall at some point. If the RBA is concerned about lower interest rates raising household debt levels and inflating home values, how about following the lead of other jurisdictions and actually doing something about it?

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

 

 

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Comments

  1. The RBA is a toothless tiger. Stevens should be replaced immediately.

    Mod – Personal attacks are not allowed. The Governor’s religious beliefs are irrelevant.

  2. A quick Google search reveals –

    100% No Deposit Home Loans in Australia

    Do 100% loans still exist in Australia?

    Yes! However you will need help from your parents! …

    So how can I still borrow 100%?

    With a guarantee from your parents:

    With a 95% loan and a credit card:

    One of our lenders offers a 95% home loan and will then approve a credit card for up to $20,000 in addition to the mortgage. The credit card is at the same low interest rate as the home loan, which enables you to effectively borrow 100% for any property up to $400,000.

    So what is the catch? This lender requires you to prove at least 5% of the purchase price, saved in a bank account and to prove it has been held or saved over at least three months.

    If you do not have any money then you may need to ask your parents for a gift, which you can then hold for three months to meet this requirement.

    http://www.homeloanexperts.com.au/no-deposit-home-loans/

    And many more.

    Bend over. Grab your ankles. And kiss your @$$ goodbye.

      • Somebody please direct me to the nearest brick wall? I suddenly feel the overwhelming urge to repeatedly smash my head against it.

        • Somebody please direct me to the nearest brick wall? I suddenly feel the overwhelming urge to repeatedly smash my head against it.

          No, russell, if you did that, you would not be of any use to yourself or your family.

          We must let people get into debt, or after presenting people with FACTS, let them work it out for themselves. I know this view is harsh.

  3. Would it be too cynical to suggest that they are not actually concerned, but just want to have something on record in case it goes pear-shaped?

    • Would it be too conspiratorial to suggest that they are not actually concerned, but just want to have something on record for when it goes pear-shaped, and they and their mates make a killing picking up more real (estate) assets on the cheap?

      Interestingly, it appears that Reserve Bank officials are the keenest investors in rental properties. “We are not sure whether to be relieved or concerned that of the five central bankers who were brave enough to note their occupation on their tax form, all five had an investment property!”, the report says. “Of the 200 occupations classified by the Australian Tax Office, the employees at the Reserve Bank topped the list with respect to their investment property exposure.”

      Link

  4. Financial stability report is nothing more than a Cover Your Ar$e report for a few overpaid bureaucrats at Martin Place (no doubt produced at great expense to the taxpayer).

    And this is a familiar pattern of behaviour – when RBAcrats became aware of the bribery scandal, they didn’t go to the AFP. Instead, they hired a private outside legal counsel to produce a CYA report.

  5. Will not happen with this current political class. Could you imagine making the little Aussie battler having to save twice as much for their first home? Certain political death by destroying the great Australian dream.

    But it is a conversation we have to have and I’m afraid it will not happen.

  6. Frankly I think that lending standards are pretty good right now. Lenders will go to 95% plus LMI up to 97% but the borrower has to be bullet proof, it’s no longer a case of mitigating small defaults etc, there is NO mitigation at that LVR level.

    The family support loans that have been mentioned above, are in fact sub 80% LVR loans and they are not subscribed to on a mass scale – they are a niche product. They do evoke an emotional response on blog sites, but the reaction far outweighs their relative importance and use in the market.

    As for low doc loans, they are a vital part of the lending jig saw – when people criticise their existence, they do so only out of ignorance, not out of industry knowledge. I don’t think that anyone wants them to be freely available to non-business and investment purpose, but like everything they have their rightful place.

    Lending standards are really managed by APRA and ASIC not by the RBA although I’m sure that the RBA can exercise a great deal of influence with the other regulators, but they don’t control lending standards.

    It’s easy to build an emotional case to tighten lending standards, especially on a bear site such as this, where most bloggers have quite unrealistic expectations of what the finance industry should be doing to aid them in their quest to buy a low priced home, however that isn’t the function of central banks.

    • “where most bloggers have quite unrealistic expectations of what the finance industry should be doing to aid them in their quest to buy a low priced home”

      All bloggers on MB own their homes already, Peter, some outright. So it’s simply not the case that we are talking our own book. We are merely concerned about: Australia’s ridiculously high household debt and the risks it poses to financial stability and Australian’s welfare; intergenerational equity; the
      (implicit) tax payer support provided to the banks, due to their over exposure to property; and the general malinvestment caused when an economy directs too much investment to non-productive housing (most of which was already built).

      On this issue, it is you that is talking your own book. You are a mortgage broker after all – let’s not forget this fact.

      • Sorry, my error in terminology – I didn’t mean the MB crew, I was referring to those who leave comments here – I wouldn’t target writers personal finances – my apologies for that error.

        Yes i am a mortgage broker – I’ve never hidden that from anyone, and it’s fair to consider my interests. However it should be remembered that lending to homebuyers is not some article chiselled in stone like a holy commandment – it’s been developed since WW2 – prior to that time only about 44% of homes were owned by the occupiers. It is a trade off between allowing the majority of people access to home ownership, or mainting that for the wealthy only. Of course there is an issue of overall financial stability, but the proof is always in the results – and arrears rates are incredibly low by any standards.

        • prior to that time only about 44% of homes were owned by the occupiers. It is a trade off between allowing the majority of people access to home ownership, or mainting that for the wealthy only.

          Since you want to stick to the “facts”, can you please cite the sources for these statistics?

          • mav –
            In the USA “The homeownership rate declined slowly but steadily from 1900 to 1920. A robust economy in the 1920s raised the homeownership rate, but the Great Depression drove the rate to its lowest level of the century 44 percent in 1940.”

            http://www.census.gov/hhes/www/housing/census/historic/owner.html

            In Australia in 1947 the total home ownership rate was 53% but I can’t find ant pre-war data.

            http://aphnew.aph.gov.au/binaries/library/pubs/rp/2008-09/09rp21.pdf

            I couldn’t see it being greatly different to the USA.

          • Peter. Here are some facts for you to consider from the Australian Census:

            1996:
            Owned outright: 40.9%
            Owned with a mortgage: 25.5%
            Rented: 27.3%

            2001:
            Owned outright: 39.7%
            Owned with a mortgage: 26.5%
            Rented: 26.3%

            2006:
            Owned outright: 34.0%
            Owned with a mortgage: 34.1%
            Rented: 28.1%

            2011:
            Owned outright: 32.1%
            Owned with a mortgage: 34.9%
            Rented: 29.6%

            So Australia has experienced a massive boom in housing debt, but has achieved falling home ownership rates.

            What makes these figures even worse is that Australia’s population is getting older, which should increase the rate of home ownership.

            So how exactly is easier credit good for home ownership?

            [Note: I readily accept that planning has played a pivotal role as well].

          • Supply-side constraints are the bigger issue with respect to home ownership as they encourage borrowers to bid higher and higher prices in order to secure the limited housing stock on offer.

            Easier credit + constrained supply = housing debacle.

          • Supply-side constraints are the bigger issue with respect to home ownership as they encourage borrowers to bid higher and higher prices in order to secure the limited housing stock on offer.
            Correct.
            Choked supply determines the number of families missing-out. Credit helps set the prices at which this number misses-out.

          • Leith – as you have pointed out many times there are places in the western world where credit has been easy to access, and yet house prices didn’t boom, so a one dimensional argument that credit alone is responsible doesn’t gel with me, and I do note that you haven’t said that at all, but it is what many here think, so it should be addressed.
            Note that I’m not necessarily for easier credit, and I would be happy with lower LVR’s of maybe 90% – but that comes with a price too – sudden jolts to the system have a price in the stability of the economy.
            We have both established that credit is not the sole reason for a boom, although I think that in our efforts to “americanise” our financial system we did take bigger steps to get to this point than the USA, who had a much longer run up period – as the home of easy credit they started before us.

            In the figures that you quoted showing a decline in outright ownership without a mortgage, I would have to look at that against an increase in population and an increase in home purchases. We could easily be gaining in the numbers of outright owners, but falling in proportion to all owners if we see a surge in market entrants. I’m not saying that your figures don’t tell a story, but there may be more to the story that first meets the eye.

            We both know that credit that is too easy to access is bad for the economy, and we both know that an inability to access credit is at least equally bad for the economy – so the debate should be about small degrees of change rather than outright change.
            Blaming credit alone is a Hansonite response, when the problems are really political, and the solutions unacceptable for those who have the power of veto over things like land availability, changes to incredibly strict building codes, planning requirements. there is also the issue of contributions and taxes, which we pay upfront, but in other countries it’s charged on an “as you go” basis. That decreases the price, but not the cost.
            In short it doesn’t worry me if we make some incremental changes to lending standards, but I wouldn’t like to see large changes made in a short space of time, and I don’t see any changes being the magic panacea expected. I think that the problem of high prices needs a broader approach.

          • UE, Thanks for that.

            PF, there it is..FACT..in black and white, and in stark contrast to the narrative that you want us to believe.

            I couldn’t see it being greatly different to the USA.

            LOL. Did the US have Kangaroos in the 1930s? What ever happened to the “We are different” narrative?

            Anyway, a wretched, lowly attempt at shifting the goal posts after the match has started, from someone who has the gall to lecture others on “sticking to facts”.

          • sorry mav, you have lost me – we were discussing pre WW2 housing ownership rates and you point me to some recent figures – what was your point?

          • we were discussing pre WW2 housing ownership rates

            yep. where is the source that proves financialization helped improve home ownership rates from WWII levels of 44%?

            Don’t gimme US figures and tell me it must be the same for Australia. You cannot be effing serious!!

          • Mav I gave you the data that proved that homeownership in Australia in 1947 was 53% and now it is 70% – is that not a significant increase?

            If you actually read that report, the fall in those who owned outright actually occurred between 1961 and 1976. Both you and Leith seem to have overlooked that.

            When you have read that and understood please get back to me.

            Leiths figures don’t line up with the Census data that I linked – perhaps he can explain that.

          • is that not a significant increase?

            Can you attribute this significant increase entirely to increase in availability of credit? Then why did home ownership stagnate even as debt increased exponentially?

          • Leith, I don’t doubt for a moment that you have quoted Census data in good faith, but so have I. I can’t explain why my Census data differs from yours, surely it isn’t subject to revsion years after the event.

            Question – why did the ownership without a mortgage fall from 47.8% in 1961 to 32.3% in 1976, it then increased gradually until 96/97 when it started to fall – would that be when new financial products allowed mortgages to stand even when the balance was nil or almost nil (a Line of Credit perhaps) or alternatively the balance was covered by credit balances held in an offset. Prior to that period when a loan was paid down to nil the mortgage was automatically released.

            We could well be debating what can be explained by a change in procedures.

            There are to many possible variable for my liking – I don’t think you should be as sure as you appear to be – far too brave for my liking – I’m a conservative punter.

            Thank you for the discussion.

        • http://www.macrobusiness.com.au/2012/09/stop-talking-rba-and-do-something/#comment-179437
          most bloggers have quite unrealistic expectations of what the finance industry should be doing to aid them in their quest to buy a low priced home
          Peter Fraser, I don’t expect the finance industry to aid me at all. I do use your finance industry for MY ends. 🙂

          http://www.macrobusiness.com.au/2012/09/stop-talking-rba-and-do-something/#comment-179453
          Sorry, my error in terminology – I didn’t mean the MB crew, I was referring to those who leave comments here…
          And, to those of us who are intelligent enough to rent (or in my case, live with my Mum)/live with our rellies to accumulate REAL SAVINGS, your attitude to us is evident in those words. You don’t think very much of us at all, now do you!!

    • It’s easy to build an emotional case to tighten lending standards, especially on a bear site such as this, where most bloggers have quite unrealistic expectations of what the finance industry should be doing to aid them in their quest to buy a low priced home, however that isn’t the function of central banks.

      Classic straw man – You seem intent on ignoring everything that is written here and come back once in a while to argue against something that didn’t happen.

      You are like Clint Eastwood and his chair at the Wingnut convention. Keep arguing with the chair.

        • Sigh, yet another “personal attack” straw man to cover up the first straw man.

          You may want to point out the following “facts”: who made the “emotional case” and who has the “unrealistic” quest for a “low price” house.

    • Well said Leith.

      Ignorance or lack of industry knowledge?

      Deep T for one has forgotten more about mortgage broking, banking, fiduciary/prudential standards etc than most brokers (who have next to nil financial education – I know, I have worked with many, attended conferences and seminars with them – they are good at their craft, but that’s about it) learn in their 3 day Cert IV courses.

    • @ PF i think that is more a product of your perspective than the issues and comments at this site. I’d say most of us are interested in avoiding the perpetuation of an economy where the single biggest driver is trying to suck more young people into more debt by abusing a necessity as a finance asset.

      My view is that housing would be genuinely cheaper and more accessible if we got the investors in existing dwellings out of the market – ie de-financialised the market. You make money from the financialisation so struggle to see the forest on this issue.

      (nb i have a nice house in a nice suburb with less than 10% leverage – couldn’t give a sh8t if prices go down. And would love to see more owners and less renters in my suburb)

    • Cognitive Dissonance

      So there you have it……its not the lenders or the regulators faults that they keep having to moderate the leading rules so that our economy can grow, its the tight fisted consumer, if he got his act together and consumed with a bit more determination we could revise our accommodations to a level we may all find a bit more tasteful

  7. Diogenes the CynicMEMBER

    LVRs need to be tightened pronto. The fact that no one really talks about it means it would be extremely effective in stopping the Aussie housing circus. It would also protect the banks – if max LVRs were 60-70% then there is a nice chunky piece of equity in there to cover their balance sheet if property prices do end up falling 40+% as they did in the USA. Yo effectively make negative equity very difficult.

    We kill two birds with one stone – stop the silly property ponzi and make the banks stronger in one fell swoop.

    • +1 …. and allows IR cuts to take place without the threat of blowing our housing bubble up even further.

      Yes, we will have to deal with some inflation but the resulting boost to our export sector (from a lower AUD) would help mitigate the effects of the general slow down ahead. A nett win for Australia.

    • +1 combine this with getting investors out of the existing residence market (ie get rid of the incentives to invest in existing dwellings)

  8. The article makes a good point, there are plenty of things the RBA could do to improve financial stability but we should remember that the RBA will not because all of those roads lead to one place – deleveraging.

    The RBA’s actions demonstrate quite clearly that they are happy with debt growth in line with income growth even though the levels of household debt reduce financial stability.

    In practice this means there are still more people tempted into taking on debt than extinguishing it.

    The idea that the RBA is trying to set rates at a level that encourage an overall reduction in debt levels is misconceived. They have never stated that as a goal.

  9. FIRST – Impliment and enforce LVR restrictions

    THEN and only then think carefully about rate cuts

  10. I agree UE, and it will help business etc. , but what’s going to happen to housing? I see it spiking…hope I’m wrong.

  11. UE – fair call on suggesting the RBA stop talking and start acting.

    You mentioned that a number of other jurisdictions have stepped in and mandated tighter lending standards – did you have any examples on hand you could elaborate on?

  12. outsidetrader-New Zealand is one, and the instrument is Core Funding Ratio-google for detail.Same banks.

  13. All the slack lending standards rely on Mortgage Insurance. Seems to me that the Bank’s are placing a lot of faith on the solvency of these Mortgage Insurers to continue stumping up with shortfall cheques,which if my memory serves me correctly are averaging out at about $90k per property claim.
    Only last week Moodys indicated that it was considering downgarding Genworth to junk status.
    http://blogs.wsj.com/deals/2012/09/21/genworth-acting-ceo-isnt-scared-of-moodys-downgrade-threat/?mod=SmartMoney

    • Don’t forget also that it tried to offload its most valuable unit i.e. the Australian operation through IPO. Somehow not so much interest though from local investors 😉

    • Cognitive Dissonance

      As long as you are not wrong by yourself, no problem, the tax payer takes the costs

      Weeee this is easy

  14. Anyone who has seen the new RAMS ad on TV knows about this. The ad said that they will provide up to 95% LVR loan and if you don’t have enough savings record, they will allow your renting records as equivalent to savings record. Well, what are you waiting for ? Easy moneys don’t come so often 😉

  15. Leith,

    Your “Spring thaw for the housing market?”
    piece just published in the SMH appears to be missing a chart or two.
    At para 12 you refer to ABS Housing Finance charts that are nowhere to be seen.
    You might want to give them a heads-up.

    • Sort of fixed now…although linking to charts is clunky.

      Unless the idea is to get the punters to MI? : )

  16. I wonder if any of these new loans will get packaged and in some creative way sold to the US FED? After all the Bernank has 40bil/month to spend on RMBS with no questions asked about the loan quality. Surely some innovative blokes will figure out how to get some of that cash.

  17. Like interest rates themselves I think min LVR’s are too blunt an instrument.

    Generally speaking won’t a combination of lower rates and LVR’s simply benefit the asset rich boomers and handicap the younger first home aspirant that is trying to save for a deposit?

    I have some sympathy with the argument that in the long run it might be for their own good with house prices currently overvalued, however with the Central Bank trying to engineer a slow price deflation and rental costs increasing (in Sydney at least for now) I think the policy would certainly have very poor unintended consequences.

    I look at the NZ market with historically low rates where Auckland (admittedly not the entire market but a pretty decent slice of the pie) prices have returned to their peak. Many of the people I speak to on the ground there feel now more than ever they will never be able to afford a property of their own in the face of rising prices and rents.