Alarm bells are ringing – finally – at APRA

By Nathan Lynch, Asia-Pacific bureau chief, financial crime and risk, Thomson Reuters

It was only the devoted, the desperate or the sleep deprived who remained in the chamber last night in Canberra when Wayne Byres, APRA chairman, buckled under a sustained line of questioning. For almost two-and-a-half hours the Senate Economics Legislation Committee had been firing questions like mortars at the country’s chief prudential regulator. By the end, Byres looked understandably fatigued.

Are Australian capital city house prices sustainable? Do they pose a systemic risk to the broader economy? Is APRA concerned that Australian households are vying with Switzerland to claim a gold medal in the global consumer-debt-to-GDP sweepstakes?

The recent data from the Bank for International Settlements is alarming, showing Australian households carrying an average of 123% debt-to-GDP.

In the measured language so well honed by prudential regulators, Byres said the risks in the Australian property market were among APRA’s highest priorities.

He said Australian housing had entered a high-risk phase due to a range of factors, including capital city house prices, household debt levels, record low interest rates and anaemic wages growth. APRA, ever vigilant, was taking action to intervene in the market to ensure that banks were not taking on excessive risks and exposing the broader economy to unnecessary systemic risks.

“The whole issue of housing and property is a big issue on our agenda. There’s a lot of discussion at APRA and a lot of discussion at the Council of Financial Regulators (with Treasury, the RBA and ASIC) about the risks. We’ve never hidden behind the fact that we are in an environment of heightened risk. Prices are high, household debt is high, interest rates are at historical lows, interest rates are low and competitive pressure is strong in the housing market. So everyone needs to be fairly careful about how they operate in this environment,” Byres said.

Nick Xenophon, the South Australian senator, wasn’t having any of it. With supportive grenade lobs from Greens senator Peter Whish-Wilson, he pressed Byres for a concrete answer to one simple question: at what point will housing debt levels trigger alarm bells at APRA?

“Do you consider that there is a point where at which the ratio of household debt to GDP becomes problematic in this country?” Xenophon asked. “Is it 200%?”

Earlier in the week John Fraser, Treasury secretary, had refused to provide a number.

“He’s a wise man,” quipped Byres, realising where this was heading.

The truth is, though few want to admit it, APRA’s alarm bells have been ringing for years. It would be an imprudent prudential regulator who suggested otherwise. The regulator’s responses simply haven’t worked.

More than two hours into the appearance Byres finally said it: alarm bells were ringing, albeit “softly”, over the accumulation of risks in the banking system.

“I’d say they’re [alarm bells] going off softly. That’s why we’ve been intervening in the sense that …” Byres said, before being cut off by questions from a feverish chamber.

It was the committee’s gotcha moment. And it went largely unnoticed.

Macroprudential mayhem

In recent years APRA has taken a number of tentative steps, jokingly referred to in the industry as “macroprudential lite”, to constrain the irrational exuberance in the property market. It’s imposed higher interest rate buffers for loan serviceability assessments, set benchmarks for year-on-year growth in investor lending and most recently took steps to constrain interest-only investor loans.

The regulator has been hamstrung, however, as these measures apply on a nationwide basis and APRA is reluctant to cripple lending in resources-linked markets such as Perth and Darwin. Behind the scenes it’s also worried about driving borrowers into the shadow banking sector, which takes lending activity outside APRA’s regulatory remit.

Despite these challenges, the message from the handful of bellicose senators last night was clear: something needs to be done about housing market risks and APRA needs to be a core part of the solution.

Some of the tools that need to be considered are hard macroprudential caps (the type the major Australian banks have been operating under in New Zealand) and lending controls targeted at specific geographical areas. APRA already has powers to impose the former and, in the wake of the latest Budget, it will soon have explicit powers to do the latter.

The politically unpalatable subtext to this discussion is that, if there is a “property calamity” in Australia, taxpayers are ultimately on the hook for these long-term regulatory shortcomings.


    • ErmingtonPlumbingMEMBER

      Yes,…the phrase, “who could have seen (or heard) it coming?” Is going to be a hard call to make, once this slow motion train wreck really gets underway.

      When does a fall in “Confidence”, transforme into a state of fear and panic?
      What is this Confidence thingy that always seems to need be debated and discussed,… yet never really defined?,…and what was that first rule of fight club again?

      Maybe it’s all just like erectile dysfunction,… once noticed and talked about,…it’s game over.

      • Nice one. Confidence is the key.. lol
        Btw – this is weird, my Marshall amp does not have those options. The photo must be a custom shop. Lol

      • Best plumber in the world, unblocking major intellectual blockages. Yeah, what’s this “confidence” fairy thingy? What really matters is that peoples’ wages are being sabotaged on every side by rent seekers, whether it be housing costs, work visas, mass immigration costs, road tolls, gas prices, and on and on and on, and ultimately the whole leveraged house of cards of debt and equity and consumer spending built on top of their weakening wages and job security will crack and collapse, and will send the economy spiralling out of the stratosphere towards the earth, and nobody will be able to do anything to stop it. WELL DONE PARLIAMENT, WELL DONE APRA, WELL DONE RBA, WELL DONE RENT SEEKERS. Welcome to New Argentina.

      • Confidence is a supply side metric, hence if taxes are cut and other market regulation is freed up ‘confidence’ returns to capital to act/invest. It is used widely as a filler word for any activity.

      • As John McGrath was quoted in yesterday’s piece. “Don’t panic”. Translation. Many are panicking and its contagious, exponential and destructive to everything debt related !

      • ErmingtonPlumbingMEMBER

        “What’s erectile dysfunction?”

        Ahhh,…I can tell your a very confidant and virile man LSWCHP,…no doubt you have a very broad, vast and “Rock solid” realestate investment portfolio. Your wife and mistresses mush be very satisfied, I imagine.

  1. Alarm bells ringing softly?

    “It’s an emergency, Sir.”
    “Come back when it’s a catastrophe!”

  2. Simón Bolívar

    The politically unpalatable subtext to this discussion is that, if there is a “property calamity” in Australia, taxpayers are ultimately on the hook for these long-term regulatory shortcomings.

    No we are not. Its implied. How this has transitioned into guaranteed I do not know. But Australian taxpayers are not going to be forking out $300 Billion to foreign banks when the housing market goes tits up – rest assured.

    So lets have a conversation about how much we owe, and the actual technical terms of the guarantee rather than avoiding it because the conversation in and of itself is all that is needed to downgrade our ratings.


    • Ventura Spleen

      It’s both explicit and implicit SB. Explicit in the bank deposit guarantee, which is theoretically uncapped but pre-authorised up to $20bn. Any higher would require consent from Parliament. And implicit in the sense that if a “pillar” got into trouble, we’d have the choice of either bailout (see Ireland) or systemic financial collapse (see Iceland). Either way, taxpayers pay.

    • Lol, yup!

      And are the macroprudential controls this time around going to be as scary as limiting loan growth to 10 per cent pa?

      Oh I know, maybe we can limit the use of interest only loans to only 5 per borrower.

  3. The simple fact of the matter is that APRA’s macroprudential measures did not work because they were never meant to work.

    Within our current broken and dysfunctional mainstream banking and monetary model the economy depends on expanding bank credit. That means that APRA and RBA will never take ANY measures that are likely to severely slow or reverse bank credit creation.

    They may fiddle at the margins to stop selected pots boiling over but that is it.

    Macroprudential fanciers often sound as though they think that APRA and the RBA will use Macroprudential measures to slow credit creation so much that prices will actually fall. They are DREAMING because that is the last thing either APRA or the RBA want.

    Tweaks is all APRA are interested in and even then they know that one tweak too many and they will be standing beside a dead body holding the murder weapon. By that I mean a housing market that is full of expectations that prices have stopped rising and are likely to fall.

    What Macroprudential fanciers never really explain is why it makes sense to experienced speculators and other rats with shiny teeth access to cheap credit at the top of the market and instead direct it at young families and FHB.

    If the market is bloated on too much cheap credit surely it makes more sense to let the air out BEFORE encouraging low income earners and the vulnerable to run aboard?

    If APRA were serious about doing something they have a perfect tool at their disposal.

    Restrict our local banks borrowing offshore for the purpose of supporting lending secured by existing property. That would immediately result in a reprising of mortgage rates with higher rates for mortgages over existing property and lower rates for mortgages secured by new properties. If we are going to use foreign ZIRP capital at all it should be to expand the productive capacity of the economy.

    But we know why they have not and will not use this tool because APRA and the RBA are perfectly happy driving private bank credit creation – anyway they can – with low cost capital inflows coming from our trade rivals (low priced sources of funding holds down mortgage rates) who are using those flows to Australia (and other clown economies) to hold down their exchange rates and save THEIR jobs and industries.

    The sooner we stop kidding ourselves that APRA and the RBA are acting in the Australian public interest the sooner we stop clutching at Macroprudential straws that are nothing more than a distraction from what is going on.

    APRA and the RBA are goosing the housing market and doing long term damage to the Australian economy.

    Nothing short of monetary and banking system reform will allow us to undo the damage they have caused.

    • Even StevenMEMBER

      1) Looks to me like APRA focuses on making sure the banks don’t fail.
      2) Lending is permitted so long as it doesn’t come into conflict with 1).

      Productive/unproductive capital flows, broader economic measures of debt/GDP etc are, I suspect, peripheral to their agenda. But looks to me like Parliament is seeking to make management of the broader economy a core part of their agenda.

      So what does the RBA do, again?

      Merge the regulators?

      • Even Steven,

        Yes, that is the core of the problem. APRA and RBA are the institutions that give flesh to the ideological idea that ‘public money’ and ‘banking’ can be completely privatised.

        The ‘balanced budget’ and ‘balanced budgets over the cycle’ have as a base the belief that the public sector creating public money should be the exception rather than rule. No simpler way of strapping down the body politic and leaving the decisions concerning public money creation to private bank credit ‘allocation’ decisions – the biggest and juiciest game of mates.

        That this model has been a dismal failure is now beyond doubt. Note: credit allocation decisions by pure intermediaries in public money is a different story.

        The idea that the solution lies in giving unelected and unaccountable institutions more responsibility for management of the economy and all the inherently political choices that are involved is not just flawed, it is outrageous.

        No surprise that the LNP would champion such an idea as they have a baked in distrust of democracy but there are plenty of so called progressives who think an ‘enhanced’ role for the RBA and APRA makes sense.

        Abolish both institutions and role them back into Treasury with a beefed up and well resourced AND independent ABS that reports directly to parliament.

        Pretty much all we need.

      • This is why we have a Council of Financial Regulators, Even Steve. In theory so these sorts of issues can be tackled in a coordinated way and regulatory problems don’t fall between the cracks. You’d have to think that APRA, the RBA, ASIC and Treasury all thought it was a good idea to juice the property market to offset the carnage from the mining capex cliff. And when it all goes pear-shaped they can point the finger and say “not my area”.

      • ErmingtonPlumbingMEMBER

        “Abolish both institutions and role them back into Treasury with a beefed up and well resourced AND independent ABS that reports directly to parliament.

        Pretty much all we need.”

        The more directly, Democraticly accountable these instutions the better. Good call 007.

        When we Gunna have that coffee brother.

    • Jumping jack flash

      “The simple fact of the matter is that APRA’s macroprudential measures did not work because they were never meant to work”


  4. “In recent years APRA has taken a number of tentative steps, jokingly referred to in the industry as “macroprudential lite….””

    C’mon guys, get it right! It’s “Macroprudential, LOL”

    • Yup, with the Fed maybe hiking again in June we can be world leaders with our (low) interest rates!

      We can take misallocations of capital to a whole new level! And pay even more for our imports!

      Aussie! Aussie! Aussie!

  5. I can only imagine the senators interested in an answer to one question. “Should we liquidate our portfolios?”

  6. The Patrician

    Seriously there must have been at least one of these headlines a month in MB for the last 3yrs.
    Usually in the week before the RBA meeting

    • But usually it’s MB sounding the alarm to tin ears. This is the first time the ponzometer is officially ringing at both MB and APRA. Bravo!

      • The Patrician

        MB has been announcing the arrival of the MP “crackdown” for at least the last 3yrs
        It was bullshit 3yrs ago
        It was bullshit in 2015
        It was bullshit last year
        It is bullshit now

      • On the plus side, Byres is acknowledging publicly that alarm bells have been triggered. So any failures are on his watch. They knew there was a problem from May 2017 at the very latest!

        Previously APRA officials (teflon dons) have pretty flatly denied there was a problem, nothing to be alarmed about, normal market forces, banks are being prudent, macro-lite is working, etc, etc.

        This is a terrible policy failure and to be a fair Macrobiz has been a voice in the wilderness re MP. You can’t blame them for getting a little overexcited three years ago when APRA claimed it was going to use the levers available to it.

      • The Patrician

        Repeatedly announcing the arrival of the MP “crackdown” (when it clearly is not) is not helping solve the problem.
        It is the opposite of helping solve the problem.
        Calling bullshit “bullshit” will help solve the problem

      • Even StevenMEMBER

        @ Patrician

        Not sure you’re right this time. I think concern is now permeating through the press, the politicians, the investment management world, AND the regulators. I think this might be it. The start of the end. Not definitely. But probably.

  7. TailorTrashMEMBER

    …..the punters locked up in their steerage cabins on The Titanic also heard the alarm bells ringing softly ……….

  8. Quote: Byres finally said it: alarm bells were ringing, albeit “softly”,

    Byres’ granddaddy was the captain of the Titanic: “There’s never been icebergs this far south, full steam ahead, 1st Mate.” (there’s never been a property collapse in Australia, don’t tighten credit.)

  9. SweeperMEMBER

    Didn’t Morrison give APRA new powers to remove and disqualify executives? Should just remove the 4 CEOs for creating this over past 5 years. As if that wouldn’t change behaviours.

  10. Is this the only place this article appears? Doesn’t the author work for a global news wire service?

    • What are you talking about bejome? Only Macrobiz?? Writing semi-occasionally for Leith and David is one of the great joys of my life — not least because of the fire and brimstone unleashed in your comments section.

      Outside the global newswire services, we do a lot of specialist professional publishing behind paywalls. The good news is that you can be sure all the relevant regulators and government agencies are reading it.

  11. In recent years APRA has taken a number of tentative steps, jokingly referred to in the industry as “macroprudential lite”, to constrain the irrational exuberance in the property market.

    You see the industry is behind the times, in the Internet Universe of Danke Meme’s we refer to these steps as MP LOLz and MP 2.0 LOLz..

    But it seems to be as popular as the phrase “Mega LOLz” around here. ;D

  12. Jumping jack flash

    Whatever the problem, it just needs more debt and it will surely go away.
    Get rich on debt!

    And if you’re super clever, you get rich from someone else’s debt.