APRA’s airbrushing of mortgage risks exposed

By Leith van Onselen

Last week, economist John Adams penned an excellent article exposing the way that the Australian Prudential Regulatory Authority (APRA) has airbrushed Australian history to paint over the huge housing risks facing the economy:

This event was predicated on the assumption that a downturn in China would lead to a collapse in demand for Australian commodities which would in turn lead, over a period of approximately three years, to:

  • a subsequent downgrade in sovereign and bank debt ratings leading to a temporary closure of offshore funding markets;
  • a sell-off in the Australian dollar;
  • widening in credit spreads;
  • Australian real GDP falling by 4 per cent;
  • unemployment doubling to 11 per cent; and
  • house prices declining by 35 per cent…

The conclusion of APRA’s industry stress test was that Australian ADIs would suffer capital losses on their residential mortgage books of $AUD 40 billion over an approximate three-year period, which, while damaging, would not result in any Australian banks failing.

This quantum of capital loss, APRA claims, would be equivalent to losses experienced in the United Kingdom in the early 1990s, but would be less than what was experienced by either Ireland or America during the GFC.

Alarmingly, APRA’s $40 billion capital loss calculation, to which no documentary evidence justifying the calculation has been published, has already been criticised and disputed by independent analysts.

LF Economics analyst Lindsay David, using Westpac’s loan data as recently revealed at the current Banking Royal Commission, as a representative baseline for the Australian banking industry, estimated the potential gross capital loss for Australian ADIs on their residential mortgage books under APRA’s ‘severe, but plausible’ scenario would amount to a stunning $AUD 298 billion over the same 3‑year time period.

It is important to note that in LF Economics’ calculations is the use of their conservative assumption that only the riskiest fringe of borrowers default, that being borrowers who borrowed 11 times or more than their income or borrowers who have monthly uncommitted income of $AUD 70 or less.

This conservative assumption is a stark contrast to recent evidence from both Ireland and America where borrowers who borrowed more than 7 times their income in the case of Ireland and 8 times or more in the case of America defaulted.

Alternatively, Principal Analyst Martin North from Digital Finance Analytics using data from his own exclusive and extensive 52,000 Australian household surveys and surveys of small and medium enterprises coupled with his own independent economic model, calculated that the gross losses to Australian ADIs would be approximately $AUD 310 billion over five years.

These significant disparities in estimated capital losses are concerning and requires prompt clarification by APRA.

…it is beyond dispute that Australia is currently experiencing the biggest debt bubble in its history at the same time we are in biggest global debt bubble in the history of the world.

Given this frightening observation, it is stunning that APRA did not reference Australia’s previous economic depressions as a baseline worst-case scenario or in official parlance a ‘severe, but plausible scenario’…

It is abundantly clear that the purpose of APRA’s industry stress test is not to objectively assess the robustness of Australian ADIs under genuinely plausible economic conditions, but rather it is a public relations operation designed to artificially boost confidence in the Australian economy and domestic financial system.

However to achieve this objective, APRA can only design economic scenarios in which the banks can pass and in doing so, they have had to airbrush Australian economic history.

Founder of LF Economics, Lindsay David, also took to Twitter to lambast APRA’s Panglossian modelling:

Now John Adams and DFA’s Martin North have teamed up to dissect APRA’s dodgy modelling and possible future scenarios:

Well worth a watch.

Unconventional Economist


  1. The regulators (ASIC and APRA) are there to cover up lies fraud and criminality by the banks NOT expose it. They seem to think that exposing the fraud and criminality would put financial stability at risk. As a result the regulators become complicit partners in the lies fraud and criminality of the banks.

    This is an example where APRA thinks it better to lie than risk exposing the truth.

  2. But what’s that I hear? Hold the front page, there are green shoots in the property slump already!

    “Slow burn’: First-home buyers are back in the game – The Age – Bad news for home owners is good news for those wanting to get into the propery market by Clancy Yeates”

    Clancy Yeates of ‘Nine-Lives-Fairfax the Ally Cat’ tells us that “the housing slump is creating opportunties for previously priced-out buyers to enter the market….” already!


    With any luck Mr ‘Clancy of the Bullshit Overflow’ will never get a job in a real newspaper. Put your ambitions on hold Clancy, if you have any.

    I’m hoping that any first home buyer stupid enough to be taken in by ‘Nine-Lives-Fairfax the ally cat’ will send Clancy Yeates the bill and get him to pay for their negative equity.

    Clancy Yeates, no-one forces you to write this crap. Remember, the ‘only following orders’ defence did not go down well in Nuremberg and it is not going to save your neck either.

    So, rack up the lies Clancy Yeates – they are going to follow you for a very long time…and define you.


    The unweighted average median multiples of its metros in 2007 was 4.7, which crashed to 2.8 in subsequent years … putting all its Banks to the wall and requiring bailouts of in excess of 70 billion euro … about $NZ109 billion.

    Currently the average Median Multiples for the Australian and New Zealand metros overall are about 5.9 and 5.8 respectively … refer …

    Demographia International Housing Affordability Survey: All Editions


    Research by the Central Bank of Ireland found high lending multipoles was the greatest problem (more so than loan to value ratios) … and subsequently imposed a general mortgage cap of 3.5 times annual household income. A year earlier the Bank of England had capped at 4.5 times annual household income …

    Mortgage Measures | Central Bank of Ireland
    … access extensive background research via link …


    A helpful television discussion about the 2007 Irish experience …

    Prof. Bill Black & Vincent Brown – Ireland’s Bank Guarantee … Youtube


  4. White shirt today. Crew cut next, I think.

    I’m with Martin that we will have al sorts of extend-and-pretend allowing debtors to stay in houses (and kick the savers out).

    • I believe Martin has drawn a long bow while there will be a lot of extended n pretend, IPS will new to be liquidated, other lenders will sue for bankruptcy even if the mortgage bank doesn’t the borrowing web is complex and across institutions too. Also 11% UE is perhaps 30% underemployment so what will happen to rents. Bankruptcy will look attractive to many if they are smart enough

  5. Because everything those gents say is correct (Australia is totally toast if housing bubble really goes), it can’t be allowed to fail.

    Tbtf. That means the kitchen sink AND the neighbours’ kitchen sink as well.

    • Peachy – you seem to be assuming that all the kitchen sinks were not thrown in the Irish and US and Japanese real estate collapses. When things are on the up a virtuous circle is in place but when things turn sour then a vicious circle tends to frustrate even the best and most concerted of endeavours.

      • You seem to be assuming that we are the US and/or Japan.

        Different dynamics, different ways out. The government will not choose “depression” as they way out. They just won’t. They will create all sorts of imbalances and injustices, but they won’t choose depression.

        You are mighty delusional if you think they will.

      • But our RE market resembles the UK much more than US Japanese or irish. How has the UK one gone?
        The US clearly threw nothing at stopping housing collapse, it was all thrown at the banks to ensure bank survival, not stop housing collapsing.

      • There are too many posts from bjw678 to answer them all, but it is clear that he is balls deep in housing. He keeps saying, “they won’t let it collapse,” as though they haven’t been doing that for 15 years already and are doing it right now (failing). Don’t even want to get into the whole “we’re different” BS.

        I suggest taking a look at this chart:

        Contemplate it for a while. Roll it around. Prod it, poke it, grasp it. Do whatever you got to do to imagine a world in which Australian households, already the 2nd most indebted in the world, are somehow able to push these heady debt levels to even greater highs. That is what you’re asking us to believe. What I want to know, specifically, is exactly how your financial Gods are going to juice credit again (ie propel household debt even higher) without crashing the economy?

    • Different dynamics, different ways out. The government will not choose “depression” as they way out. They just won’t. They will create all sorts of imbalances and injustices, but they won’t choose depression.

      So you obviously think the Australian govt and institutions are omnipotent.

      • Remember the Aussie govt has the option of trashing the AUD. That’s a pretty significant policy tool the Irish didn’t have. Guaranteed to be put to use to preserve domestic privileges of the incumbent elites.

      • Exactly right, mcPaddy.

        Also note that the MB crowd will cheer the trashing of the AUD all the way. It won’t be a good outcome for the house-poor.

    • Peachy,
      I like your attitude, but why do you believe that we will avoid what no one else has managed to?

      • We have much more riding on it.

        So we will go harder to avoid it for longer.

        I can’t see it being avoided *permanently* (if we assume that a complete ruining of the country is avoided), but I do see it being avoided very easily long enough to ruin the lives of those waiting for a correction.

        It’s certainly not cooked yet.

        (Of course, there is a possibility of a misstep or mishap that will see it undone sooner (possibly – soon), but one would be silly to make that their base case scenario. In my assessment.)

      • Dennis – my comment with the respond is awaiting moderation.

        Very strange, because it is squeaky clean.

      • Google Uk house prices for last 50 years.
        Look at the charts. Then tell me nobody has managed to.
        Then consider which housing market probably most closely resembles the Australian one?
        Flammable tower inferno dog box units. High immigration.
        Restrictive planning and zoning laws. Controls their own currency, not Euro.
        Sacrificed manufacturing and industry at the altar of increasing RE prices.
        And probably more.

    • In less than six weeks Sydney property will have been falling for a year per Corelogic.
      Hard to believe that a government willing to act, able to act, and sufficiently on the ball to act would have let it go on as long as that, so hard to believe effective action will be taken before the point of no return has passed.

      • Ok Robert, so where is the point of no return? -17% pa?

        see https://about.homely.com.au/blog/2017/3/23/what-we-can-learn-from-australias-median-house-price-from-1970-2016
        I know it’s a table of numbers and not a pretty graph but i’m sure you can cope. Guess what, over and over again property goes up a lot, then goes down a bit, then goes up a lot, then goes down a bit. It’s how markets tend to work in our “free market” system.
        If you can’t be bothered reading -17% growth in 1990 was followed by +6% in 1991.
        But keep holding your breath for the big collapse.

      • Are you really trying to say that being down nominally 11% (15% in real terms fwiw) after two years is a good investment?

        Any other economic events of note in 1990 that could be plausibly correlated to property prices?
        How did unemployment go over the next couple of years, for example? Or GDP?

        As you say there a lots of pretty colours and numbers on that graph, and you can even do some reasoning with them. Here’s something that could be interesting to explore – based on the numbers on the graph, how long did it take for someone who bought Sydney property in 1989 to break even? Do you think IP holders raised on the ‘doubles every seven years’ mantra will be satisfied with being underwater for that length of time?

        Those figures are nominal – another fun game could be to subtract inflation from the annual returns, noting it was around 3.5% in 1990/91 and the cumulative effect of inflation between 1989 and 1996 was 26% – if you sold your Sydney property bought in 1989 for the same amount in 1996 – as per the table you provided – your stake had lost more than a quarter of its spending power before duties and costs. Or alternatively, if you were able to pay cash, a Sydney property was a sweet 26% more affordable in 1996 than 1989 (I’d be plenty happy with that!! And interest rates fell by roughly 10% over the same period).

        How many years did someone who missed out on 1989’s annual return have to wait to see it repeated? What about someone who missed out on 1988’s annual return?

        FInally, given this was posed as more of a political question (i.e. when will it be too late for Turnbull to act to save his weak a__?), how many more elections did the PM in 1990 get to successfully contest? As a benchmark, how did that PM’s popularity when originally elected compare to our current PM?

  6. All regulators have to preserve their institution (and senior management). This involves any means to maintain ‘confidence’. Witness recent Riyal Commissions. that so many people do not recognise this is the tragedy.

  7. Stone the Crows

    A Housing Bubble Pops – A seismic event: Off the Richter Scale or just some fool howling at the moon ?


    It is rare that a housing market makes such a beautifully defined U-turn, after a long hard surge.

    Is the hangover arriving while no amount of artificial stimulation will straighten out the flaccid market ?.

    Some sad and embarrassed faces at those investor’s relations parties ?

    • I believe Brisbane detached family homes will outperform the rest of Australia, with a 5 year return of 0% 😉

    • Good find Reus. The myth has been well and truly exploded. Everyone is ahead on their mortgages, except the serial renter loser virgins. This is scientific fact and the result of free markets, Darwinism, and good-lookingness.

      • reusachtigeMEMBER

        Yes it’s a great article and the argument is clearly won unlike the poor attempts around here. He kept it simple instead of trying to baffle readers with the #fakenews and #alternativefacts of an over-educated.

    • Stone the Crows

      And since the last Census, wages are up 4.1% and mortgage rates are down 0.5% with house price growth dissipating.

      There is a new fancy word for you mate – “dissipating”

    • Yes it’s a great article and the argument is clearly won unlike the poor attempts around here. He kept it simple instead of trying to baffle readers with the #fakenews and #alternativefacts of an over-educated.

      You might appreciate the following:

      So Precedent Trump said ‘would’ instead of ‘wouldn’t’. BIG DEAL!! I counted and he said 23712 words that day – out of this he only got ONE WRONG, meaning he was 99.9999987% ACCURATE!! Of course, this ain’t good enough for the Failing Jeff Bezos FAKE NEWS MAINSTREME MEDIA! WHICH HUNT!!!!

    • Martin_DFAMEMBER

      Except that the 30% benchmark is irrelevant… and does not include investor loans at all… or all other debt repayments.

      • Hi Martin,

        You need to know (if you don’t already) that Reusa is a MB-Contra Contrarian (that is to say – a main-stream follower) comic relief character/sock-puppet account manned by an unknown (as of yet) intelligence.

        His schtick is to sprout all the REA propaganda in a humorous (and so far – sadly accurate) way, and brag about the number of “relations” (cf sėxual encounters) had at his allegedly “Beautiful and endowed investor parties”

        We all take turns at punching him just because he’s such a punchable scamp – and we don’t take him seriously not for a moment.

        As of late – Peachy has turned contra-contrarian, but there’s a dark streak in her messages.

      • The joke is funnier if you don’t have to explain it. Kind of like the rusty star picket for ScoMo. 😁

      • @Gav Sorry – I blame increased levels of blood in the caffeine stream! 😀

        And, by the way – the star picket still stands, and it’s getting rustier and rustier. Them rust-pitted edges can become mighty sharp just by themselves.

      • At the start of MB, he was a housing bear who got tired of being a bear, so rebirthed himself.

  8. Long overdue structural action by the New Zealand Government ? …

    Fran O’Sullivan: Vehicle for change… but at what cost? – NZ Herald



    It’s refreshing that the Labour-led Government is not so shy that it won’t steal the best of its predecessor’s policies when it comes to infrastructure funding.

    Urban Development Authority? Tick. Special Purpose Vehicle to fund infrastructure? Tick.

    It is not yet clear if Crown Infrastructure Partners — which was one of former National Cabinet Minister Steven Joyce’s brain children — will be the special purpose vehicle that Cabinet finally adopts when it looks to operationalise the plan for the Urban Growth Agenda which was unveiled by Cabinet Minister Phil Twyford in Auckland last night. … read more via hyperlink above …

  9. Have seen a couple of interviews with this “economist”

    He is a cretin.
    Has no idea of how money works in a modern economy

      • cbf adding anymore detail – you can watch his other interviews with martin north if you’re interested

        He’s the type of idiot that still cant understand why Japan hasn’t collapsed into a mad max hellhole

        The fact that his claim to fame is working for arthur sinodinos says it all