Weeoo, weeoo, weeoo. It’s back:
A common danger for forecasters is to simply extrapolate whatever has been happening. For example, when the Australian dollar is falling, you’ll see heaps of forecasts that it will fall another few cents. When it’s rising, there are heaps of forecasts that it will gain more ground.
And so it seems to be with some of the dire forecasts going around about banks tightening up on credit because of the royal commission. That in turn is used as an excuse for predict further housing price falls – always a headline winner.
Such housing credit forecasts have come late to the party. It already happened. Particularly where residential real estate investors are concerned, the relevant regulator has ruled its tightening phase over.
And, given the tone of Commissioner Hayne’s interim report, there’s a good chance we’re already coming out the other side of the credit squeeze.
Independent property analyst Pete Wargent says the banks are already out of the blocks in search of more investor clients with Westpac reintroducing cash rebates for people refinancing.
The rally in bank stocks on Friday afternoon reflected relief that Mr Hayne didn’t indicate a leaning towards another, harsher level of credit legislation. Instead, he pointed towards simplification and enforcement.
“Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?”
That’s a theme Treasurer Josh Frydenberg quickly warmed to. The Australian Financial Review reported Mr Frydenberg – a banker before entering Parliament – “revealed he will not rush to impose heavy-handed regulation on financial companies despite the royal commission’s scathing assessment that greed in the sector had failed consumers, because ill-considered rules could constrict lending and hurt the economy”.
…Yet the same AFR article goes on to say its survey of economists “finds that stricter lending requirements are set to push Australian house prices down through to the end of next year as lending conditions tighten”.
Unlike Mr Wargent looking to what happens next, the economists appear to be extrapolating what has happened.
And what has happened has been devastating for property investors, as Mr Wargent’s blog summarises: “The crackdown on investor credit growth has been ruthlessly effective since 2015, the 12-month growth rate falling from 10.8 per cent to the lowest level on record in August 2018, according to the latest Reserve Bank financial aggregates.
“With the Royal Commission Interim Report finally and conveniently landing just before the long weekend, the major banks will be relieved to see that there’ll be no heavy-handed regulation coming their way, and Treasury quite clearly keen to avoid any further tightening of household credit.
“Since the 10 per cent cap on investor credit growth is now removed, there’s plenty of headroom for investment lending to pick up from here.”
If that were true then we’d already be seeing it. The problem is APRA replaced macroprudential one with macroprundential three, in which banks need to prepare for lower numbers of high debt-to-income loans which is why WBC is busy telling its specufestor clients where to go because nearly half its loans don’t make the cut.
And what about negative gearing reform which the Pascometer was flashing red about just last week? Or, for that matter, the new income and expense measures?
Then there is the growing building bust confirming the credit constraint. Fresh from UBS:
Looking ahead, we expect dwelling commencements to fall moderately to 210k in 2018 and 195k in 2019, and house prices to decline 5-10%, keeping the RBA on hold until 2020. But if approvals keep falling, there would be downside risk. Meanwhile, renovations are now also trending down, amid falling home sales. Finally, the weaker trend in non-residential building approvals – if sustained – suggests momentum for business investment is also easing, after rebounding in the last year.
There is downside risk, to the whole economy.
Fitch wrapped it all up nicely today in a new warning on banks:
Australian banks are likely to face additional profit pressure as a result of the Royal Commission’s interim report into alleged misconduct in the financial sector, says Fitch Ratings. The findings should not affect bank credit ratings immediately, but could raise compliance and regulatory costs, lead to fines and legal class action and further slow credit growth. We maintain a negative outlook on the banking sector, which also reflects higher wholesale funding costs and rising loan-impairment charges.
The interim report identified failings and behaviour that were below community expectations and, in some cases, in breach of the law. Most of these cases occurred outside of banks’ core mortgage and corporate lending activities, particularly in insurance and wealth management, which the major banks had already started to exit in the previous few years. The exception is Westpac (AA-/Stable/aa-), which retains its wealth management arm, BT. Nevertheless, the major banks will continue to face elevated reputational risk, which could erode their strong franchises. Meanwhile, a loss of trust in the system may increase wholesale funding costs, which could be difficult to pass through to borrowers in the current climate.
The findings are also likely to make banks more cautious in their lending decisions, even though the government will take time to consider the implications for credit availability before making any regulatory changes. Problems related to mortgage and consumer lending and the application of the responsible lending code suggest banks will eventually be required to further tighten their expense verification processes. Furthermore, increased scrutiny on intermediaries and brokers could hold back banks that most rely on them to generate loan growth.
Additional tightening of lending conditions would weigh on Australia’s housing market, which is already cooling in response to the Australian Prudential Regulation Authority’s stricter macro-prudential regulations on mortgage lending. It could also add to consumer spending growth headwinds.
The interim report criticised the previous leniency of the regulators, which suggests that regulatory enforcement and scrutiny of bank practices will be stepped up. This would be credit positive for the sector in the long-term, as it would further strengthen the regulatory environment and ensure prudential standards remain high internationally. However, it could lead to increased fines and additional compliance and regulatory costs for the banks in the short term.
There is no more bearish signal for credit and deeper house price falls than the Pascometer turning bullish.
Weeoo, weeoo, weeoo.
