Housing crash blame game erupts

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I’m back Monday but here’s a little warm up post. The politico-housing complex has joined the new year with a wailing siren of destruction. Leading off is disastrous L-plate Treasurer, Josh Frydenberg, who appears to have qualified for the job only thanks to an apposite moral flexibility, via the AFR:

“Now that APRA have lifted some of their restrictions on investor lending, we should see a pick-up,” he said.

“My message to the banks is still very clear – keep the books open.

“It’s in the banks’ interests, it’s in the economy’s interests, and it’s certainly in the public’s interests.”

UBS put it best last year:

The removal of the Interest Only cap is unlikely to result in a re-acceleration of housing credit growth in our view. The major banks should continue to tighten underwriting standards as they move towards complying with Responsible Lending laws (i.e. verifying customer income and expenses) in response to the Royal Commission and will result in further reductions to customer maximum borrowing capacity.

…Further, while the caps will now be removed for most ADIs, APRA has cautioned them to “maintain prudent internal risk limits”, and has made it clear that “a re-acceleration in interest-only lending at an industry-wide level would raise systemic concerns. In such a scenario, APRA would consider the need to apply industry-wide measures in response.” We therefore view the removal of the Interest Only cap as largely irrelevant and we leave our housing credit growth forecasts unchanged.

That’s what the L-plate Treasurer is really on about: the election. As house prices fall, and the economy grinds to a halt, the election is going to morph into a giant housing bust blame game. In one corner we will have Labor and its negative gearing reforms. In the other will be EVERYBODY else: the government, Treasury, RBA and press. It’s just as well Labor’s lead is unassailable and shadow treasurer Chris Bowen has the backbone and smarts to push the reform through for mid-2020.

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In the meantime expect more of this, via The Australian:

Westpac chairman Lindsay ­Maxsted has warned that a rising tide of banking regulation, ­including excessive restrictions on new loans in the wake of the royal commission, is tightening credit and causing the pace of lending to homeowners and businesses to slow.

…He said Westpac’s books were “open’’ but there were limitations on demands from borrowers as people and companies currently had lower appetites for lending.

Corporate leaders including former mining boss Hugh Morgan, property developer Bruce Dixon, Westpac director Peter Nash, South32 chairman David Crawford and financial services chief executive Ahmed Fahour yesterday echoed Mr Frydenberg’s comments. They warned that banks, risk-averse in the wake of the royal commission into the financial ­sector, could drag the nation’s economy to a halt.

The master race at play, eh. Shifting blame back to the government. Nothing will change in lending standards before the election and I remain doubtful that they will change after. Most of what we see above is self-interested arse-covering. The housing market has now shifted to internal dynamics anyway as the RBA has baked-in a deflation mindset. It’s weakening demand not supply that is now the issue, as NAB said late last year:

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Further evidence has emerged of a softening housing market, with National Australia Bank chief executive Andrew Thorburn revealing home loan applications to the bank have fallen by 7 per cent over the past six months.

While Mr Thorburn said he still expected housing credit to grow by 3-4 per cent next year, concerns over falling dwelling ­prices and the possibility of rising interest were taking hold among borrowers…

Mr Thorburn said the supply of credit was not a problem — it was more on the demand side.

Only one thing can fix that. Cheaper credit to shift expectations back to price inflation. The RBA is going to cut. My guess is March after it slashes forecasts in the February SoMP and then again in June, book-ending the election campaign.

The real question remains what impact will that have? As China slows and the terms of trade plunge during H1, probably not much.

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Stay tuned. We could be printing by this time next year.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.