Suddenly irresponsible mortgage lending is a problem!

Freedom of Information (FOI) documents released on Friday by the Reserve Bank of Australia (RBA) reveals that it saw risks in its decision to cut the cash rate to 0.10%, alongside introducing the Term Funding Facility (TFF) for banks and buying government bonds.

In particular, the RBA noted that “a permanent (temporary) 100 basis point reduction in the cash rate [could] ↑ real housing prices 30 percent (10 per cent) after about 3 years”.

However, the RBA said the Council of Financial Regulators (CFR) “will act if needed” to control risks:

This is a curious admission by the RBA given that it supported Treasurer Josh Frydenberg’s decision to scrap responsible lending rules, which was in contravention of the very first recommendation of the Hayne Banking Royal Commission that such rules remain in place:

Indeed, in the lead up to the Morrison Government’s decision to scrap responsible lending rules, RBA Governor Phil Lowe told the Standing Committee on Economics that Australian mortgage restrictions had become too strict and were constraining the economy:

“The pendulum has probably swung a bit too far to blaming the bank if a loan goes bad, because the bank didn’t understand the customer; if it had done proper due diligence—this is the mindset of some—the bank would never have made the loan. So some of the banks have had this mindset, ‘Well, we can’t make loans that go bad'”.

The RBA and Treasury also directly undermined ASIC’s “wagyu and shiraz” responsible lending suit against Westpac:

The Australian Securities and Investments Commission has decided not to appeal to the High Court its case against Westpac for alleged responsible lending failures, after the heads of the Reserve Bank of Australia and Treasury both privately warned it would exacerbate economic uncertainty caused by COVID-19…

Worse, Australia’s financial regulators, ASIC and APRA, were not even consulted on the decision to scrap responsible lending rules:

Financial regulators weren’t asked for their assessment on the scrapping of responsible lending laws before the government’s surprise announcement, according to testimony, leaving the head of a leading regulator to learn about the controversial decision in media reports.

Commissioners from ASIC and APRA were questioned about the scrapping of responsible lending laws before a parliamentary committee last week, where they revealed they were given little-to-no notice and were not asked for their views on the decision…

“I’m the commissioner with responsibility for credit,” [ASIC’s Sean Hughes said], “and I was first advised when I read the Treasurer’s media statement through the media on the morning of 25 September.”

So, we find ourselves in the bizarre situation whereby the federal government, with the blessing of the RBA and Treasury, neutered our financial regulators by green-lighting irresponsible lending.

And yet these very same regulators, under the auspices of the CFR, will then be called upon to rein-in lending standards as the housing market inevitably inflates, due partly to irresponsible lending.

Expect no action this year. Australia is facing a case of closing the regulatory gate long after the mortgage horse has bolted.

Unconventional Economist


  1. Nah, irresponsible lending isnt the problem. People not prepared to speculate on real estate are the problem………

    RBA says low rates will push up house prices

    The Reserve Bank and the Australian Prudential Regulation Authority are prepared to tighten lending standards if record low interest rates result in a housing boom that could leave new home buyers in negative equity or risk them taking on too much debt.

    Documents obtained by The Age and The Sydney Morning Herald under Freedom of Information show that in late November, the RBA considered issues associated with interest rate settings including their impact on depositors, savers and asset prices.

    The RBA and APRA know that their entire policy positioning is well beyond al dente and is now pretty much complete mush. When it comes to banks or real estate agents, buyers ask nothing more than ‘How Much?!’ they can get their hands on and ‘How Much?!’ a suitable abode will cost and decide that – in a nation of the worlds most heavily indebted mortgagees, with the world’s most spectacularly uncompetitive economy – their ‘wafer thin’ morsel of additional debt means nothing alongside the Mr Creosote the economy has become. That means if they can get it they will spend it, and worry about ‘serviceability’ when JobSeeker ends, confident that Scotty from Marketing has their backs…..

    The bank last year took the official cash rate to a record low of 0.1 per cent while engaging in a program of quantitative easing to offset the impact of the coronavirus recession. RBA governor Philip Lowe has said he does not expect interest rates to rise for at least 3 years.

    In a research paper dated November 23, the bank examined some of the issues surrounding record low interest rates.

    And in a nations with the worlds most heavily mortgage indebted punters the roar went up – ‘Go you good thing! and Woohoo! and with a fist punching Yes! – as an entire nation was overcome by the notion they may never see interest rates go this low again, and thinking that if they were only going to get one sighter of it then now was the time to speculate like no other. And that the one thing Australians love to speculate on the mostest is Houses! There were high fives and group hugs, beers bought, and backs slapped across Australia on the news. RBA Governor Phil Lowe earned a nomination for ‘Greatest Bloke Ever’ for his 3 year declaration, with the name ‘Phil’ for babies surging in popularity across the nation’s suburbs.

    That paper found low interest rates plus the RBA’s quantitative easing program were lowering borrowing costs, “contributing to a lower exchange rate” and supporting assets including the prices of houses.

    It noted that higher asset prices should push up the wealth of people and translate into increased spending, especially for “credit-constrained households”.

    “Housing prices are likely to (increase) alongside other asset prices,” it found.

    That research received a standing ovation from the RBA Board upon presentation, has been placed into a golden frame, will be placed into a ‘Golden Pavilion’ at the soon to be built Museum of Australian Realestate – MOAR and will be nominated for inclusion on the National Estate. It is expected that the Morrison Government will soon push for a national framework for the words of the report to be learned by rote in Australian Primary Schools. National Party Backbencher, Barnaby J, is leading a push to have Lake Eyre in the nations arid centre, renamed as ‘Lake Humungous Mortgage’, declaring in Parliament that the ‘time was right’ to recognise Australian housing speculation for what it is.

    ‘It is part of who we are as a nation declared the Member for New England. It is as Australian as the bronzed ANZACS who charged at Johnny Turk at Gallipoli, It is what sustained their sons through 4 years at Changi! We should be building this into our national consciousness and being proud of who we are!

    CoreLogic data shows that despite the deepest recession since the 1930s, Sydney’s house prices lifted through 2020 by 4 per cent to edge above $1 million. Melbourne’s median house price fell by a moderate 2 per cent to just under $800,000.

    After a Minutes silence for the fallen real estate speculator in Melbourne the mood turned upbeat with an air of expectation.

    The paper cites previous research by RBA economists that show a permanent percentage point reduction in official interest rates can drive up real house prices by 30 per cent over a three-year period. A “temporary” percentage point reduction in interest rates would push up real prices by 10 per cent.

    The bank has cut official interest rates by 1.15 percentage points since June.

    And every man woman and child, as well as bald headed babies hitherto not known to be able to count, burst into a national YIIIIHHHAAAAA!!!!! as alcohol sales soared and with analysts tipping a baby boom in about 7-8 months.

    Schoolteacher Patsy Ferozeshah of Melton West in Victoria said the rate cuts were bringing real numeracy benefits in the classroom. Every kid in class knew that 1.15% off the OCR was the starting bell on more than 10% gains for property prices. We have kids who normally wouldn’t do much more than fill their pants or throw sand at each other, and they were all coming in and paying attention through our maths class where we go over the mortgage calculators of the Big 4′

    But the paper also noted there were risks from low interest rates, including the encouragement of borrowers to “take on too much credit”, looser lending standards, “optimistic assessment of risk” and people taking on mortgages with small deposits relative to the size of their loan.

    Philosophy Professor at at ANU, Auzymandius Cheoh, has won rave reviews for his new syllabus and body of research work around the concept of ‘Does too much of anything Actually Exist?. He says too much borrowing is a myth.

    ‘Its like parents tell their kids scary monster stories when they are little kids. Its part trying to get them into bed, part trying to build their resilience, and part just bullshit. There are no monsters out there, and we cant actually borrow too much either’

    Naathyn Mayt Smurf of the Real Estate Speculators Association of Australia (RESPAA) says anyone fretting about deposit size should be thinking about the bigger picture.

    We encourage people to think of their deposit as a nugget. If you find a nugget it tells you there is something more to be found and that you are probably rich. Well once you have found a nugget you sell it to someone else and then go and find another bigger nugget. And if size really is an issue, well there are lots of creams and toys for that sort of need on the internet, but most people will find what they have is big enough and that for the first timers in the market, its mainly others who will have the toys and all they need to do is suck it up’

    It said loan-to-valuation ratios were increasing but were still well below the levels evident in 2015 that prompted APRA to tighten lending standards.

    If prices continue to rise, more people will end up buying at the top of the price cycle. When that cycle corrected, more of the national mortgage book was “likely to be in negative equity”.

    The paper said ultimately the Council of Financial Regulators (CFR), made up of the RBA, APRA, the federal Treasury and the Australian Securities and Investments Commission, would intercede if required.

    “Australia’s financial regulators will monitor and control risks,” the paper noted.

    “CFR will act if needed.”

    Naathyn Mayt Smurf also noted that if anyone needed to worry about size it would be Australian market regulators, adding that last time they had seen in daylight they were in stocks, with their pants down around their ankles, an eyeless leather mask tied to their heads and with a billiard ball strapped into their mouths.

    ‘Sure they’ll intercede. There’s a little hole in the wall where they poke their intercession tools through, and big butch angry wymyn speculators take their tools and bend them into weird shapes and punch them, while the regulators scream in agony. Sure they’ll act, but that screaming and that agony. That is real.

    The same research paper looked at how low interests were affecting the broader community. It found that higher income and older households were most likely to be detrimentally affected by the drop in interest rates over the past five years.

    Five per cent of households headed by a person at least 65 years of age earned more than 20 per cent of their income from interest. If interest earned through superannuation accounts was included, this jumped to a fifth of all households headed by a person of retirement age.

    Interest income accounts for 7 per cent of gross regular income for those aged over 65. For those aged between 75 and 79, this increases to 10 per cent.

    “Households reliant on interest income are now required to draw down more of their savings than in the past to maintain the same cash flows,” the paper noted.

    ANU’s Professor Auzymandius Cheoh came back at this point by posing the question ‘Is there a broader Community?’ and noting that this too might be reflective of deep rooted fears of loneliness in the national psyche, but has no factual basis in reality.

    ‘I’m sure some people in the community would like to think of themselves as ‘the broader community’ but in reality they may not be to the extent their experiences tell them they could or should be. If they arent real estate speculators then they have almost certainly had every chance to be one and they either have taken that opportunity or they have wasted the time they could have devoted to real estate speculation on some other activity. So thats basic opportunity cost. Then we come to those people who were in the real estate market their whole lives and now feel they want to be paid for being out while others are in. Well please. Do we need to consider that sort of nonsense? Some of those people might be a little bit selfish’

    Cheoh added that such people owed it to their friends relatives and children to get back in the ring and fight it out to the end.

    One of the “upsides” noted by the paper for savers is that stronger economic conditions and higher asset prices, particularly for their homes, was boosting their overall wealth.

    Another winner from low interest rates was the federal government which is expecting to borrow another $77 billion this financial year. Federal debt is already at a record $808 billion.

    “Low rates are also supporting government borrowing and subsequently the economic recovery,” the paper found.

    That observation drew a resounding Yes! from Federal Cabinet when it met, accompanied by a seven minute standing ovation and a round of table thumping only toned down by Prime Minister Morrison who whistled the room to some semblance of order before announcing ‘And Boys and Girls, These people are now talking about NEGATIVE interest rates!, leading to a further 8 minutes of sustained whooping and hollering, and pistols being fired into the air. Cabinet met in Canberra to consider a proposal from the NSW Government to construct a ‘National Tomb of the Unknown Financial Regulator’ including a 70 metre concrete sculpture tentatively titled ‘Intercession’ depicting a wall with regulator tools. Subject to council approval a site in Cecil Hills alongside the M7 is expected to be approved.

    • Strange EconomicsMEMBER

      Good analysis Gunna – clearly you have a microphone to report all the right groups.

      Yeah. Revealed the secret report – Congratulations The plan is a total success ..1 % down = 30 % over 3 years on house prices . How good is that!. Economy fixed.

      Why can’t they have one low interest rate for business, which should be encouraged and a higher interest rate for mortgages. Surely easy to legistate. Of course a lot of companies would suddenly become real estate investors, but still.

    • Yes, Martin North did a video on the late Friday FOI releases, concentrating on the mantra that high and increasing house prices support economic growth. This is based on the quaint notion that the higher the household wealth, the more spending they will do, completely ignoring the fact that for recent purchases, the net wealth when considering the debt is quite low.

      If the RBA were serious about increasing household spending in the economy, they would concentrate on direct methods like wage increases, instead of the roundabout method of first creating more debt via the commercial banks, which is then supposedly spent. This is a very dubious proposition as we know that the only prices that have been increasing substantially in the last dozen or so years are the prices of financial assets like shares and property. If the primary goal of the RBA is inflation targeting, and their policies haven’t worked over the last decade or so, then surely they need to try something else.

        • If they were truly independent they would be out there pushing the need for wage increases and arguing against all policies holding that back, such as mass migration. But yes, I know, they aren’t independent and are directed to spruik the governments line.

        • The big fat lie here is that the indirect wealth effect should increase inflation, but it is obvious to all that the wealth effect is creating inflation in the markets in which inflation is not measured, but not in the markets in which it is measured. If the RBA cannot admit this then they are just BSing.

          • If you were trying to inflate asset prices for elites it would be smart to take all the measures revealing the downsides to the have nots out of the equation, wouldn’t it. Strange that.

  2. I’m genuinely shocked that this has happened. I mean don’t they care about making housing affordable? ☺️

    • Housing affordability requires a range of measures and its certainly a focus area for this Government, one that we look forward to working more collaboratively with our constituents on, to develop some really innovative solutions. Like tiny houses, otherwise known as a porta-loo. Very mobile, very agile.

      • Jumping jack flash

        Firstly, everything is affordable if the bank deems you worthy of the debt you need to buy it with. I can buy my own island and fleet of ships if the bank decides that I am eligible for the debt that is required to buy it. At that moment it is totally affordable.

        Secondly, there’s nothing wrong with living in a shoebox on a postage stamp. Think of the planet and the sustainability and carbon footprints. Forget about mobile tiny homes, mobility is unnecessary stigma. Tiny homes are fixed on their own, separately titled, tiny parcel of land that is worth exactly as much as the giant, 300sqm block that it was cut from 5 years ago.

    • As most politicians have a minimum of 2 ip’s registered to their name, no they don’t care if property is affordable. In fact, affordable property works against their vested interests.

  3. Why would anybody waste their time in small business or work for the man when they can make a motza in property and finance, with the implied guarantee of the Govt, RBA and Treasury to prevent it from collapsing. Yes its idiocy, but if you aren’t in on it, who is the real idiot.

    • Strange EconomicsMEMBER

      95 % of Australians have already realized this years ago. Only people who overcomplicate it think otherwise. Economics or popular psychology.

      Why risk money and years of effort starting an actual business? Why use those difficult skills, when a bit of simple renovating returns 20% and a bit of borrowing 10% a year. Some misguided people still do, but the view obvious to the rest – housing is a one way bet (in Australia).

      • Jumping jack flash


        Plus getting instantly rich from someone else’s pile of debt is far better for the environment.

    • As the owner of not only a small biz, but a retail one at that… I totally agree.

      I should have started flipping houses or projecting building years ago.

  4. “However, the RBA said the Council of Financial Regulators (CFR) “will act if needed” to control risks:” 😂. fo sho.

  5. Jumping jack flash

    Irresponsible lending is only a problem if there isn’t enough of it to keep the momentum going.

    The growth rate of the debt must be sufficient to “paper over the cracks” in the enormous house of cards that is our debt ponzi economy. Not only ours either, but most of the developed world’s as well.

    The problems only arise when someone in the crowd points out, loudly, that the emperor has no clothes on and you can see his winky. This is kind of what happened in 2007/8. Hopefully they’ve learned their lesson from then and will completely embrace infinite debt growth, with no risk as long as it is growing fast enough.

    • Strange EconomicsMEMBER

      The secret paper (somehow extracted by FOI – when nothing else is allowed under FOI – should have been banned on cabinet secrecy grounds or something) says 1% interest rate drop – 30 % over 3 years for property. 10 % so far in Year 1. The plan is totally succeeding. !

      • Jumping jack flash

        Their plan will succeed as long as they don’t baulk at the inflation that will be required to keep it self-sustaining.
        They’re desperately searching for inflation right now, so it shouldn’t be a problem, at least for a few years.

        When the price of a small latte hits $20, some of our great leaders may scratch their heads a little.

        Also when the cost of getting their lawn mowed hits $300.

        • The place where I buy coffee at work increased their prices by 20c in two years. At that rate, it would take 140 years to reach $20. The only inflation showing up in the economy is in asset prices.

          • Jumping jack flash

            Yes, certainly at the moment it is. CPI is a joke and the inflation is hidden, etc, etc, etc. That’s been going on for literally decades.
            But consider the recent furore over wage theft and what its exact purpose is.

            If we were to abolish wage theft and pay everyone at least the minimum amount of money so they would become eligible for the (minimum) amount of debt to buy a house, then how much would prices need to rise?

            And could they rise? Not at all. The inflation required would be far too much for people to continue to buy coffee.

            But if we kicked it off with a well-timed bout of [COVID] stimulus, then potentially prices could inflate, and then wages could inflate and then debt could inflate, WITHOUT needing back to back interest rate cuts and the economic shenanigans they’re inventing to try and keep things running for a couple more years.

            The debt economy would become self sustaining. But it needs some serious inflation.

            And right now, COVID is their golden opportunity to get it started.

        • #tinyhomes #inspo #coffeeculture #cheapskate
          As takeaway cups shrink in Melbourne & regional cafes the price of small latte has doubled. Pretty, funky cups one can barely hold comfortably as volume halved. Pleasure over before it’s begun.
          Even 711 $2 cup shrunk, same lavazza at BP. All business onto it small is the new large.

  6. The entire job of a bank is access the RISK of lending money out.

    Its not the borrowers responsibility, its the banks.

    If the government says its not the banks responsibility but is prepared to guarantee them if it goes bad, we should nationalise the whole ruddy lot of them now and call it done.

  7. Housing is only unaffordable in Coastal NSW, Melbourne and Canberra. These efforts are about getting the rest of the country up to speed!