Wayne Byers has this one chance to repair his shattered reputation

In Australia, it just doesn’t do to tell the truth about our ruling classes. Take, for instance, Wayne Byers, chairman of the Australian Prudential Regulatory Authority. As the Hayne Royal Commission exposed banking disgrace after crime in 2019, it became abundantly clear that APRA had completely failed under Byers over the previous cycle.

Yet what happened? Why! He was reappointed in the middle of the HRC, immediately before Justice Hayne turned to condemn APRA ‘s failings. Byers should have been sacked or resigned, as some within the Australian parliament demanded.

In terms of incentives, then, Byers was captured by Treasurer Frydenberg personally, over the national interest.

This conflict of interest is about to be cast in stark relief against Australia’s economic needs. As the latest round of property bubble moves towards blowoff, stoked directly by APRA and its easing of mortgage lending buffers in 2019, and cheered on by Treasurer Frydenberg, leading standards are going to tumble, if they have not already.

If this is allowed to run for much longer it will do serious harm to the national interest as financial stability is threatened, the AUD is driven up versus the counter-factual and it will become impossible for the RBA to ever tighten again.

That is, the national interest and the Government’s interest are rapidly diverging. With an election due early next year, Treasurer Frydenberg is furiously trying to stoke the bubble to ever greater heights by scrapping the very responsible lending laws that the HRC fully endorsed. There is another senate vote on these in June.

The base case is still that the cross-bench will defend the laws so Byers may not face the fateful choice of having to tighten on mortgages immediately after the Government loosens them, and directly before the election. But he should be. He should be doing it right now to ensure that as much of the RBA easing as possible is tipped into the AUD so that nominal growth lifts with exports and national income, budget repair is accelerated, and Australia can remain competitive as the Government seeks to diversify the external sector from China.

So, a captured Byers most likely won’t tighten before the election. He owes his mate Frydenberg, personally.

What about afterward? The need then will be great. Yet the Government will quite likely have just campaigned on Labor risk to house prices. Will Byers move then? And what will he do? Capital Economics has a crack using the RBNZ template:

  • New Zealand’s experience suggests that the planned increase in risk-weightings for investor housing loans in Australia won’t act as a big deterrent to bank lending. If investor loan growth started to run hot, the banking regulator would have to respond with direct caps on lending growth or LTV ratios.
  • Lending standards in Australia have remained sound so far, but with the housing market roaring to life there are mounting risks that banks will become exuberant. To forestall a renewed surge in riskier interest-only loans and lending to investors, the Australian Prudential Regulatory intends to make changes to its capital framework which should come into effect on 1st January 2023.
  • There are two key changes. First, loans to investors will carry a higher risk-weighting for the calculation of risk-weighted assets than loans to owner-occupiers, with the surcharge widening non-linearly with loan-to-value ratios. (See Table 1.) Based on the current LTV distribution of new mortgage lending, we estimate that the risk-weighting of investor loans would rise by around 9%-points. What’s more, all investor loans and interest-only owner-occupier loans will carry a higher multiplier of 1.6 compared to the 1.4 for standard principal and interest owner-occupier loans.
  • We doubt that those changes will act as a major deterrent to investor lending. After all, the Reserve Bank of New Zealand made a similar change on 1st November 2015, prescribing a higher risk-weighting for investor loans. (See Table 1 again.) While that resulted in a brief decline in the share of investor lending, it jumped to a fresh high in mid-2016. This prompted the Bank to stipulate that only 5% of lending to investors could take place at loan-to-value ratios above 60% less than a year later. And the suspension of the cap on investor lending last April triggered a renewed rise. (See Chart 1)
  • For now, lending growth is set to remain contained. The 32% y/y annual jump in housing finance commitments to investors marked the largest rise since 2017 and suggests that investor lending will soon grow faster than the measly 0.2% y/y rise in February. But that increase is smaller than for other housing loan categories and coming off a very low base so investor credit growth is unlikely to exceed 5% this year.
  • A stronger pick-up is possible though. For one thing, banks have significantly accelerated and simplified their mortgage approval process over the last couple of years. What’s more, a vote in the Senate on repealing “responsive lending” legislation is due in June. While the government has delayed the vote as it is scrambling to secure sufficient votes, a repeal would probably result in looser lending standards.
  • Given that the new capital regime won’t kick in for another two years, APRA would need to use other tools to rein in riskier forms of mortgage lending. These could include either a direct cap on the growth in investor lending similar to the one launched in 2014 or restrictions on LTVs ratios.

The obvious next step is very easy. We don’t need complex LVR caps or any other esoteric tightening. All Byers needs to do is reverse what did in 2019, and lift the mortgage lending buffers that he so fulsomely cut to reboot the bubble immediately post-HRC. This had house prices flying back well before COVID.

If he does so he can prove his credentials as an independent regulator.

If not then we’ll all know why.

David Llewellyn-Smith
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Comments

  1. mikef179MEMBER

    “it will become impossible for the RBA to ever tighten again.” I think we are already there.

    I was just thinking the other day, do the regulators/RBA even have a definition for what constitutes a housing bubble? Some metric or metrics that they go by? I have a feeling that they don’t. And so therefore there could never actually be a housing bubble in Australia, in their view. Happy to be proven wrong.

    • Display NameMEMBER

      .Yep. Interest rates cannot go up from here. The Debt to income multiples will make loans unpayable for many if rates revert to the mean. Bring it on.

    • happy valleyMEMBER

      Off memory, the RBA said last year that if interest rates dropped by 1%, house prices would increase by 30% over 3 years. That metric is the sole one that runs RBA policy (aka self-interest) – inflation and employment are flags of convenience BS.

    • Agree. The home loan economics dont stack up for people on rising interest rates and flat wages.

    • Even StevenMEMBER

      Im SURE they dont have a definition for a housing bubble. No doubt they’ll be able to rattle off some ‘indicators’ but something definitive, a line in the sand, i doubt it!

      We were in a housing bubble as far back as 2005/2006. Australia has advanced its thinking not one iota since then.

      I attribute primary blame to government. Secondary blame to voters (it just doesnt come through clearly enough in polling as a pivotal issue and it should be sourcenof massive outcry) and thirdly – regulators RBA, APRA, ASIC. The main culprit being RBA which has primary responsibility for economic welfare and financial stability.

  2. How many times have you written posts like these in the past? Last chance APRA, last chance RBA, and yet…

    I have come to accept everything housing is corrupt, and to such massive scale that most don’t see it anymore. Cheering this on to an even greater megaboom all the way to a nuclear blast is the only way to go.

  3. I have a feeling his key performance indicators are all grouped under the heading ‘MPLOL’ …. and he has met them in spades!

  4. reusachtigeMEMBER

    Yeah I don’t know if the bloke’s reputation is in tatters. In the real world I think everyone thinks he is ace.

  5. https://www.pbs.org/wgbh/frontline/film/meltdown/

    @darklydrawl

    Thank you for sending me this

    Darkly sent me this

    Frontline doc on 2008

    I want to explain why I say we are headed into the greatest financial crisis in history

    2008 GFC

    Listen the the $ amounts

    In the big meeting Paulson Bernanke said WE NEED 700 BILLION to save the whole global financial system from meltdown…..then Paul Krugman talks about $1 Trillion but let’s just keep this discussion to billions so it’s apples to apples, Krugman talks about 1000 billion …….to save the system
    Then Paulson provides a 30 Billion Garauntee to Jp Morgan for JP to take Bear Sterns for $2 per share plus the guarantee for toxic assets

    So please see the numbers above ……we are only a decade later

    The stimulus by the FED and US Government just now was 8,000 Billion …..FED BALANCE SHEET increased by 3,000 or 4,000 billion , government stimulus 4,000 billion

    The derivatives now built up into the system are 1,000,000 billion to 2,000,000 billion now estimates in notional derivatives

    The guarantees now required is 1000s billions

    The crisis coming is 50,000 BILLION to 100,000 billion

    The response required will be 50 Trillion (50,000 Billion)

    Even if there was the money it’d take a year to print that

    The crisis coming in H2, will be 50,000 Billion minimum……

    Once these derivatives unwind, banks all over the world are going to collapse like dominos …….see in video they were worried about the contagion from bear sterns

    It’ll be GEFC the greatest ever financial crisis possibly 50x the GFC

    When this hits Wayne Byers will be hiding in the toilet with Lowe & Morrison

    I’m not just making this up ….to sound extreme, I’ve done lots of homework on this ….now you are right I may be wrong but I believe my analysis has strong data backing up what I’m saying

    Our banks will never survive this, they barely survived in 2008 and China saved us …..government was in surplus etc ……

    Also watch in the video they talk about the insane gains in property people were making. Sound familiar to today ?

    • Goldstandard1MEMBER

      Mate, you are an outlier until it actually happens, but people will be hurting so much en mass that they won’t be remembering the bear’s comments, they’ll be trying to understand “how could this happen” whilst everything implodes. This thinking is because “getting out of Covid” with more asset bubbles proved to many of the last bastion that no matter what happens, the central banks and govs can print and stimulate us out of anything so everyone is joining the party at exactly the wrong time.

      Most people don’t understand that missing out on some asset bubbles for 1 year is nothing compared to risking it all and puting your family/mental health/future at risk.

      • They don’t know GS and it’s not their fault. You unfortunately only learn by experience
        After GFC (debt crisis) they just used more debt to try and fix the problem
        H2 this year
        It’s going to be a very hard Xmas
        From early next year we will be in the worst of it

      • SoMPLSBoyMEMBER

        Now, driven by only greed, the people are being encouraged to allay their fears and natural hesitations and participate in what will certainly be the irretrievable end of Straya’s egalitarian society. It’s true; some will win but many will lose. It’s ugly now and will be uglier at the conclusion.

        Pacuvius ( Classical Roman- 2d cent BC) wrote:
        “Philosophers say that Fortune is insane and blind and stupid,
        and they teach that she stands on a rolling, spherical rock:
        they affirm that, wherever chance pushes that rock, Fortuna falls in that direction.
        They repeat that she is blind for this reason: that she does not see where she’s heading;
        they say she’s insane, because she is cruel, flaky and unstable;
        stupid, because she can’t distinguish between the worthy and the unworthy.”

    • chuckmuscleMEMBER

      You are right to focus on the banking sector I think. All this measuring of non-financial debt to GDP is missing the main component of leverage creation – the banks. We just conveniently ignore financial sector leverage because “net, net, net… banks are just intermediaries blah blah blah”.
      We need to re-regulate bank credit creation – DLS suggestion of going back to 2019 is wrong (unless he wants to argue pragmatism vs ideal). Mandate residential lending risk weights > commercial risk weights and watch the productivity boom.

    • Mike Herman TroutMEMBER

      Keep on posting BC. I think you’ll be proved right about a lot of things. The false sense of security that many, many people now have, the capitulation of those that were holding off and have now joined in. Everything is going off, houses, stocks, crypto, yearling horses (this Easter in Sydney was the highest since… wait for it… 2008), second hand cars, all hitting records…. it will be obvious once it all unfolds but until then….I sit and I wait…. am practiced at that now…. which is why I like reading posts like yours….. I notice gold hasn’t really joined the party… that’s where I am….. precious metals and cash… have a good day….

        • Mike Herman TroutMEMBER

          Have you changed your mind on gold? I can’t think of another place I want to put cash right now. I’ve started buying some other currencies but mostly in AUD and then gold…

  6. “the national interest and the Government’s interest are rapidly diverging…”
    I think you mentioned the national interest half a dozen times above. Either it doesn’t exist (since the society has effectively turned into a Merdoch zoo, with vested interests only) or the national interest IS to to have the house prices propped up by all any means. I suppose the answer depends on whether you’re a renter-owner-specufestor.

    • Goldstandard1MEMBER

      I disagree with this. It’s more a short term/long term thinking. Ever rising house prices are death by a thousand cuts. Yes individuals are happy their houses go up short term (think next few years), but when society turns on them via people not having jobs, crime, no innovation as resources are going into flipping houses and managing debt, no manufacturing, greed culture and much much more, that’s also going to affect those owner/invester people and their family, kids and friends. It’s just INDIRECT so they don’t draw the link.

      So in summary, I think owners/investers might want higher house prices but do not see the macro affect of them. Thus these things tend to BREAK rather than be managed down because nobody votes for pain, it just happens.

    • Display NameMEMBER

      The main parties no longer pretend to even act in the national interest. See the Gas Transition. Its a transparent fraud. The only backers are the PMO and the Gas industry. Sadly the vested interests that have purchased our politicians are often multinational so it rare that their interests and the countries overlap. Its a lose lose situation.

  7. happy valleyMEMBER

    “If not then we’ll all know why.”

    Prima facie, Byers is compromised to Josh, the private banksters and self-interest (Pymble, Sydney house prices).

  8. Even StevenMEMBER

    The state of property in Australia is a national disgrace. Various parties have differing degrees of responsibility, government, voters, regulators, banks, real estate industry, wealthy landowners.

    Having said that, MB throws the word corrupt around a little too loosely. My recollection is that the lending standards APRA reduced was the minimum 7.25% mortgage rate that all loans are stressed at prior to the loan being extended. If the borrower cant afford the loan at 7.25% then it was not extended. Im not sure what they replaced it with – i think a fixed margin above the actual loan rate.

    Given what we know about the world, do we REALLY believe mortgage rates are going back to 7.25%? So is this an example of corruption? Or realism?

    If I was not already in a comfortable financial position, I’d be seriously considering emigrating such is the level of my disgust. I want to see this house of cards burn to the ground (and dont care how much the price of my house falls).