According to the ABC, Kevin Nixon, Former Managing Director of Regulatory Affairs at the Institute of International Finance (IIF) says foreigners are puzzled about the entire Australian housing market. Now a partner (risk) with Deloitte in Sydney, Nixon is a respected voice globally on regulation and governance of the financial system.
In a Deloitte round-table on the Australian mortgage industry, he remarked about his experience at a meeting of central bankers, “One of the central bankers present asked: ‘What’s going on in Australia?’ to which the research economist replied: ‘We’ve given up thinking about Australia. There is no economic rationale for it”
But while research economists and central bankers around the world can simply give up trying to understand the psyche of the irrational Australian property investor, the challenge mounts for local regulators trying to make “behavioural adjustments” to keep the market from that fateful correction and limit irreparable damage to our banking system.
On Friday in a House of Representatives Standing Committee on Economics, the Chairman of the Australian Prudential Regulation Authority, Mr Wayne Byres said the regulator was unlikely to ever disclose what capital controls it will impose on individual banks who do not exercise prudence.
Last year, the watchdog wrote to banks indicating it would not like to see loan growth to risk taking property investors exceed 10 per cent. Earlier this month, it was revealed the limit was breached by three of our major banks. (‘Investor loan growth limit breached by three major banks‘)
Macquarie Bank lead the pack with investor loan growth up an astronomical 73.1 per cent over the year.
Investor loan growth for the NAB grew at 13 per cent, followed by Westpac 10.4 per cent, ANZ 10.3 per cent and the Commonwealth Bank at 9.2 per cent.
The Australian Prudential Regulation Authority has the authority under the banking act to apply different prudential capital ratios to authorised deposit taking institutions (ADIs). It is widely believed the regulator will increase the ratios of banks it believes is imposing greater risk to the Australian banking system, requiring the bank to hold more loss-absorbing capital and as a side effect, reduce profitability. However, these ratios will remain confidential.
Mr Byres told the house economics committee:
Prudential regulators are traditionally the people who try to operate behind the scenes—below the surface, below the radar. Financial institutions survive and thrive because they have confidence and the community has confidence in them, and you are happy to put your money into the bank, you are happy to take out your insurance policy and you are happy to invest your superannuation money because you have confidence that, when the time comes, you will get your deposit back, your policy will be paid and your super money will be there.
Unfortunately no institution is perfect, and sometimes issues arise. Prudential regulators tend to try to operate behind the scenes to get issues fixed and to avoid them becoming a source of concern to the community. If we can do that well and head off problems before they become serious problems, that is actually reinforcing of financial stability, because it is preserving the confidence that exists in the system.
But it could be too late for the regulator still scared from the collapse of Australia’s second largest insurer, HIH.
Barclay’s warned last week, Australian households are the most indebted in the world.
Today, head of fixed income for BT Investment Management Vimal Gor echoed the same concerns saying homeowners in Sydney and Melbourne have so much debt that any drop in house prices would be a disaster. (‘Drop in house prices would be a disaster: analyst‘)
The Reserve Bank of Australia was unable to drop interest rates last month due to the housing bubble entering hyperdrive in both Sydney and Melbourne. With APRA’s crackdown remaining top secret and with the Reserve Bank as chair of the Council of Financial Regulators, the next cut in the official cash rate could signal APRA has confidently put these much needed controls in place. Until then, it would be imprudent for the central bank to cut.
» RBA says too early to judge APRA’s home loan restrictions – The ABC, 25th March 2015.
» Banking regulator APRA says individual banks targeted in crackdown on investor loans – The ABC, 21st March 2015.
» APRA keeps macroprudential strictures on bank lending secret – The Sydney Morning Herald, 20th March 2015.
» RBA sounds alarm about bursting of housing bubble inflated by cheap credit – The Sydney Morning Herald, 25th March 2015.
» Hot property: lenders push back on rate cuts – The Australian, 26th March 2015.
» Investor loan growth limit breached by three major banks – The ABC, 10th March 2015.
» Numbers add up for constraints on bank loans for residential property investors – Australian Financial Review, 15th March 2015.