If you look at the messages coming out of the RBA over the last few years, you can trace the credit pendulum as it swung from lending being ‘too loose’ to the present day, where alarms are sounding over it being ‘too tight’. Despite all those macro prudential measures and consequent lending changes, we never quite achieved the Goldilocks credit environment we were hoping for.
The mortgage lending market has been a big item on the agenda of the Council of Financial Regulators, whose members include the RBA, APRA, ASIC and the Australian Treasury. The A-Team of financial regulation, if you will.
At a recent meeting, the members discussed the tightening of credit conditions for households and small businesses.
“A tightening of lending standards over recent years has been appropriate and has strengthened the resilience of the system. At the same time, members agreed on the importance of lenders continuing to supply credit to the economy while they adjust their lending practices, including in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry,” a statement from the council read.
“Members discussed how an overly cautious approach by some lenders to incorporating relevant laws and standards into loan approval processes may be affecting lending decisions.”
Taken in isolation, the council’s wish for lenders to tighten their practices while still supplying credit shouldn’t pose too much of a problem. In theory.
But when you’re taking actions that are cooling an already cooling housing market, one where foreign buyers are no longer picking up the slack, combined with a royal commission that has the banks running scared and with a Labor government proposing significant housing tax policy reforms is poised to win the next election, well – that’s when tampering with credit becomes a bit of a problem.
The outlook for Australian housing has turned sour as pitiful auction numbers roll in each weekend, gradually looking worse as the Saturdays go by. Clearance rates recently fell to their lowest level in seven years. Some believe they could soon dip below 40 per cent.
All of this has driven the OECD to warn that the Australian real estate market, once considered primed for a moderate correction, could face a hard landing. And that would have significant consequences for the broader economy. For when the houses we pay for fail to increase in value, we have a tendency to tighten our belts.
“The market has started to cool over the last year, with prices falling most notably in Melbourne and Sydney. So far, data points to a soft landing without substantial consequence for the overall economy. Nevertheless, risk of a hard landing remains,” said Philip Hemmings, who heads the Australia desk at the OECD Economic Department.
“Notwithstanding the estimates that Australia’s market is not greatly overvalued, house prices could fall more substantially. Should this happen, household consumption could weaken. Households would cut their spending due to lower housing wealth and due to increased economic uncertainty generated by downturn.
“Households would also reduce expenditures related to the purchase, sale and maintenance of housing (such as spending on renovation and interior decoration). Sustained decreases in house prices would also weaken construction activity. Weakened aggregate demand could in turn lead to losses on loans to businesses, putting stress on the financial sector.”
Rather than taking action, the government has turned these warnings into a political platform. Treasurer Josh Frydenberg picked out the positive sentiments in the OECD warning as evidence of the government’s great work and pointed to Labor’s negative gearing policy changes when noting the negative bits.
Labor’s efforts won’t be the thing to tank the property market. But they could be the straw that breaks its back.
Unfortunately, like so many things in this country, the economy and financial system have been kicked around as a political football for far too long, to the detriment of all Australians consumers and the financial system in general.
From the royal commission to APRA’s lending curbs and now the negative gearing debate, the availability of finance has taken a beating and Australians are now finding it harder to borrow money. Right at the time when it’s cheapest to do so.
Ironically, all of this meddling was done to promote resilience. Instead, it could easily trigger its own problems and have that resilience tested in the process.
