Feature Stories | Mar 19 2021
Rising bond yields, rising margins, ongoing growth-to-value rotation and the prospect of higher dividends have brokers remaining bullish on the banks. But a resurgent housing market may yet prove an impediment.
-First sector earnings upgrades in six years for Australian banks
-Looser lending standards driving loan demand
-Will APRA be forced to step in once more?
-Have we seen this movie before?
By Greg Peel
“The Credit Squeeze experienced over the last six months is now expanding, with owner-occupier lending now falling alongside investor lending. UBS believes further credit tightening is “almost inevitable” post the Royal Commission final report due next year. The upcoming federal election is likely to reduce credit demand as borrowers contemplate changes to negative gearing and capital gains tax relief.”
(Australian Banks: Uncertain Times, December 19, 2018)
We recall that once the dust had settled following the 2008 GFC, Australia’s economy began to grow once more. Not only did Australia manage to avoid a technical recession, the wave of loan defaults anticipated by Australia’s banks never materialised.
But a funny thing happened. A stock market’s movement typically correlates with the strength or otherwise of the underlying economy. But as the economy rose out of the GFC, the stock market lagged. It took Wall Street three years to regain its pre-GFC high. It took the Australian market twelve years.
One major drag was the Aussie dollar, which moved above parity with the US dollar. Australia had avoided a recession from what we call the Global Financial Crisis. Americans refer to their experience as the Great Recession.
The stock market has always been the first go-to source of investment for retirement. But not post-GFC. With stock market returns muted, and interest rates still low in the wake of the GFC, retirement investors turned to property instead. The banks welcomed these investors with open arms, making borrowing as accessible as possible.
The result was a housing bubble. As the RBA became increasing concerned a housing bubble would ultimately result in a housing bust, it turned to APRA to tighten lending standards for investor loans. The risk was as rates rose, which was what the RBA was signalling at the time, investors on interest-only loans and owner-occupiers on high loan-to-value (LVR) ratios and high debt-to-income (DTI) ratios would be unable to service those loans, leading to a cascading effect when house prices began to fall.
And after two incursions from APRA to tighten lending standards, fall they did.
Then along came the Banking Royal Commission, and a bloke called Bill Shorten. Aside from the many crimes and misdemeanours the RC exposed, one element was very lax borrower scrutiny from lenders. In short, the banks were happy to simply take borrowers on their word in relation to any other debt obligations they may be carrying.
And everyone lies.
Before the final RC report was handed down it was already feared even stricter lending standards would follow, and that would only further fuel what was now becoming a “housing crisis”. And it didn’t help that the Labor Party was considered a shoe-in at the 2019 election, running on a platform of abolishing negative gearing.
Ironically, the RBA was forced to start cutting rates again.
History shows the May election was not Bill’s finest hour. A gloating Coalition then turned its attention to a budget surplus. It appeared the housing crisis would now come to an end, although banks would still be required to lend only to those applicants deemed safely able to service their mortgage, following close scrutiny of their household balance sheets.
That, in essence, meant not lending to anyone much.
The Coalition then stopped gloating when covid hit. The risk of a renewed housing crisis, and a surge in loan defaults on everything from mortgages to business loans to credit cards, was starkly real. It was grim-faced Josh Freudenberg who had to deliver the news that the government’s surplus assumptions had just gone out the window. Instead, Australia would need to go heavily into debt.
The RBA did what it could by cutting its cash rate to as good as zero, but urged the government to do even more on the fiscal side. JobKeeper, first homebuyer grants and HomeBuilder subsidies were just not going to cut it. Fearing he would go down as the Treasurer that lumbered Australia forever with record government debt, Josh had an idea.
Reverse the tightening of lending standards. Put the onus back on the borrower to be honest about other debt obligations. And it worked. Between historically low mortgage rates, government subsidies and relaxed lending rules, the housing market turned around.
Australia’s average house price rose 3.0% in the December quarter when economists had forecast 1.8%. House prices rose 2.1% in the month of February, marking the fastest pace since 2003. Westpac economists believe prices in Sydney and Melbourne could rise by as much as 20% over the next two years.
Who said history never repeats?