There was a major “My Bad” moment in Australian banking yesterday, when closer scrutiny by APRA, Australia’s banking regulator, revealed that lenders incorrectly classified a staggering $50 billion worth of investor property loans to owner-occupiers.
Philip Lowe, deputy governor of the RBA, broke the news, saying “material revisions have been made by more than 10 institutions, including two of the largest lenders.”
The end result is a seismic shift in what everyone thought they knew about lending in Australia, and makes a mockery of APRA’s recent crackdown on investor borrowing and 10% growth limit, as well as the capital rules.
The result is a 5% jump in investor loans as part of the total, as Lowe points out.
“The cumulative effect of the upward revisions has been to increase the stock of investor credit outstanding by around $50 billion, or 10%. According to these new data, investor loans now account for 40% of total housing loans outstanding, not the 35% reported earlier in the year,” he said.
The RBA deputy noted that while the reasons for some of these errors were identified, in other instances they reamain unclear, with lenders unable able to provide comprehensive back data. Even in the measured tones of the RBA, there was some alarm.
“As lenders have looked more closely, what they have found has surprised and, to some extent, concerned us,” acknowledged Lowe.
As the chart below reveals, the revisions have made a dog’s breakfast of data that measures outstanding levels of housing debt in Australia.
The circled section of the chart shows the massive ramping up of annual investor credit growth, especially over the past two years, and the subsequent sharp decline as some lenders reclassified investor loans and those to owner-occupiers – another curious anomaly that yet again raises questions over the reliability and criteria applied to housing loans by some Australian lenders.
Aside from the wild gyrations in annual growth in investor and owner-occupier credit growth, the other thing that stands out is the enormous growth in total housing credit, shown with the black line. In the 12 months to September this year, regardless of classification, housing credit has soared by $106.1 billion, just shy of the 12-month record level of $106.3 billion struck in January 2005.
That’s an enormous acceleration in the level of outstanding housing debt, up from just $71.8 billion recorded in the 12 months to September 2014.
Given the sharp increase in housing credit, perhaps it’s not how the loans are being classified as but how much is being lent that’s the concern – particularly given elevated unemployment levels and record-low levels of wage growth.
On the back of the sharp increase in housing debt over the past year, the total outstanding level of housing credit has rocketed to $1.495 trillion, the highest level on record. While the value of housing stock is significantly higher than outstanding credit – by some estimates it’s four times larger – it’s little wonder why some analysts are believe financial stability risks are growing too.
From September 2005 through to September 2015, the total amount of outstanding housing credit to owner occupier borrowers grew by 100.1%, or $466.8 billion. For investors it increased by $329.6 billion, or 141%. Combined, in the space of a decade, total housing credit outstanding soared by a massive $796 billion.
Monetary policy, as it should, has played a significant role in the acceleration in housing credit. As shown in the chart below, there’s clear evidence that periods of monetary policy tightening has seen the annual growth in housing credit slow, and vice versus for periods of monetary policy easing, such as Australia’s current one.
The alarming thing is just how rapidly housing credit has grown since the RBA’s current easing cycle began in late 2011. Housing credit growth was running at around $50 billion per annum at the beginning, now it’s more than doubled. When the RBA took the cash rate below 3% – the previous record low level during the GFC – borrowers pressed their foot to the floor for exceptional acceleration.
No wonder Sydney house prices have risen 50% since May 2012.
While this was required to help with Australia’s economic rebalancing – including boosting residential construction to help mitigate the effects of the slowdown in mining investment – it has contributed to a substantial increase in housing debt.
Plenty blamed the banks for this – relaxing lending standards that likely contributed to yesterday’s loan reclassification debacle – it’s clear that the RBA was also a significant contributing factor in the ramping up of housing debt.
APRA’s recent measures have been deemed by the RBA to be “helping to contain risks that may arise from the housing market”.
Malcolm Edey, RBA assistant governor of the financial system, recently said “the risks appear manageable at this stage, but they underscore the need for sound lending practices and for appropriate prudence by investors”.
While that may be the case, the question that should be asked after the horse has bolted is: who was responsible for leaving the gate open?
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