There’s plenty of talk about a housing bubble in parts of Australia.
Treasury secretary John Fraser recently said there’s “unequivocally” a bubble in Sydney and growing concern about inner-city Melbourne apartments and the risk of overbuilding.
The RBA wants – needs – housing construction to help with the economic transition. But it doesn’t want the associated leap in prices that low rates, negative gearing, and superannuation leverage have caused in Sydney, and to a lesser extent Melbourne.
The RBA says recent sharp price rises are becoming problematic for financial stability. That implies they think that if house prices stop rising, or indeed start falling, consumers and banks could get into trouble.
But leaving aside the question of whether Sydney is in a bubble or not the real question is how much risk is there in the Australian banking system?
It depends on who you ask. Doomsayers claim a day of reckoning is coming and house prices are going to fall precipitously. Bankers, on the other hand, argue they have the systems, processes and capital to handle any eventuality the economy and the market throws at us.
APRA, Australia’s prudential regulator, appears to think the the truth might be somewhere in between after the recent stress tests. So it’s raising the requirement for capital and talking about a new minimum risk weight for mortgages for the Majors and Macquarie.
But the reality is that no-one knows what will happen if house prices stop rising or fall. Past history is no longer an acceptable guide. It’s been 24 years since the last recession and the structure of the Australian economy is very different now.
Equally though we know from the GFC, and Ben Bernanke’s now famous comment that not all housing markets can fall at the same time, have proved that devastatingly unexpected events can take down housing and with it the economy.
So, the question is not really is there a bubble in housing. Rather it’s what happens if the bubble bursts? How much risk in the financial system and how has that risk moved through time?
That’s the important “what if?” we need to know.
Up until now anecdotes and doomsday predictions couldn’t be judged nor analysed objectively through reference to the data. It just didn’t exist in real-time. What banks, credit unions and building societies generally did is report arrears, defaults and losses.
That’s a backward looking process with no real way for investors, lenders, depositors and other interested parties to judge the real risk in an individual bank’s mortgage books, nor system-wide risks in Australian banking.
That’s about to change, with the RBA forcing banks who want to access its emergency liquidity facility (the CLF) to release loan level mortgage data for the securities they will give the RBA in times of trouble to access cash.
Earlier this year Westpac disclosed that the RBA has a potential exposure of $66 billion to it by way of the CLF. Estimates of the RBA’s total exposure the RBA to the overall banking system are well north of $200 billion of taxpayers money. Understandably, the RBA wants to know what the risk on the securities it is lending against looks like so it can decide if it is an acceptable risk in the unlikely event any Australian bank needs to access the emergency cash.
Butthree big Australian banks are fighting RBA requests for greater market access to loan data, citing privacy concerns.
Those concerns now appear assuaged with the tie up, announced this week, between Rozetta Technology, an Australian university-based provider of big data and analytic solutions, and Mòrgij Analytics (Morgij), a financial technology company specialising in the mortgage loan risk analytics.
Morgij allows users to analyse mortgage loan risk at both a macro, system-wide, level while also allowing drilling deeper into pools of mortgages for a better understanding of risk in the Australian market.
What’s important is that Rozetta’s internal protocols protect privacy for mortgage holders, addressing the concerns of the three big banks.
That gives the RBA, fund managers, offshore investors – who fund a large part of the Australian banking system – a clearer understanding where risk lies.
That means that we can have the meaningful debate and answer post-bubble questions.
Questions like: what is the impact of Sydney prices dropping 20% and unemployment rising 3%?
Mortgage loan level data sounds like a dry subject.
But because the RBA is forcing the banks out into the sunlight to disclose a certain, but large, percentage of the risk held in their home loan mortgage books, we’ll have a data set to model so we can better understand the impact of house prices on the Australian financial system and the economy.
Who knows what we’ll find.
But, once the data becomes available in early August, we’ll at least be able to rely on data, not doomsayers or anecdotes.
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