Caution Reigns At First CFR Meeting

By Glenn Dyer | More Articles by Glenn Dyer

Relaxed, but alert? That’s one way of describing the attitude of the nation’s supreme council of financial regulators to the home price crunch and the tighter lending activity.

It may have been an accident of timing but the first ever post-meeting statement from the Council of Financial Regulators (CFR
– the Reserve Bank, APRA, ASIC, Federal Treasury) on Thursday morning has coincided with the rising hysteria about the house price slide in Sydney, Melbourne, and to a lesser extent Perth and the escalation in the number apocalyptic forecasts of doom and gloom.

The CFR meeting was held on Monday at the Reserve Bank in Sydney and according to the statement, the stability of the housing market, lending activity and the fallout from the Hayne Royal Commission dominated discussion.

It is clear from the stilted prose of the summary that there is a rising level of concern about the impact of the royal commission on lending by banks that seem to have been shocked into tightening their standards (when those standards should have been in place all along).

“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. 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.”

“Members observed that housing credit growth has moderated since mid-2017, with both demand and supply factors playing a role. The demand for credit by investors has slowed noticeably, largely reflecting the change in the dynamics of the housing market. In an environment of tighter lending standards, the decline in average interest rates for owner-occupier and principal and interest loans suggests that there is relatively strong competition for borrowers of low credit risk. Credit to owner-occupiers is continuing to grow at 5 to 6 percent.

“The Council undertook its annual review of non-bank financial intermediation. Overall, lending by non-ADIs (non deposit-taking institutions) remains a small share of all lending. However, non-ADI lending for housing has been growing significantly faster than ADI housing lending and there is some evidence that non-ADI lending for property development is also increasing quickly.” This is in fact small groups filling the gap left by the banks when they have tightened their loan criteria too far.

On house prices – the caution was very evident: “Members discussed recent developments in the housing market. Conditions have eased, but this follows a period of considerable strength in the market. Housing prices have been declining in Sydney, Melbourne and Perth, but are stable or rising in most other locations. The easing in the housing market is occurring in a period of favourable economic conditions, with low domestic unemployment and interest rates and a supportive global economy. “

“APRA briefed the Council on its latest review of the countercyclical capital buffer, the results of which will be published in the new year. It also provided an update on its residential mortgage measures, including the investor lending and interest-only lending benchmarks. In line with APRA’s announcement in April 2018 that it would remove the investor lending benchmark subject to assurances of the strength of lending standards, the benchmark has now been removed for the majority of ADIs. The interest-only lending benchmark, introduced in 2017, has resulted in a reduction in the share of new interest-only lending, along with the share of interest-only lending that occurs at high loan-to-valuation ratios,” the statement ended.

Notice there was no concerns expressed about the punishment the big banks are experiencing at the hands of shareholders at annual meetings.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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