What to do about it is much less obvious. The overall increase in interest rates would clearly have all kinds of unwanted economic impacts, which means that we are primarily talking about a potential re-emergence of the type of macroprudential controls and restrictions on loans which stopped the previous price spike a few years ago.
But unlike this cycle, the current sharp escalation in prices is not driven by investors but by homeowners, particularly first-time home buyers. Making borrowing more difficult for potential new homeowners by adding restrictions and imposing loan limits makes little political or financial sense.
Even the usual measures of reducing high loan-to-value ratios and high debt-to-income ratios are problematic if it simply reflects the number of first-time homebuyers struggling to enter the market.
This naturally translates into the housing market with fears that too much of another generation will be deprived of property unless they can call on Mommy and Daddy’s Bank.
At the top, Westpac Managing Director Peter King and George Frazis of the Bank of Queensland insisted that the problem is more the fundamental mismatch between supply and demand in the housing market and that the solutions can only really come from an increase in housing. offer. But it’s a longer-term proposition at best for what appears to be a much more immediate problem.
Not that this dilemma is confined to Australia. A world of very low interest rates triggers global asset inflation and exacerbates wealth inequalities.
In Australia, this naturally translates most clearly into the housing market with too many fears of another generation is billed for homeownership unless they can call on Mom and Dad’s Bank. (For those who use this fast growing facility, the average level of parental contribution to help fund a deposit is now $ 89,000, up 20% over the past 12 months … while four in 10 Australians believe it is. ‘they will need family support to buy a first home. I’ll keep you posted, parents.)
The deadlock in the Senate on the abolition of responsible lending laws do a lot to help despite claims on both sides of politics that change is either absolutely crucial (government) or reprehensible (Labor and Greens).
The Morrison government was determined to overturn these laws to increase the availability of credit, especially for small businesses, as the economic focus quickly shifted from the Hayne era of berating banks to encouraging growth.
Clearly, a booming mortgage market demonstrates that enforcement of existing home loan laws is hardly a problem.
But while responsible lending laws only apply to consumer credit rather than business credit, the line becomes blurry as small businesses often use their homes as collateral for business loans.
In the wake of the royal commission in particular, banks became increasingly worried about being slammed for violating lending standards, with the Australian Securities and Investments Commission even suing Westpac (at the fury of Josh Frydenberg).
Although the regulator ultimately lost, Westpac in particular had become extremely cautious in its approach to lending during this period – evident in its dismal performance in its small business lending arena.
Yet King now seems just as cautious about the impact of overturning responsible lending laws to boost access to credit for small and medium-sized businesses.
“It will make a difference more in the speed of loans than in the amount of loans,” he said.
That’s because it will make the process cheaper and less time consuming, according to King. But he still insists that the stagnation in lending to small businesses is due more to lack of demand and the timing of the cycle than to difficulties in accessing credit.
“What you get is companies are building up cash, so there are actually a lot of deposits in the system right now, including corporate deposits,” he said.
“They first take deposits before getting into debt. I think we still have to wait until the deposits run out and then debt will be a feature that people are going to build, provided we see good confidence and good prospects because businesses are investing to grow. “
King is therefore now focusing on “fine-tuning” the bank’s ability to anticipate these growth prospects when evaluating business applications rather than maintaining the focus on traditional mortgages which rely more on declining track records and financial backlogs. client’s income.
“We don’t want to lend to people who can’t pay us back,” he said. “Likewise, I think most businesses or consumers don’t want to take on debt that they can’t afford. So there is an alignment there. It’s just a matter of how to do it in practice.
Call it a responsible loan.