/Kenneth Hayne, housing and why we fear the truth about the banks

Kenneth Hayne, housing and why we fear the truth about the banks

Updated

November 19, 2018 10:02:06

The stage is set, the actors assembled.

This morning, the final act in a seven-part drama gets underway in the Lionel Bowen Building in Sydney’s Goulburn Street. As far as theatre goes, it’s been more farce than comedy, more tragedy than melodrama.

The climax, nevertheless, promises to be a thrilling affair as the puppetmasters, the four powerbrokers behind a corrupt and broken regime, are paraded before the full glare of public gaze.

The tension has been building all year. Initially given little chance of success, the low-budget production leapt out of the box from the first episode, largely due to the stunning performances of the lead players, Kenneth Hayne, Rowena Orr and Michael Hodge.

Arrogance, humiliation, anger, greed, stoicism and dignity; the full gamut of the human condition has been on display.

But the denouement holds a far more tantalising prospect for an audience gripped by the spectacle — the prospect of justice and retribution.

But will there be a twist in the ending? Will the lure of lucre triumph over honour and principle?

When greed has come to no good

For months now, pressure has been building on the royal commissioner to pull his punches.

Ever since his interim report was dropped in late September, senior bankers, government ministers and their lobbyists have been agitating for a more sedate, less confrontational approach.

Most were left reeling by the muscular tone of Commissioner Hayne’s initial assessment.

“Too often, the answer seems to be greed — the pursuit of short-term profit at the expense of basic standards of honesty,” Commissioner Hayne said.

“How else is charging continuing advice fees to the dead to be explained?”

Commissioner Hayne’s depiction of a system that has been rotten to the core, overseen by regulators that turned a blind eye, highlighted the stark dichotomy in community standards to criminal conduct and law enforcement.

Petty thieves are delivered the full brunt of the legal system and run the risk of seeing the inside of a prison. Those orchestrating widespread theft involving the best part of $1 billion have been allowed to act with impunity.

“The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court,” Commissioner Hayne said.

Since the interim report, there appears to have been no let-up in the inquiry process. That’s raised the prospect that at least one and possibly several of the four chief executives may be presented with evidence that they were leading organisations that were stretching the law to breaking point and beyond.

Banks and their property addiction

Our big four banks essentially are glorified building societies. They own 80 per cent of all Australian mortgages and the mortgage business accounts for about 60 per cent of their loan books.

Given Australians owe around $1.6 trillion, that makes the banks horribly susceptible to any problem in the housing market.

For years, their profits have been turbocharged by soaring real estate. The more they lent, the faster housing prices escalated. And the quicker housing costs climbed, the more potential owners needed to borrow. It was the ultimate perpetual profit machine.

That’s why pressure is being directed at the royal commission. House prices are falling. Credit is tight.

In September, new home loans plunged 14.2 per cent compared with a year earlier, the worst result since 2010. And it appears to be getting worse as this graph from investment bank UBS shows.

In 2014, regulators decided to pull the reins in on a runaway investment boom, which was tightened again last year. The laws around foreign purchases began to be enforced.

That’s begun to scare off buyers, even those with access to cash. Why buy into a falling market?

The ethical dilemma — honesty or hardship

They call it the Hayne effect. Credit already was being squeezed before the Royal Commission got underway, particularly after the Reserve Bank decided to lop the top off the investment frenzy.

While limits were put in place in 2014, last year’s move to restrict interest-only loans resulted in the banks jacking up interest rates on investment loans. The decline in lending is shown by the blue line in the graph above.

It worked. Property price gains in the major east coast capitals began to moderate and then ease.

But the revelations emanating from the royal commission, forcing banks to lend responsibly, has caused credit growth to shrink and hit the housing market more generally with new owner-occupier loans heading south, as shown in the graph by the thin black line.

The imposition of proper standards has begun to hit where it hurts. It may even curtail economic growth and possibly hurt employment. And that has created a mild sense of panic in some quarters.

Banks now are strictly adhering to guidelines, insisting on bigger deposits, and stress testing potential customers as to whether they can meet repayments when interest rates eventually rise. It’s the sort of thing they were supposed to be doing all along.

Given the economy for the past few years has been driven by a housing construction boom, the sharp drop in credit growth and real-estate prices has sent shivers through Canberra with direct calls last week for the banks to ease up on the lending crackdown.

The east coast housing construction boom deliberately was fired up to take up the slack from the wind-down in the mining boom.

But if we now are at a stage where we cannot afford to jettison lax standards and irresponsible lending, behaviour that spawned theft and graft on a monumental scale, something really is rotten in the state of our economy.

Topics:

business-economics-and-finance,

industry,

banking,

australia

First posted

November 19, 2018 05:53:41