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Wages caught in a ‘pincer movement’ will push property higher

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Wages have been slow to rise… but that could be about to change.

There are two forces converging on the outlook for wages, both set to push Aussie earnings higher.

This has been one of the puzzles of recent years. The economy has been strong, unemployment has been low… so why haven’t wages been growing more quickly?

Actually, why haven’t they been growing at all? On the whole, wages have been flat for a few years now.

This is important for the property outlook. It’s income that determines serviceability, and it’s serviceability that determines house prices.

And personally, I’ve been waiting for this piston to fire for a while now.

Anyway, there’s two big trends forming that might finally put the spark in the chamber.

The first is that you can only keep pressure on a pressure cooker for so long. My guess is that workers have been made timid buy the increasing casualization of the workforce (record numbers of people are holding down two jobs), and high levels of immigration, which adds a lot of people to the labour pool, many of whom are coming from a relatively weak bargaining position.

These factors have made workers on the whole less aggressive than they might otherwise have been.

But there’s a sense that workers might be waking up to the economic reality.

That’s the RBA’s sense of it. They reckon the market is totally ignoring the risk of a break out of wage inflation. From the AFR:

Reserve Bank assistant governor Chris Kent says bond markets are underestimating the risk of wages growth stoking higher inflation, as long-term Australian bond rates fall towards historically low levels.

Dr Kent said low bond rates that did not compensate investors for the risk of inflation were not only an “Australian phenomenon”.

“What we have had here is a gradual pick-up in inflation while unemployment rates have moved to quite low levels in NSW and Victoria,” he said.

It may be true that the RBA is just ‘jawboning’ the market here – trying to talk up the prospect of inflation – but even if that is true, having such a prominent institution saying that workers should go harder is probably going to have some effect.

“Rise up Comrades!”

The other force here is the prospect of a Federal Labor Government.

Credit Suisse were warning last week that a Shorten government could result in ‘cascading’ wage increases. From The Canberra Times:

“We believe the ALP’s package of employment and industrial relations policy reform would represent a transformative shift in the bargaining power of labour in Australia with cascading implications across the whole of the listed market”…

“Our assessment of ALP’s policies indicates a potentially transformative shift in the bargaining power of labour, leading to a rise in the labour share of GDP over and above cyclical dynamics and cascading impacts across corporate Australia”…

The policy changes will lead to wages growth that will particularly impact on construction support services, hospitality, healthcare, agriculture and retail…

Federal Labor has pledged to restore penalty rates for some workers, crack down on sham contracting and labour hire regulation to ensure those workers are paid the same as directly employed staff doing the same job…

I mean, you could probably put that in the folder of “Well, duh” economic analysis, since Shorten and co. are being pretty explicitly about increasing the lot of workers. But still, it’s not to be ignored.

And put these two together, with workers being cheered on by both the RBA and by the Federal Government, then you’ve have something close to a perfect storm.

And that’s the thing about a wages break out – it can happen pretty quickly. Once one industry scores some big wage gains, neighbouring sectors in the economy will pretty quickly start to want their share too.

And as the wage pulse spreads through the economy, house prices will drive higher as a result.

Not now, and not this year given the lags on these things. But by 2020… maybe.

One Bank Breaks Ranks With New Boom Mortgage

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ANZ is issuing ten-year IO mortgages… What does it mean?

So ANZ has broken ranks with the big four, and is aggressively targeting investors with a new ‘boom mortgage’.

That’s not what they’re calling it obviously. To them it’s just an interest-only mortgages with a ten-year interest only period.

But to me, that says ‘boom!’

From the SMH:

ANZ Banking Group is loosening some of the clamps it put on interest-only mortgage lending in 2017, after pledging to reopen the door to property investors following a period of excessive caution.

The big four lender on Thursday said it would again start offering customers an interest-only period of up to 10 years, up from five years now. It will also allow interest-only loans where a customer has a deposit of 10 per cent of a property's value, where previously it required a 20 per cent deposit.

The changes are a clear signal the bank is trying to spur growth in the housing investor market, where interest-only loans are most popular, after chief executive Shayne Elliott last month admitted it had been “overly conservative”.

It is also the latest sign of a loosening in restrictions on investor and interest-only loan growth, after the Australian Prudential Regulation Authority (APRA) late last year removed caps on these types of mortgages.

“On recent review, we have made a decision to increase our focus on the investor market. The upcoming changes demonstrate our continued appetite in the investor market, whilst ensuring we remain in line with our APRA requirements,” ANZ said.

Latest Reserve Bank figures show housing investor credit growth was just 1 per cent in the year to January. ANZ last month said its housing investor loan book shrank 3.8 per cent in 2018.

The remainder of the big-four already offer IO mortgages with a 10% deposit, so that’s not a huge change. But 10-year interest only periods… that’s pretty aggressive.

I did look into it, and it’s not going to be available to everyone. They’re going to be assessed at a minimum floor rate of 8.25%, which is a very high hurdle to cross. They’re marketed only for high-income professionals with stable jobs.

Still, it’s an interesting change in direction.

Over the past year or so, we haven’t seen any news that has pointed to a looser credit environment. It’s all been about how much tougher credit conditions have been getting.

So this is a real break in direction.

It signals that either

  1. APRA is now willing to back off a bit; or
  2. The banks have stopped caring what APRA thinks

Both are bullish signs for the market.

And if the market recalibrates so that ten-year interest only mortgages are the norm, that will give prices a boost. It increases the amount that people are able to borrow and service, and increases in borrowing capacity mean increases in prices.

So something has shifted here. There’s a break in the weather. A change in the wind.

It’s not exactly clear what it is, but either way it’s a big boost to the market.

Yellow Brick Road becomes collateral damage

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It’s getting a bit murderous out there… but is it really as bad as it seems?

Some big names are becoming collateral damage in the property market’s turn lower.

With sale volumes down and credit harder to secure, we might be looking at the end of some big household names.

Last week it was celebrity millionaire Mark Bouris’ Yellow Brick Road, which reported a $34m loss:

“It is now particularly hard for mortgage originators and brokers to assist borrowers to obtain an approved home loan,” Mr Bouris said in a statement.

“In all the years of being involved in the home loan business, I have never seen such difficult borrowing conditions. These factors have caused an adverse impact to our new lending, particularly in the December quarter,” he said.

“The whole regulated environment for home loans has tightened, particularly around credit approval processes. Every borrower is impacted, but self-employed, small business owners, and older borrowers are finding it particularly tough to get a loan,” he said.

…The AFR suspects Bouris’ tale of woe may be partly prompted by the need to justify the company’s $34 million half-year loss, overwhelmingly caused by a writedown of Yellow Brick Road’s goodwill in the lending and wealth divisions, from $24 million to precisely $0.

If you track YBR’s share price, it’s been on a slow-bleed down since a peak in mid-2014.

However, YBR has taken another leg-down recently, after the Hayne Royal Commission tore shrapnel holes in the entire mortgage broking industry. Mortgage Choice (yellow line) and AFG (red line) have also taken a bruising this year.

But we can’t really claim to be surprised. APRA and Hayne have ushered in one of the tightest credit environments in recent memory. It was always going to be an attack on the mortgage broking business model.

At the same time, real estate agents are also doing it tough in the light of a down-turn in sales.

Remember, real estate agents are much more sensitive to a downturn in sale volumes than they are to a downturn in prices.

The McGrath Agency is the poster boy for this. A few weeks ago they released their FH19 results, which delivered an 18% crash in revenue and an EBITDA loss of $2.5 million:

Their share price is now down 88% since the float in late 2015, with investors strapped in to a one-way ticket south.

Looks like John McGrath cashed out of the business at exactly the right time. Well played, sir.

Anyway, even though price declines have so far been relatively modest, the hits to big names like McGrath and Yellow Brick Road give us the impression that there really is blood on the streets.

But the point I would make is that both of these guys, and most of the big property names we’re familiar with, are volumes business.  

And over the past couple of years they geared up to manage the huge volumes of trade that were pumping through the system in the boom.

When volumes returned to normal levels (which was inevitable, but did happen quicker than most people were expecting), they were always going to be left with excess capacity.

But you can’t shed capacity the way you turn off a tap. It takes time to figure out the right organisational size, recalibrate your systems etc.

So in the adjustment phase, you’re always going to have to cop some pain.

And that’s what we’re seeing right now.

And so it’s easy to sell a doomsday story here if you want to.

But so far, everything we’re seeing seems pretty orderly to me.

Economy is crapped-out, but that’s not the real story

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Yesterday’s data showed that the economy wasn’t doing great… but there’s a bigger picture here.

Yesterday, the economy turned a momentous corner.

And not momentous in a good way.

The headline from the Sydney Morning Herald says it all:

AUSTRALIA FALLS INTO PER-CAPITA RECESSION

A “per capita recession”? What even is that? We’ve never heard that before.

Basically it’s economic growth once you strip out the impact of population growth. So if it wasn’t for population growth, and immigration in particular, our economy would be going backwards.

We’ve never bothered to do that before. But now all the papers are doing it. This is a new world.

Australia's economy has slumped into a per-capita recession for the first time since 2006, leaving the country relying on population growth to propel its economy and creating a political hurdle for the Coalition.

The Morrison government has pledged to reduce the migration rate but figures released on Wednesday show that without migrants fuelling consumption, Australia's economic growth would be going backwards.

The Australian Bureau of Statistics data shows the economy grew by 2.3 per cent over the year and 0.2 per cent in the December quarter – below market expectations and well short of Reserve Bank forecasts of 0.6 per cent.

The budget forecast of 3 per cent growth for 2018-19 and the mid-year economic update's revision to 2.75 per cent will struggle to be met, putting a strain on preparations less than a month out from Treasurer Josh Frydenberg's first budget.

The fact that a major paper is leading its reporting of the GDP figures with a comment on immigration shows just what a hot-button topic it is.

And people might be right to wonder why we’re still importing record levels if immigrants when our economy is actually going backwards. People might start to wonder at the sense of that.

Spineless politicians on both sides might look to duck that whole issue and focus on the headline numbers, but there’s not much joy there either.

The headline number was positive, but much weaker than people were expecting, and much weaker than the RBA had been forecasting.

That makes the prospect of rate cuts more likely.

When you break it down by components, you see that growth has been driven by public spending, which was the best performing component.

But that’s not great. It’s saying that if the government wasn’t spending away, the economy would probably be going backwards. You can’t have a government-dependent economy… not for long anyway.

That sounds ok, but when you remember that inflation was 1.8%, it means that in real terms, wages fell by 0.3%.

The figures also showed that average compensation per employee (a fancy term for wages) rose just 1.5% in 2018.

Put all that together, and you don’t have a pretty picture.

Wages are going backwards, on a per-person basis we’re already in recession, and if it wasn’t for immigration and government spending, our economy would be stuffed.

This is not the pre-election snap-shot Scott Morrison was hoping for, I can tell you that.

The Anti Rate-Hike Indicator You Should Know About

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All bets are off now. Rate hikes are a thing of the past. What the heck happened?

Take a look at this chart here. This is a story of a hundred broken promises.

Over the past six or seven years, the markets have continually over-estimated the trajectory of interest rates. They expected them to be a lot higher than they actually ended up being.

And you can understand why. Because for all that time, the RBA was saying that the next move in interest rates would be up. They were saying that they would like to ‘normalise’ interest rates from their historically low levels, and they’ll be doing that just as soon as they possibly can.

The markets took them at their word…

… and everyone was wrong.

Now, things have become interesting. Markets are actually expecting lower interest rates.

It started when the RBA gave up trying to sell the world on rate hikes and admitted that, actually, the next move in interest rates might not be up. Maybe things are about right where they are, and it’s a coin-toss as to which way the next move in rates is going to be.

That led to most market economists downgrading their expectations as well. This week, Westpac’s Bill Evans broke ranks and said he now believes the next move in rates will be down.

The curious thing here is why anyone thought interest rates would be going up in the first place. When you look at inflation (the metric that the RBA is supposed to care most about) – it’s barely making it into the RBA’s target band.

There’s hardly a case for rate hikes there.

Probably where they got the idea that rate hikes would be going up is this chart here. This is employment growth vs the RBA’s cash rate.

As you can see, historically, they’ve moved pretty closely together. When jobs growth is strong, interest rates rise, and when it’s weak, they fall.

For twenty odd years that rule of thumb served us pretty well.

But around 2013 it started to break down. Jobs growth was strong – going great guns actually – but interest rates were stuck to the floor.

And to be fair, most economists were thinking it would have to happen sooner or later. Strong jobs growth would feed into stronger wages growth, which would turn into stronger inflation numbers.

But it just didn’t happen.

And I reckon the key to understanding why that transmission mechanism broke down is this chart here. This is the part-time employment share across the anglo-sphere.

What it shows is that a lot of jobs in Australia are part-time. It’s 32% here – almost one in three. It’s just 20% in New Zealand.

So while jobs growth has been strong, we’re not adding full time jobs. More and more we’re creating part-time jobs.

And the thing about part-time work is that it tends to be a bit precarious by nature. If you’re only on a part-time contract, you’re not in a position to be hustling for higher wages.

And so the growing share of part time employment helps us understand why wages growth has been so underwhelming.

… which in turn helps us understand why inflation outcomes have been so soft.

… which in turn helps us understand why the promised rate hikes just never materialised.

I think a lot of economist in the market and at the RBA thought that this would just sort itself out.

But now, they’ve collectively given up on it.

The wages boom isn’t coming. Rate hikes are off. This is the new reality.

Westpac is giving away houses?!

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Westpac is in the courts already, with a class action on the way. The mortgage market is getting crazy.

This could possible be the opening chapter in a whole world of crazy.

There’s a class action being brought against Westpac for breaching their responsible lending obligations.

Look out!

Westpac is facing a class action for allegedly giving loans to people who couldn’t afford to pay them back.

The class action, in the Federal Court, is the first against one of Australia’s big four banks since the banking royal commission delivered its damning report.

Maurice Blackburn principal lawyer Ben Slade says Westpac will be accused of breaching its obligations to protect customers from financial harm.

“Westpac is required to comply with strict obligations which are specifically designed to protect consumers from irresponsible lending and the risk of financial hardship,” he said on Thursday.

“This case will seek to prove that Westpac failed to comply with these obligations and that this failure caused substantial losses for many consumers.”

The case could involve thousands of home loans issued after January 1, 2011.

The central issue here is the use of HEM – the Household Expenditure Measure.

What we learnt in the Royal Commission was that many banks were using benchmarks to calculate serviceability, rather than looking at people’s actual expenses.

One benchmark was the HEM – which was apparently pretty much set at poverty-line levels.

What that means is that if your actual living expenses were more than the HEM (and unless you were on the poverty line, they probably were), then the bank was willing to lend you more money than you would normally get.

That sounds great, but the flip side is that from the regulator’s perspective, the bank was giving people bigger debt burdens than they could reasonably be expected to carry.

That is, they breeched their responsible lending obligations and put people into undue hardship.

And that’s what Maurice Blackburn are going to argue.

I actually didn’t think it would come to this. It’s hard to imagine anyone who bought a property in 2011 now regrets the decision.

But that’s with prices at their current levels.

The further prices slide, the more people might start to regret their decision.

And if they slide far enough, people might suddenly feel like they actually would like a way out of their mortgage.

Enter Maurice-Blackburn.

Now I don’t know what happens if you prove that the bank gave you more money than you should of got.

Do you just write off the mortgage and call it even. “I’ll just take the house thanks. I’m not greedy.”

It could happen.

Or does the bank owe you compensation? Do you just get to pay the amount you should of received and the monthly repayments that entails?

But then who picks up the difference?

And where does this end? Right now Maurice Blackburn are going after Westpac because we know that Westpac were using benchmarks (ASIC is currently in court proceedings against them.)

But you can be sure that they were not the only ones. If Westpac was doing it, it was probably rife across the majors but also across the smaller players as well.

Maybe there’s hundreds of thousands of active mortgages that could be up for review.

Crazy-town.

I’ve got no idea how this plays out. But if you’ve got a mortgage with Westpac, I’d be watching this one closely.

They just started giving money away… Whaaat?

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The 20th anniversary of the zaniest moment in economics shows us just how far we haven’t come.

This month marks the 20th anniversary of one of the strangest events in economic history.

Maybe you never heard of it. It was 1999. The internet was still getting of the ground. Facebook was still just a pimple on Mark Zuckerberg’s teenage mind.

But one small pacific nation decided to do something ‘radical’. They’d be having a bit of a rough trot, and the economy was in the doldrums.

So their wacky leaders came up with something zany – FREE MONEY.

Yep, they just made money free. They were giving it away.

Not only that, when people weren’t taking it off their hands fast enough, they started buying stuff off people, to put even more money in their pockets.

It was crazy-town. La-la-ville. Why-don’t-you-have-your-pants-on-palace.

Every economist in the world was predicting fire and brimstone.

And what happened?

Wel… not all that much, actually.

Nothing really happened. Inflation never materialised, growth never happened, and the economy barely changed stride.

And that’s when we entered the twilight zone. It rewrote the economic rule book.

And what this little pacific nation did became a template for America in the GFC, Europe in the 2010 EuroFunk Contest, and Australia in 2020.

(Did he just say that? Oh no he didn’t.)

This radical and crazy policy became the economic orthodoxy. It became the new normal.

I’m guessing you’ve already tweaked that this ‘small pacific nation’ is actually Japan – still one of the most powerful economies in the world, though less so than in 1999.

And what I’m talking about is ZIRP – the zero interest rate policy, and quantitative easing – buying financial assets off the financial sector.

Ok, so it’s not exactly dropping money out of helicopters on ordinary people – the money still had to be funnelled through the financial system.

But if the interest rate is the price of money, then ZIRP really is just free money if you are close enough to ground zero – like if you happen to own an international bank or something. (Those guys need a break.)

But whatever the case, it certainly was radical. Minutes show that board member Yasuo Gotoh told his fellow board members that it felt as if they were “stepping into a fairy tale like Alice in Wonderland.”

They didn’t know how things would turn out. But they didn’t feel like that had a choice.

So they swallowed the pill and jumped.

And this is one of the key lessons for me. Policy makers don’t really know what they’re doing. They pretend that they do, but ask most economists how the economy really works, and they’ll tell you it’s more voodoo than physics.

And again, today, we stand on a bold frontier, where no one really has any idea how the economy works or how we should manage it.

Truth is, there is no ‘managing’ an economy, no more than there is managing a cyclone. We can tinker at the edges, but by and large it is out of our control.

The other point is that our policy-makers’ go-to solution is any crisis is always to “throw money at it.” That’s what Japan did. It’s what the US and Europe did. And it’s what we’ll do too, when our time comes… and it will.

There’s a lot of money to be made if you can get in the way of it.

… I mean, like I did. All that money after the GFC had to wash up somewhere, and a good chunk of it washed up in Australian real estate.

But yeah, 20 years on and nothing has changed. We don’t know how the economy works. We only have a few tools at our disposal, and most of them involve throwing money at the problem.

I know I’m asking you to take a red pill here. I’m asking you to leave behind the comfortable illusion that someone somewhere knows what the hell is going on.

But bite it.

Once you wake up to this reality, you start to see opportunities everywhere.

Is the credit crunch already over?

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The data says that APRA’s restrictions have done their job. Time to let the market run free again.

It’s looking to me like the credit crunch might be about to ease up.

Let’s remember how we got here. Right now, the national property market is in the midst of an orderly and mild consolidation.

And consolidations are expected. The property market moves in cycles, up and down.

Most times that’s driven by dynamics in the cycle itself. Left to it’s own devices, the property market, just like the broader economy, will run hot, then cool and then run hot again.

But that’s the thing. The property market wasn’t left to its own devices. Since 2016, APRA has been getting involved, creating limits, particularly on investor lending. It started with making sure lending to investors wasn’t growing too quickly, and then became about cutting back the pace of Interest Only (IO) lending.

This clamp down on IO lending was across the market, but was particularly focused on investors.

Predictably, as the credit taps were squeezed, price growth began to stall, and over the past year or so, prices actually started to come-off, little by little.

And that’s where we are today.

So obviously if we’re interested in finding out when the market is going to start growing again, then the first question is really, ‘when will APRA back off?’

This is a little hard to predict. One of the things that came out of the Royal Commission was that APRA – who is responsible for regulating the banks – seems to have been a bit asleep at the wheel.

Given the huge list of crimes, misdemeanours and affronts to human decency that emerged from the Royal Commission, you do really have to wonder what APRA were doing.

APRA has been made to look a little silly. But what worries me now is that they might over-compensate – try to play the tough wild west sheriff. And that might mean that conditions remain tougher for longer than they need to.

And the truth of it is that right now, I’m seeing a case for letting up on the restrictions.

Take a look at this chart here from the RBA. It shows what has happened to IO lending since the restrictions came in in 2016.

The orange lines – new lending – is the one to be watching here. As you can see, IO lending pretty much fell off a cliff when the restrictions came in, particularly to investors in the bottom panel there.

But what you see here is the banks very quickly bringing themselves into line.

And after the initial adjustment, things just sort of levelled out – the share of new lending has remained fairly constant in recent months.

If it remains constant, the share of outstanding lending – the blue line – will keep trending lower, and until it re-joins the orange line.

And the structural change in the market that APRA was looking to create, will be complete.

Mission accomplished.

The thing I would note is that once this transition has been made, then the normal cyclical dynamics should start to reassert themselves.

That is, even if the share of new lending remains at around 30%, after a year, that will be the new reality we’re working with – so our annual growth rates (which compare this month with the same month 12 months ago), there won’t be any impact left in there at all.

And so that should mean that we should see price growth should realign with the cyclical trend.

It is possible that these restrictions have caused the cycle to turn. There’s a good chance of that. So I don’t think we’ll see positive growth numbers this year or in the first half of next, but after that, I’d be looking for things to start moving again.

But I’d also be saying to APRA, since you’ve caused the cycle to turn, and you have done what you set out to do with IO lending, maybe it’s time to cut investors some slack.

We certainly don’t need any more restrictions. We don’t need no sheriff out there shooting from the hip.

Here’s hoping cool heads will prevail.

I freaked out, then I saw this!!!

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Could the Turkish crisis derail the whole global economy? This one chart says no.

Flying back in to Greece, I’m thinking, “Great. Wouldn’t you know it. The wheels are coming off in Turkey, the whole region is about to go up in flames, all before I’ve even had my first glass of ouzo.”

If you failed geography, Turkey and Greece are neighbours. And Turkey is going down in a flaming ball of debt and bad life choices.

The world is panicking about it. That’s the thing about the global economy these days. It’s all inter-connected. It’s like a giant Jenga set. Some pieces are more important than others, but you never know which one is going to bring the whole tower tumbling down on top of you.

So could it be Turkey?

I was plugging in to the global sense of panic. I was losing sleep. But then I found one chart that put everything back in perspective.

But let’s back up a bit first.

In case you missed it, Turkey’s currency, the Lira, is going to crap. It’s dropped off a cliff and is now down a gut-wrenching 45% since the start of the year.

To put that in perspective, the Argentinian Peso – that perma-cluster-fuk of a currency is only down 38%, so things are bad.

Now, a collapsing currency isn’t necessarily bad news. It makes your exports cheaper and when the Aussie dollar falls, we actually get an economic boost most of the time.

The exception though is when you’ve borrowed lots of money and it’s denominated in other currencies.

So imagine I owed someone US$100. Right now that means I owe them about AUD$130. But then let’s say the Aussie dollar falls off a cliff, down to about US50c.

I still owe them US$100, but suddenly that’s now worth AUD$200. So my debts have ballooned, even though nothing has changed except the exchange rate.

And this is what is happening in Turkey.

This chart here is a little hard to make out, but it shows foreign-currency denominated debt as a percent of GDP. Turkey is streaks ahead at around 70% of GDP. Ouch.

What’s worse, they don’t have much foreign currency reserves to tide them over or prop up the currency. It’s worse than in Argentina.

On top of all that, you’ve then got a political situation that doesn’t inspire much confidence. President Recep Erdogan reckons it’s all a ‘foreign plot’ to destabilise Turkey. There may be some truth to it, since it was Trump’s tariffs that sparked the whole mess for Turkey. But still, it doesn’t sound like a politician ready to take responsibility for the mess he’s in.

(I know! How unusual.)

And he does have to front up to some of the blame. His economic agenda has been to pump heaps of money into real estate development, mostly funded by off-shore borrowing. He has also eroded the integrity of Turkey’s economic institutions. After the last election, he appointed his son-in-law as the head of the finance ministry, and took personal responsibility for appointing the central bank’s governing council.

So Turkey is in a mess and nobody thinks they can get out of it.

What a disaster!

And so as Turkey goes over a cliff, everyone is wondering where the next domino to fall will be. Italy, Spain, Germany, Europe???

This could be the ruin of the global economy.

I was certainly working myself in to a state over it. I could barely get through my second plate of prawns.

But then I saw this chart.

This tracks foreign bank exposure to Turkish debt.

So the story here is that it’s Spanish banks that are going to bare the brunt of it. Most other banks are fine.

Spain is alarming. That charts saying that 25% of Spanish bank capital is exposed to Turkey, which does seem staggering.

But then France and Italy have little more than 5%, and when you get to the US, it’s sweet FA.

So most nations can roll with it without major dramas.

Spain however, does seem to be in trouble.

But I’m also relaxed about that too. Spain has been in trouble for a while. There’s not going to be any surprises there. All of Spain’s creditors knew they were taking on risk, and so should (I hope!) have been planning accordingly.

So the worse case scenario is that Turkey goes up in flames, Spain goes into recession, and the rest of the world muddles on.

The best case scenario is that Turkey somehow fudges its way through.

And the most likely scenario is somewhere in between.

So, I think we can all breathe a little easier.

Maybe even order another side of prawns.

Credit taps open as bank gravy train resumes service

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The dodgiest of dodgy banks is writing its own rules… but property investors might be better off.

Ok, this sure looks dodgy. And to be honest, I don’t even know what story the banks are telling to make it look legit.

I don’t even think they bother anymore.

Ok, so remember in 2014 APRA came in and said that it wanted the banks to slow down lending to property investors. They put in a cap of 10% pa. That was as fast as they wanted investor lending to grow.

And the banks all towed the line, and it was the start of a range of credit tightening measures, most of which are still intact and have given us some of the tightest credit conditions since the GFC.

That was yesterday. Today, we’re waking up to a looser credit environment, as APRA starts giving banks relief from the cap on an ad hoc basis.

From Banking Day:

The volume gains made by non-ADI lenders in the investment mortgage market could come under severe pressure in the next few months as APRA begins to loosen the prudential constraints on lending to investment borrowers.

Banking Day can confirm that HSBC Australia, Macquarie and People’s Choice Credit Union are among the first ADIs to secure relief from the cap on investment lending introduced by the regulator four years ago.

In April, APRA signalled its intention to remove the restriction on a case-by-case basis, with licensed ADIs required to demonstrate that their serviceability tests and assessment criteria met new standards set incrementally by the regulator over the last three years.

Since 2014 APRA has required all ADIs to keep monthly growth in investment lending below ten per cent.

Banking Day understands that none of the four major banks have sought relief from the cap amid concerns that their lending practices were not likely to meet responsible lending requirements.

So that’s good news for investors. It has been tougher to get loans across the line lately. A little relaxation is a welcome thing.

But it’s also kind of strange, isn’t it? Why are they giving individual banks ad hoc relief? Do they care where the money is coming from? Shouldn’t they be worried about the ‘system’ overall?

I mean, that’s their mandate, right?

So it’s odd that they’re not relaxing the speed limit across the board.

But it gets dodgier. Take a look at that list that’s getting relief: HSBC Australia, Macquarie and People’s Choice Credit Union.

Now take a look at investor mortgage credit growth in our largest lending institutions:

Yep, that grey line is MCG – Macquarie bank – busting through the lending cap with gay abandon

… in June.

Just to be clear, let me lay out the timing again. Macquarie banks busts through the lending cap in June, to effectively be clocked doing two and half times the speed limit.

APRA responds, not by slapping Macquarie on the wrists, but by granting them an ad hoc exemption to the rules… in August.

(Seriously. I’m not making this up.)

Macquarie is in a class of its own.

Remember the GFC, when the government announced a deposit guarantee to protect customers of the big four… and Macquarie?

Macquarie had a tiny depositer base at the time. It was still effectively an investment bank, and yet it secured a deposit guarantee and a massive free kick from the government.

And here we are ten years later, with Macquarie effectively setting its own speed limits.

While a Royal Commission into dodgy banks is actually still sitting!!!

Yup. It’s like they’re not even trying anymore.