Strange moves this week as the CBA wants to put itself in chains.
So this is a bit of a weird one.
Matt Comyn – the boss of CBA, Australia’s biggest bank – did something strange last week.
He went before the House of Representatives economics committee hearing on the four big banks, and asked them to put him in chains.
Sort of. He said that the banks should voluntarily put a bend in the credit hose and keep a lid on house prices.
… even though housing is far and away their most profitable business unit, after baby meat manufacture. From the AFR:
CBA chief executive Matt Comyn has expressed concern about the speed at which property prices are rising, arguing banks should act now to cool the market before it becomes a much bigger problem.
“We think it would be important to take some modest steps sooner rather than later to take some of the heat out of the housing market,” Mr Comyn said.
Mr Comyn said he was not worried about mortgage stress or the levels of indebtedness by home buyers today.
“If we look at the simple numbers and the relative growth rate of housing over the last 12 months I am not concerned about the period just gone. But in terms of increasing housing debt and increasing house prices we are increasingly concerned,” Mr Comyn said.
The bank said it had noticed an elevated number of loan applications despite the lockdowns in Sydney and Melbourne and, when combined with the trajectory of house prices, that signalled problems ahead.
“We have put up our benchmark floor rate to 5.25 per cent from 5.1 per cent, which is well above the rate customers would pay,” Mr Comyn said.
So, it’s not a problem yet, but it could be.
And CBA have voluntarily tightened the screws, by setting the floor rate (the interest rate used to assess whether people can actually afford the repayments) a couple of notches higher.
What on earth is going on here?
Now I don’t believe for a second that this is about any sense of the collective good. At the same hearing, ANZ’s Shane Eliot said he was thinking about equality.
“Current house prices make it harder to enter into the housing market. This could translate into a shift in wealth distribution towards older more established families and if perpetuated, raises the issue of greater economic disparity,” Mr Elliott said.
So woke.
So call me a cynic, but I don’t think this is there game here.
Rather, I think this is them trying to stay one step ahead of APRA, and to make sure that APRA doesn’t bring the kind of restrictions that choked the market back in 2016.
Remember back then, APRA introduced a range of restrictions – such as limiting loan-to-valuation ratios, and putting restrictions on the growth in the investor loan book and the interest-only loan book.
The banks didn’t like that.
So Comyn wanted to make it clear that the banks would much rather see increases in the floor rate than any other kind of lending restrictions.
“With caps around loan to valuation ratios, one of the disadvantages of that is some of those measures impact particular cohorts of buyers more than others such as first home buyers.
“If you are asking us what our preferred measure of implementation is, I would say the floor rate,” Mr Comyn said.
So Comyn is offering the government something here in order to avoid the APRA stick down the track.
Even though moving the floor rate from 5.1% to 5.25% isn’t going to move the dial all that much.
But I do suspect it will be enough.
Banks learnt a tough lesson in 2016. They’ll be very wary of a repeat.
And look, that’s all a good thing.
Stable growth is good. Reckless growth is not.
And so I think this all actually prolongs the life of the current boom. There might be a bit less in the short term, but a bit more in the medium and longer term.
And the less APRA gets involved, the better.
JG.
Ruth says
I’m a bit confused. Are the banks asking the RBA to lift rates to control prices? That’s not the RBA’s job. Why ask the govt to do what they can do themselves? As you say there is a trick here. The strategy may be to front-run APRA but I’m wondering if there is some strategy to gain market share by the big 4 over smaller banks. Do you have any thoughts on that one? Another thing, I’m pleased that first home ownership has risen, very important to have a high home ownership rate in any country. Countries that don’t have high home ownership tend not to build indiiduals’ wealth, have a higher tendency to turn communist and a lower tendency to maintain property. I only hope they have the sense to pay down principal. Even though I don’t think rates will rise for a long time, people’s circumstances change, and rates over 5% are pretty hefty anyway, but inflation is coming sooner or later. Another thing. They never look at how much prices are influenced by overseas cash buyers. No point disadavantaging citizens with APRA restrictions when cash buyers from overseas are still driving up prices.
Jonathan Gardner says
“Countries that don’t have high home ownership tend not to build individuals’ wealth, have a higher tendency to turn communist”
Well, I’m glad we have just narrowly escaped communism! Phew!
“They never look at how much prices are influenced by overseas cash buyers”
Pretty sure we dont have a huge amount of overseas buyers for the last couple of years, due to, ya know, that Covid thingy thats been going around.