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Australia's consumer regulator's interference with mortgages could trigger economic meltdown.

BIScom Subsection: 
Author: 
Nigel Morris-Cotterill

Starting point: banks in Australia have behaved appallingly. The Australian Consumer and Competition Commission, ACCC, has been shown up as .. pick a negative adjective and it's probably been used. The ACCC, along with other regulators who have been shown up as wanting are now doing their best to prove they are "across it," as Australians say. Today, they say that they have produced a "final report" from their residential mortgage price inquiry. But.. has the ACCC now moved from ensuring good behaviour to managing how banks do business? It raises risk management questions, liquidity issues and even the stability of the housing market which has been in an accelerating downturn for a while and is showing all the signs of turning into a bit of a crisis.

That should sound horribly familiar to Australians who have seen significant percentages come off property prices in the past couple of years. It started with speculative developments in places like Brisbane where, after an initial rise, prices are now falling back to the point where negative equity is a fact of life.

Negative equity is the laxative that makes housing markets take a dump. Then lenders tighten their sphincters and reduce the percentage of a property value they will lend on. After all, history shows that, once a slide starts, prices are like out of control skiers on a steep, icy, slope. When a large scale slides starts, prices often fall by 30-50 percent. They take years to recover. In that time borrowers are paying for loans on value they don't have. Technically, because the asset is worth less than the loan, banks would be entitled to repossess it but that's not done so long as the borrowers are protected by continuing to make repayments. Sooner or later, deals are done where couples divorce, one leaves to rent and the house is transferred to the other, along with the mortgage, and in due course that person defaults. For that any many other reasons, houses are left empty and neighbourhoods deteriorate. This is not speculation: it's history and it's repeated itself with four similar events in the past 50 years in the USA and the UK.

Banks are told, on the one hand, to lend more responsibly and on the other to lend more, responsibly. ACCC appears to be ignoring both of those instructions, encouraging poor borrowing practices which, history shows, will lead to a housing crash beyond that which is already unfolding.

The ACCC is right: borrowers should have access to information, but it is wrong to suggest that long term loans should be excluded from long term fiscal planning which is the nett effect of the suggestion. What the ACCC is saying is, in effect, "listen borrowers, here's the deal. Take a 30 year mortgage because the monthly payments will be lower but you can get out of that anytime you want." For banks, that turns long term assets into contingencies. It undermines the balance sheet and it undermines stability. It undermines the ability of banks to raise capital which undermines their ability to both meet its capital requirements and to make new loans.

All of this means increased caution which means lower percentage loans, lower multiples of earnings, higher interest rates if any risk factors are present. That means less borrowers and that means more properties falling and lying vacant which, of course, further compounds the weakness of the balance sheets of banks.

The ACCC is right to get down and dirty and kick the living daylights out of the banks for all the wrong they have done. This, however, is the wrong place to kick: the effects are predictable and the risks are potentially catastrophic.

Further reading: ACCC - Trivago: https://www.accc.gov.au/media-...