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Tuesday, 25 June 2019

No risks allowed

Reducing risk?

There's a lot of teeth-gnashing going on about the stalled economy right now, leading to ever-louder calls for record low interest rates, government fiscal stimulus, quantitative easing, helicopter money, and goodness knows what else. 

Goldman Sachs are now calling for the cash rate to fall 100 basis points this year to just 0.50 per cent, for example, while others expect QE to kick in sooner. 

OK, but let's take a step back and consider for a moment how all this came about? 

It's not too big a leap to conclude that at least part of the economy's slowdown was caused by the combination of a banking royal commission and a fairly savage crackdown on mortgage lending. 

The ADI exposures for the March 2019 quarter suggested that the five-year squeeze on higher-LVR lending may finally have run its course - at least as a share of the loans actually still getting written. 

However, the volume of loans written was some 19 per cent lower than two years earlier (despite a population increase of about 800,000 over that time). 

As for the 'mysterious' retail recession and abject lack of household consumption? 

Well, here's one way that more and more dollars have been sucked out of the economy: the lowest ever volume of interest-only lending on record getting through the net in the March 2019 quarter, now down by more than ¾ from the peak. 

The stock of outstanding IO loans fell to a fresh record low share of mortgages at 23 per cent, a colossal fall from 39 per cent only a couple of years earlier.

No wonder the economy has felt the pain, that's a tremendous reconfiguration of household finances in such a short space of time. 

Loans to investors were down by a third from two years earlier, rendering investor credit growth non-existent.

Mind you, owner-occupier lending was down 15 per cent year-on-year as well. 

Meanwhile, low-doc loans have essentially ceased to exist, and in fact other non-standard loans have by and large gone the way of the dodo too. 

Let it flow!

Many of us, including me, doubted there'd be such a resolve to crack down so effectively on the excesses in mortgage lending.

Fair play, and credit here where it's due.

But while many still seem to be cheering on ever-tighter lending criteria, it's also worth recounting the RBA's point that the appropriate level of risk in the mortgage market is not nil, and that there should always be an element of speculative demand in the market.  

After all, it's all a bit circular if the solution to the slowdown is interest rates being cut over and over and over again.

Better to get some credit flowing and let banks lend to willing borrowers while we still have some!