Housing boom raises risks

Australian Prudential Regulation Authority (APRA) chairman Wayne Byres.

The market’s recent love affair with the banking sector demonstrates that investors prefer the COVID recovery story to wallowing in self-pity about possible regulatory intervention to curb the housing boom.

The 5.3 per cent average total shareholder return of the major banks in March was more than double the 2.4 per cent return for the ASX 200.

Indeed, for most periods ranging from six months (50.1 per cent versus 18.5 per cent) to a year (56.6 per cent versus 37.5 per cent), the big four’s average TSR has been on a tear compared to the broader market.

Morgan Stanley reckons that price-to-earnings multiples for the major banks will continue to exceed their long-term averages, assuming no abrupt end to the current environment of low interest rates, rising dividends, stronger capital ratios, and a lower risk profile.

Why worry, then, about any reintroduction of speed bumps for home lending when the regulators don’t seem to be overly fussed?

Reserve Bank governor Philip Lowe reinforced the message after a board meeting on Tuesday, when the directors decided to maintain the cash rate at its record low of 0.1 per cent.

The governor noted that housing markets had strengthened further, with prices rising in most markets.

Credit growth to owner-occupiers had picked up, with strong demand from first-home buyers, although the investor market remained subdued.

For the umpteenth time, the RBA said it would carefully monitor trends in home lending, and it was important that lending standards were maintained.

The problem for investors is that the regulators keep talking about intervention, or at least hinting at it, sometimes unprompted.

And while the formal trigger of lapsed lending standards has yet to be declared, there are signs that the pressure dial is starting to twitch.

It’s about this point in the cycle that Australian Prudential Regulation Authority chairman Wayne Byres starts to get weary of reminding everyone he has no mandate to target house prices or improve affordability.

He recently told a parliamentary hearing that prices were “a risk factor, not a goal”.

Last month, dwelling prices rose 2.6 per cent — the strongest rise in 33 years.

Prices are now at a record level, up 7 per cent since the COVID trough last September.

APRA, for its part, has directed its attention to other areas.

It’s more concerned with signs of any acceleration in housing credit growth, an increasing share of interest-only loans, or lending at high loan-to-valuation ratios.

A high aggregate level of debt in the community would also raise eyebrows, as would any relevant intelligence about compromised lending standards gathered from APRA’s supervisory work.

The danger in such an environment would be financial instability in the household sector, and banks migrating up the risk curve to meet the demand for credit.

Portfolio limits could be relaxed, and important market developments overlooked.

Byres’ latest assessment is that it’s “not immediately obvious there are flashing red lights out there”. While household debt is obviously high, it’s recently declined relative to income, and serviceability has been supported by rock-bottom interest rates.

The pressure, such as it is, comes from signs that housing credit growth is picking up and likely to outpace stubbornly low income growth for the foreseeable future.

The share of high loan-to-valuation and debt-to-income lending is also increasing, but not at a concerning rate, and partly due to the relatively high share of first home buyers in the market.

“So it’s a nuanced picture,” Byres said at the end of March.

“There does not seem cause for immediate alarm. Nor, though, for complacency.”

Regulators have a range of macroprudential measures at their disposal.

Clearly, they would be different to the interventions in 2015 and 2017, when the stability risk related to investor lending.

This time around it’s mostly the owner-occupiers, especially first home buyers.

Byres specifically mentioned countercyclical capital buffers, where capital ratios are lifted in times of economic expansion to curb asset growth, and APRA’s new non-bank lending rules.

One way or another, the die should be cast by the end of the year.

D-day on pay

National Australia Bank has moved to the next stage of its comprehensive payroll review, making remediation payments of $40.4m, including interest and superannuation, to 7773 current and former staff.

NAB’s role in corporate Australia’s embarrassing underpayments debacle began in December 2019, when the bank revealed it was investigating payroll errors responsible for short-changing 730 employees about $850,000.

Since then, the bank’s exposure has mushroomed, with a pre-tax provision of $128m announced in the 2020 financial year.

The remediation period is from October 1, 2012 onwards.

NAB has already paid $26.5m, including interest and super, to about 58,000 current and former staff.

The payments related to two specific issues — fortnightly base pay and super underpayments from October 1, 2012 to June 30, 2020.

Group executive people and culture Susan Ferrier told Four Pillars the latest payments of $40.4m related to part-time remuneration, district allowances and meal allowances.

“NAB continues to engage openly on these issues with the Finance Sector Union and the Fair Work Ombudsman,” Ferrier said.

“The issues identified in the Payroll Review are not acceptable and we apologise to all current and former colleagues impacted.

“We are moving as quickly as possible to fix these issues and we want to make sure we get this right.”

NAB chief executive Ross McEwan has previously said the amount of the provision was an estimate, as the final impact could not be determined with certainty until the remediation program was completed.

The review, he said, was complex, and the data required to be analysed was “substantial”.

“The issues largely stem from a lack of appropriate investment, governance and oversight over time, resulting in a payroll system not fit for purpose,” the NAB boss said.

While the bank was aiming to finalise the investigation on a number of matters from the review by the end of 2020, some matters could continue into 2021.

Mr McEwan said the payroll issues were not acceptable. The incident had demonstrated the importance of “getting the basics right and the impact on people and our business when we don’t”.

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