Thanks to the banks fixation on housing lending, we have a situation where ever larger banks require more and more capital to lend to ever inflating house prices. It has become the Banks “Event Horizon”. The economic cost to Australia is potentially significant and possibly irreversible. Its also part of a global trend.
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According to Wikipedia, an event horizon is a boundary in spacetime beyond which events cannot affect an outside observer. In layman’s terms, it is defined as “the point of no return”, i.e., the point at which the gravitational pull becomes so great as to make escape impossible.
As Philip Lowe said in a speech yesterday, households borrowing is higher and more risky, lower income growth means households are less likely to spend more, and value is being shifted inter-generationally speaking.
In the past few years, we have seen house prices surge to new heights, housing debt rise to all-time records, and regulators struggling to adjust capital ratio controls to more reasonable levels, having let those lenders with advance IRB calculations off the hook for year, and with a focus only on financial stability.
We have consistently questioned the wisdom of ever more lending pouring into the housing sector, at the expense of productive lending to business, the former simply inflating house prices, household debt and bank balance sheets, but not contributing to productive growth at all. Bigger banks are not necessarily better.
Now the upcoming changes to capital have made the banks suck in even more capital – circa $13bn so far this year in one-off activities, and more to come. But this capital, and the current loan repricing is all about positioning for more mortgage lending, though with greater focus on refinancing, and owner occupied loans.
But, consider the circular and reinforcing forces in play, more lending allows household debt to rise, which allows house prices to rise, which grows the banks balance sheet, which demands more capital, which allows the banks to lend more, which allows debt to rise…… etc, etc. A never-ending cycle.
This is the Bank Event Horizon.
