APRA Wayne Byres’ Final Home Price Warning Isn’t What You Think

“Not only is this not always possible, but it risks creating moral hazard in which the downsides of risk-taking are at best underestimated, and at worst ignored.

“All of this might sound like a bit of an odd message coming from someone who is tasked with protecting the community. But in the long run, if we don’t get the balance right, it will lead to an inefficient financial system and a net loss to the community as a whole.

Byres extends this idea to the housing market, which he accurately describes as “this Australian obsession”.

In a rebuttal to concerns that the tail end of the mortgage market — in this case, newer borrowers who have taken on large debts to buy property over the past two years — is a major source of risk for banks, Byres argued that the housing market will not threaten the stability of the financial system.

He doesn’t deny that there will be pain, but it is an example of the importance of caveat emptor.

“The existence of some troubled borrowers is not a sign of weak credit standards. After all, a bank that does not give bad loans will be a bank that refuses to credit many good customers.

This is an important point. All loans involve taking some credit risk. We want banks and borrowers to be aware of these risks – even conservative ones – but we don’t want them to be so risk averse that sections of society cannot access them.

The danger for bank loan books is in the tails, no doubt. But from a political point of view, we want the regulators to manage the policy according to the majority of the market.

What Byres is saying is that proper protections for the minority are vital, but they cannot and should not completely eliminate risk.

Also, a slight drop in house prices might not be such a bad thing, he says.

“House prices in Australia are undeniably high, and a persistently low price level would not be a bad thing overall.

“Our decisions as a society to transform a seemingly abundant resource – land – into something very valuable, forces the community to go into very heavy debt for housing.

“First-time home buyers need more than a decade of diligent savings to build up a deposit, which creates a major barrier to entering the housing market.

“As a nation, we are concerned about housing affordability. The only way to truly improve affordability over time is to keep the rate of increase in house prices below that of our incomes.

“From a narrow financial stability perspective, lower house prices making it easier to lower debt levels wouldn’t be a bad thing.

“From a broader societal perspective, I suspect there would be a lot more benefit to people using less of their income to just put a roof over their heads.”

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