House prices are skyrocketing out of the average battler’s budget. Despite warnings of a possible housing bubble, APRA is banking on the banks only losing 2% from their mortgage books in their “stress testing”. This threshold sounds very favourable to the banks and allows them to get greedy at the possible expense of Australian homeowners.
Transcript
Stress testing banks during COVID-19 dated 15th of December, 2020. I have a question about one of the criteria APRA uses to stress test a bank, and that is a fall in real estate prices or to use a simple explanation, the ability of a bank to maintain liquidity during a real estate meltdown. Can I say it like that?
Well, I think Senator, it’s more a question of whether they can sustain their solvency, which for us it’s more of an issue of a capital, but liquidity is an important consideration as well.
Thank you. From the report, the figure APRA used as a proxy for a real estate meltdown was the loss of $49 billion in residential mortgages over three years. Is that correct?
That sounds about right, I think Senator. I don’t have the document in front of me, but-
That’s what I’m reading. Thank you. And with that loss being 30% of the total bank loss in the period of the stress test, as a loss rate, this would translate into 2% of Australian banks residential mortgage loan book. Is this correct? And please confirm your figure for the value of residential mortgages held by Australian banks. What is it?
Oh, well I think the, now I think the, if we’ve published that number, Senator, I’m quite comfortable to correct, total mortgages the banking system would be-
In the term of residential mortgages.
Yeah. Sorry. Total residential mortgages. Housing loams We’re talking about here. Owner-occupiers and investors would be, it’s in the order of a trillion dollars, I think Senator that’s something that we can come back to you on.
Thank you for that.
Very happy to take it on notice.
Okay. Thank you. Final question on this topic before moving onto a simple topic, can I confirm that APRA is projecting a real estate meltdown would only cost our banks $49 billion in losses on mortgages, and that loss would accrue over three years? That seems to be a very favourable assumption for the banks.
Well, that’s the, that’s the impact that we expect to have on the bank given they have collateral against their loans. Many loans have very low loan-to-value ratios. So in many cases of banks we have loans that even with a substantial fall in real estate values the banks would incur no loss, that’s not to say the borrowers would be unaffected by any means.
Well, I think that’s the concern. Sorry, go ahead.
Senator, I was going to add, I mean, it’s just to your question of projection or forecast, this is stress test. So, it is a set of assumptions that we use to look at the resilience of the sector and the entities involved. So, it’s not forecast or projection.
Okay. Thank you. It’s just that our constituents are concerned that we’ve had 20 years of the banks putting a lot of money into real estate, and taking it away from small businesses and funnelling it into real estate. And we’ve seen real estate prices increase a lot recently. Some people are calling it a bubble. So basically the question amounts to, are you letting the banks do as they please, and then sweetening the impact for the banks?
Well, Senator we don’t allow the banks to do what they please. We’ve got a raft of prudential standards that ask the banks as they’re making commercial decisions to take risk into account, and where we see risks, and I think an example of that would be the recent increase in the buffer, APRA acts and takes action.
Okay. Thank you.
I can just note for the record that, Mr. John Lonsdale was the one who provided that answer. Just leading into your next question.
Does APRA embed staff in financial institutions, like say the Big Four banks?
[Byres] No.
Okay. Thank you. Thank you.
