Financial Risk

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For every one dollar earned, on average, Australians have nearly two dollars of debt. Australia has a household-debt-to-income ratio of 190 percent.
Much of this stems from a national obsession with buying real estate, according to the latest episode of ABC’s Four Corners, which discussed the forces driving the debt-fuelled housing boom and the risks it poses for the country.
Reported by Michael Brissenden and presented by Sarah Ferguson, the show brought together experts to map the danger zones in the housing market and lending practices that have driven the boom in residential lending and was critical of banks in the event of potential hard landing.
Banks have at least 60 per cent of their loans in the housing market, and concerns grow that a housing downturn could be disastrous for the Australian economy.
All the Big Four banks have defended their lending practices following the episode on ABC.
ANZ CEO Shayne Elliott, who was on the show, said ANZ's market share was a bit lower than the average but “I think that's not a healthy, that's a, it is a healthy mix at about 60%”.
He said the reality was that housing loans are pretty good because they're quite diverse in terms of lots of reality small loans across  the country.
Ferguson said while the regulators have recently forced banks to tighten up on lending - “experts in tonight's program say the legacy of loose, irresponsible lending has many years to run”.
Brissenden said a big part of the story was the role of brokers lenders and developers who encouraged people to borrow more than they could afford.
Citing the case of Carlene Stafford, who was convinced to borrow $445,000 to buy an investment property in Queensland.
Stafford said she received an unsolicited phone call one night and the first question was “did I own my own home? I said yes. Was I working? Yes”.
“And I had a call from a developer and he told me that he could help be get into an investment property that would assist me financially when I retired.”
To do that she used the equity in her almost paid off home.
Stafford, however, didn't know at the time was that even the banks own estimates on her financial commitments left her with $9.17 at the end of each month.
She said while the developer told her it was a risk-free investment, “the only person and only people that it was risk-free for was for the banks, for the bank, the ANZ Bank.”
“They've got nothing to lose. They've got the house up there. They've got my house here if necessary.”
Or they've got a couple 100,000 to be paid back once I sell this or die.
“So that goes out of my kids' inheritance.”
ANZ CEO Shayne Elliott travelled to Armadale, WA last week to meet and hear directly from Stafford.
ANZ said in a statement that Stafford agreed she was responsible for declaring her estimated expenses and advising ANZ about her financial position and the bank was not responsible for introducing her to either the developer or the broker.
Elliott did concede that Stafford had been targeted by aggressive sales tactics by both the developer and broker and the bank has agreed to a revised settlement with Stafford.
ANZ said it has hardship programs in place for customers who find themselves in unfortunate circumstances.
Both the Commonwealth Bank and NAB cited their commitment to the remuneration reform recommendations of independent expert, Stephen Sedgwick. 
CBA said it will implement the recommendations to ensure remuneration structures are aligned to appropriate customer outcomes.
“Our employees, including lenders and managers, are measured on a balanced scorecard which includes customer-based and business performance measures,” it said in a statement.
Meanwhile, NAB said its staff have a balanced scorecard across both financial and non-financial objectives, including “delivering the right outcomes for customers”.
It said a vast majority of staff incentives have no direct link to product sales.
NAB said it had recently announced changes to its incentives program, effective 1 October, for its most senior branch and contact centre managers, which will see “greater emphasis placed on customer outcomes, actions and behaviours for staff incentives”.
Second-biggest mortgage lender Westpac said it was addressing the community’s feedback about product referral incentives.
“We were the first of the major banks to remove product-based incentives for our 3,300 tellers in our branch network, so they are now rewarded solely for providing quality customer service,” it said in a statement.
“We have also removed product-specific targets for personal bankers and will reward them equally for customer service and financial measures. These changes apply to all brands across the Westpac Group.”
It said Westpac Group home lenders are rewarded based on a number of factors including customer satisfaction and mortgage drawdowns, and subject to meeting risk and compliance measures.
While they provided a written repose, Brissenden added that “most bank CEOs were reluctant to speak to Four Corners”.
American economist Jonathan Tepper, who called out the Spanish housing crisis, said "bubbles really depend on loose credit, that's one of the things that's really fuelled the Australian housing market".
"Anyone with a pulse could essentially get a mortgage," he added.
"I go back to the analogy that I always use, which is insiders versus outsiders, right? If you're the insider, you're like the frog in the frying pan. The temperatures been turned up very slowly on you."
"If you're an outsider you might say, "Do you know what? That looks a bit too hot."
"I'm just the outsider sitting there telling people that the temperatures been turned up."
Brissenden said banks' exposure to mortgage risk has already caused some reassessments. In June, Moodys downgraded Australia's banks.
Frank Mirenzi of Moody's said "our concern is around the fact that you've got households holding more debt. That potentially makes them more vulnerable to a change in their circumstances, and if there's a shock to the economy, that potentially leads to a rise in sensitivity to the banking sector."
"The banks could in fact experience higher losses because households are more indebted."
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Big Four Banks defend lending practices against Four Corners claims

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The RBA says over the past six months, domestic financial risks have shifted from housing lending towards lending for residential development and some other commercial property markets, and there are ongoing concerns associated with the challenges in the resource-related sector.
It suggested a glut of inner city apartments and an influx of Chinese money into the property market was shifting the risks in the banking system.
In its most extensive warning yet of the indirect risks facing the Australian property market, the Reserve Bank's Financial Stability Review warned that the supply of new apartments in major metropolitan cities could "weigh on prices and rents," which could reduce the income of property investors and make it harder for them to sell.
"With the demand for apartments softening in some areas … and households facing tighter access to credit, settlement failures might increase," the RBA advised.
It noted the actions of the regulators since late 2014 have helped induce a tightening of authorised deposit-taking institutions’ (ADIs) housing lending standards, and housing market conditions have moderated since the previous RBA Review.
"In particular, the share of high loan-to-valuation lending has taken a noticeable step down and tighter serviceability metrics have reduced maximum loan sizes.
"ADIs have also increased advertised interest rates for investor loans relative to owner-occupier loans, while providing larger discounts for some owner-occupier lending.
"These developments have contributed to a moderation in the pace of investor credit growth, though the effect on growth of overall housing credit has been largely offset by a pick-up in owner-occupier lending.
"While the household debt-to-income ratio has increased a little further, mortgage buffers in offset and redraw facilities are rising strongly, which helps to mitigate any associated risks.
"While these developments have generally enhanced resilience in the household sector, the tighter access to credit for households could pose near-term challenges in some medium- and high-density construction markets given the large volume of building activity that was started several years ago.
"These apartments are popular with investors and foreign buyers and any concerns over settlement risk and/or a slowdown in demand for Australian-located property by Chinese and other Asian residents could lead to difficulties for particular projects, though there is little evidence of either occurring so far. Risks seem greatest in the inner-city areas of Melbourne and Brisbane, where new supply is most geographically concentrated, and increasingly in Perth."
The RBA noted some other commercial property markets were also adjusting with a lag to a slowing in demand.
"This is most noticeable for office buildings in the resource intensive states, where vacancy rates remain very high as further supply continues to come on line.
"More broadly, commercial property yields have compressed across a range of market segments and there are some questions over their sustainability at these levels once global interest rates normalise."
In the rest of the business sector, the balance sheets of resource-related companies have come under strain following the large falls in global commodity prices over recent years and interest payments are taking an increasing share of earnings for the smaller producers and mining-related services firms.
The RBA noted none of the "domestic risks appears to be enough on their own to seriously degrade the near-term functioning of the domestic financial system, though they could exacerbate a major shock from elsewhere, such as a global economic downturn."
"In any case, Australian-based banks have taken further steps to increase their resilience to potential risks.
"As noted, ADIs have tightened their housing lending standards to align them with the prudential regulator’s expectations.
"While lending to the commercial property sector by the Australian major and Asian banks has continued to rise, many ADIs have tightened lending standards in this area and have reportedly become quite cautious in lending to certain parts of the sector."
The RBA noted banks’ non-performing loans remain low overall: while they have picked up for resource-related lending, banks’ exposures to this sector and to mining services firms are small.
"That said, some foreign banks operating in Australia have much higher shares of their total lending to this sector.
"Bank profitability has also remained high and capital levels have increased substantially in the past year.
"Nonetheless, with banks now competing intensely for lending in a narrower range of markets, it will be important that their serviceability and other lending standards remain appropriate."
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