Placing clamps on the banks could hurt the property market: Gottliebsen

I am not sure that the chairman of Bendigo and Adelaide Bank, Rob Johanson, fully grasped the power and potential impact of the words he used in his KGB interview.

But the clear conclusion from his comments is that the Greens’ proposal, currently before federal parliament, to restrict bank interest rate rises to increases in the Reserve Bank cash rate, has the potential to deliver a devastating fall in Australian house prices. From that would follow a big rise in bank bad debts.

I want to emphasise that is not what Rob Johanson said. But it is a clear implication of what he said.

In answer to a question by Stephen Bartholomeusz about the looming bank regulation, Johanson said: “None of us… who can remember trying to buy a house in the 1970s would want to have to go through or go back to that situation for funding.

“With my wife I bought my first house in 1967 and I remember vividly what it was like in the 1970s. Getting a housing loan from the bank was extremely difficult and as a result house prices were very low because you had to assemble deposits many times current requirements.”

Why would the Greens’ proposal to restrict interest rate rises take us back in the direction of the 1970s?

If the banks’ cost of overseas funds was to jump further and they could not pass that increase on to customers, then banks would be forced to reduce their overseas wholesale borrowing which accounts for about 40 per cent of current funding.

They could go harder into the local deposit market, but to substantially boost the size of that market would, on my reckoning, require term deposit interest rates of about 1 per cent higher than current levels. But of course, under the Greens’ plan the banks could not pass those higher costs on.

So banks would either slash profits or lower what they lend for housing to what they can raise from depositors at economic levels. Accordingly they would ration out the reduced amounts of available money by requiring home buyers to have much higher deposits.

That’s what happened in the 1960s and 1970s. Given the boom we have just experienced, a return to the 1970s would send house prices down and that fall would cause the banks to tighten even more, so sending dwelling prices even lower. Although the causes are different, this is what happened in the US.

The Greens would argue that the banks’ profits are so high they would absorb the lower margins in lower profits. As CBA chief Ralph Norris pointed out this week, banks are not high profit earners when their earnings are compared with the capital they require. While there might be some lowering of margins if rates rose markedly, that process would end and the amounts available for lending would be slashed.

It might not be intentional, but in Australia banks have developed a unique system to keep dwelling prices high. They are liberal in granting housing loans, so there is a strong consumer demand for houses. But they are really tough in their funding of developers so that they restrict the supply of dwellings.

By restricting the supply and boosting the demand, banks keep dwelling prices high. If the Greens’ proposal were enacted and we had further increases in the cost of funds overseas – which many are predicting – then the current high house price arrangement would be blown apart.

Most likely the Greens have no idea of the effect of their proposals. Alternatively it might be part of their hidden agenda to lower economic activity.

I am delighted that neither the government nor opposition are going down that path.

This article first appeared on Business Spectator.