Senate Economics Legislation Committee, , 29:20 to 46:56
Officials examine the drivers of investor credit growth and its impact on the housing market.
Topics: Infrastructure, Workplace relations, Parliamentary privilege
Speakers: Nick McKim, Michele Bullock, Dr Christopher Kent, Lisa Darmanin, Unknown Speaker
>> Okay, I'm going to have to rotate the call. So, I'll go to Senator McKim 15 minutes and then we will we'll rotate around 10-minute blocks.
>> All right. Thanks. Thanks very much for coming in and good morning to you both. Miss Bullock, in your um public remarks post the uh the board meeting last week, I was particularly interested that you singled out credit growth as uh as one of the factors that um concerned concerned you and and the board. Um we're receiving a sort of rolling series of of lending figures um at the moment and yesterday um we received lending figures uh around the annual growth in the vector uh sorry in the value of um of credit for property investors which jumped from uh 19% in the September quarter to 32% in the last 3 months of the year
>> growth
>> uh growth in the value the value of lending for property investors
>> must be new
>> must be new
>> lending growth
>> new lending growth
>> is that what you're talking about
>> yes yes it is
>> new lending growth
>> yep and and I'm just I want to ask you uh and whether you can quantify the contribution that that particular pretty large spike in um lending makes to the overall uh credit growth that would that you identified as a concern to the board and whether a 32% annual growth in new lending for property investors is is
>> Sorry, I don't have the uh so you're talking about the growth in the flow of new lending >> which has which then comes into effect.
I mean I'm asking firstly whether that contributes to the the um the credit
growth that you
>> and secondly then um like do you have like is that sustainable that's a large spike is that sustainable and what are the factors that are driving that um and more broadly what are what are the factors that are driving the credit growth that you identified as one of
of remarks and then I'll I'll let Chris talk um specifically about some of the credit. So, um we know that when um interest rates decline and housing [clears throat] prices are rising that investor investors respond much more quickly than owner occupiers. owner occupiers um I think still account for the bulk or more than investor credit does. I think that's fair to say, isn't it Chris? Um so um but what we've observed is that um over recent times investor credit growth has been well above average in in the last year or so and uh owner occupy credit has been picking up but it's sort of been around about average or maybe a little bit below. So a lot of the a lot of the strength in credit has been driven by investor credit in this.
>> And what are the factors that are driving that Ms. Bullock?
>> Well um I I guess two things. One is lower slightly lower interest rates and um it started to pick up before interest rates came down. So it probably was anticipation of lower interest rates. And the second thing is that as I said earlier that investors tend to um move with the housing price cycle. So when housing prices are going up, investors tend to be more in the market and when they're and when they're coming down, they're generally pulling back a bit. So they tend to and I guess there's one point worth making here that from a financial stability perspective we watch this because there is a um a possibility for um investor behavior to exacerbate cycles >> and that potentially might have financial stability implications. If um for example the cycle turns the investors pull out that exacerbates the downturn and that might have implications for other borrowers.
Thanks. Do um do government policy settings like the capital gains tax discount or the 5% deposit scheme do they have an impact on um investor behavior and therefore the the spike that we've seen in um in lending to property investors? Well,
well, none of the tax the 5% deposit scheme applies to first home buyers. Some of them may be investors. I don't I don't know, but a lot of them probably aren't. A lot of them are probably just trying to get in.
>> But don't I mean, do you think that investors might anticipate an increase in demand from first home buyers and therefore decide to jump into
>> they they may um you know, that's possible. Um uh
>> that they may that may be about them shifting. If they're ready to go with their finance, they were ready to buy. they might think if I can move a bit faster at the margin I'll come in earlier but at the same time when they show up at auctions there are going to be more first home buyers that would be willing to compete with them so it's sort of double-edged
>> and then on the taxation side of things I mean the point here is that nothing that's as far as I can tell has been basically steady the first time schemes new the taxation things you refer to they haven't changed so they're not driving the current u adding to anything in the current cycle. They're just things that have been constant underneath.
with that spike that we're discussing, um at the moment, like for example, Westpak have said that 39% of all lending is for property investors at the moment. I wonder that's the highest share by the way since 2017. um does that pose any um financial system risk issues to you or uh raise any inflationary concerns?
>> Um it doesn't we we obviously are alert to the potential financial stability implications and um part of the reason um APPPA putting on its recent guard rails in debt to income ratios was to be a bit forward-looking in this sense. So to say basically um these are the guard rails and um be careful if you start to approach those guard rails because we're worried that there's possible vulnerabilities building up in the system. Our most recent financial stability report looked at all of this. It always looks at these sorts of things. We don't see financial stability as being a problem at the moment.
>> All right. Okay. Thanks. Um and just 92% [clears throat] of um credit to um property investors is put into the existing housing stock as opposed to new builds. Um do you think this contributes anything to uh the productivity challenge that we have in Australia at the moment?
I'm not really sure in what way. I mean
>> well it's not generating um productive investment into new houses for example. It's simply um driving property speculation into the existing house.
>> Well you you've also got to remember that um the rental stock in Australia is owned by the households the very investors you're talking about. Now in other countries this isn't actually necessarily the case. A lot of the rental stock is owned by corporations or by super funds or in Australia um the rental stock is owned basically by other households. So there's two sides to this coin is the only point I'm the way that um investors um choose to buy established housing or new housing um I don't know why that might be the case. It might be that there's um certain advantages taxation wise for them doing that. But again, all these things I mean the whole housing market issue um is basically comes down to a supply and demand story as we've talked about before. we aren't building enough houses and demand [clears throat] for houses um obviously is outstripping that and that's what's driving not only the um the house housing prices issue but also the rental situation and vacancy
rates. >> The other thing just to remember of course is that an investor [clears throat] might be buying it from another investor who'd already paid off their loan and they did that as part of a retirement strategy and they're going to use those funds to fund their retirement. So
>> um thanks. Look um you've you've um been very clear as bulk that you know you you understand that you know millions of Australians doing really tough at the moment and um you know that's clearly what I'm hearing. Um, I hear from a lot of people, I'm sure you do, too, about how hard it is at the moment. And a lot of people feel like they're working harder and harder, but still falling further and further behind in the sort of daily or weekly or monthly financial grind um that they're facing and that they feel their their living standards are actually declining or that they're having to work harder just to maintain um the same standard of living. And there's a large sense of frustration in large parts of the community about that. Um so it really caught my eye that we're now seeing um corporate profit forecasts revised significantly upwards. I mean, UBS recently um uh this week released uh a forecast of ASX 200 corporate profits that went up from 3% forecast in corporate profits to a 12% forecast in corporate profits. Like what's what's causing this kind of two two phase economy where corporate profits are really really strong and they look like they're going to grow significantly over the next 12 months and yet so many millions of Australians are really struggling at the moment. Is there like what's the ex I just a genuine question. How are we in such a two-speed economy where some people are doing so well and the and the big corporates are doing so well and people at the bottom are just feel like they're working harder and harder and just can't get ahead. Well,
um I think part of the problem is that inflation, what people are observing is that the price level has risen substantially over the last few years. And that has meant that when everyone goes to the supermarket now, they just look at the prices and they remember they were here and now they're 20% higher. And that hurts people. Um, it's also true to say that as always there is a range of different experiences across the economy. You have some people on relatively low incomes, you have some people on on higher incomes. The reason that corporates um can uh do well at the moment I think comes back again to the point that in total excess there is excess demand that demand for goods and services in the economy now not everyone is contributing to that but there is excess demand and in those circumstances businesses make money they can put up their prices they can recover their costs we know that unit labor costs are still rising by quite a lot and to the extent that there is demand for their goods and services then businesses can put up their prices to account for that and for the rising cost of their inputs. So um yes there are is always a range of experience across the economy from my perspective in monetary policy and I've said this before we recognize that interest rates have differential effects on different parts of the economy that's just the way monetary policy works unfortunately. Unfortunately, when interest rates are going up, it hurts people that have debt. And when interest rates are going down and um then people are getting hurt are the people that actually have savings. So, it has differential effects. We know that, but that's monetary policy.
>> I wouldn't I wouldn't overstate this. There's also a global dimension because this is a a common feature. But one aspect that impinges on us is commodity prices. And a lot of the listed corporates uh which UBS would I assume be referring to are profiting off higher commodity prices which is a global phenomenon and in the main to the benefit of the Australian uh economy. Now that doesn't mean uh that households who are struggling to uh make ends meet won't be adversely affected at the margin by higher prices of say the the food in the shops that relates to that. But that often that uh you know the cost of beef uh to the farmer uh is a small share of what the the customer is paying at the store.
>> You've got two minutes, Senator McKim.
>> Um thanks you both. That's that's really helpful. I I I've got two more questions. Hopefully we can get get them through and then I'm actually done for the >> for the RBA. So that might just help you be slightly more generous chair potentially get me out of the room. Um, this is a this is a a question phrased in in the global context. Um, not quite in the context that Dr. Kent was just I wanted to ask you about the impacts of inflation on um on political circumstances around the world. Um there does appear to be a relationship between the the difficulties of a lot of people with debt which you've just acknowledged of living through an inflationary cycle and a cycle of uh interest rate rises and and a shift to the hard right in global politics whether that's reform in the UK whether it's Trump in the US whether it's the rise of the Nazi party in the vimar republic at the moment lein in France or one nation here in Australia. Have you thought about that at all? And do you um have any views you'd like to share about the societal impacts of inflation rather than the economic impacts of inflation?
>> Um no, I have nothing to say on the
>> No worries. Um last last question from I actually thought that might be your answer, Miss Bullock. And I have no I have no truck I have no truck with that answer by by the way. Um >> the RBA unanimously voted last week the sorry the board unanimously voted um last week to to increase interest rates. Obviously you've got the secretary of treasury on on the board. Um uh I wanted to ask whether there are either formal or and this is this is a transparency question. Are there any formal or informal um governance arrangements where uh the Treasury Secretary is expected in some way to vote in the same way as the rest of the board or does everyone on the board including the secretary exercise a
genuinely? everyone on the board exercises a general a genuine um right to have their own vote.
>> And if that's the case, um is it open to the treasurer to give direction to the Treasury Secretary uh to vote in a particular way or not? And and I ask because I know that there's a view that the RBA is apolitical, but I have a different view. I'm not suggesting you have partisan politics. I don't make that allegation at all. But the the decisions you make are political decisions in my view because they impact on the day-to-day lived experience of all Australians as you've said before and they do have an impact on the political debate in this country. So just to be clear, I'm not accusing you of making partisan decisions. I too much respect for you to that for that for for you and the board for that. But I wanted to ask whether there is a possibility that the treasurer could direct the treasury secretary and whether um whether in your view that is something that is a risk or um at least a potential risk.
>> Um I don't believe it is. Um the review of the Reserve Bank of Australia looked at the issue of the Treasury Secretary on the board confirmed that they felt it was remained appropriate but also made it extremely clear and the government accepted this that they are there as an individual. They are not there as a representative of the treasurer.
>> Thank you. Uh Senator Sharma.