‘ Liar’ label is a fib
Townsville LET’S kick off the week by burying a few myths.
Now, there might be $ 500 billion of “liar loans” out there, but they are not about to bring all the banks, far less the entire financial system, crashing down anytime soon. Or indeed, anytime, as they say in the good ’ ole USA, period.
GFC Mark Two is not barrelling out of the ’ burbs towards you with the force of a down under Hurrican Irma or the speed of a Hurricane Harvey ( or even, for that matter, slowly, like a pensioner on a Zimmer frame).
Thank you UBS for the survey of home loan borrowers – incidentally, of about half the number of people who are surveyed in those breathlessly reported voter opinion polls. But the really instructive number out of the survey got buried a tad.
The headline said – more accurately, screamed – that $ 500 billion figure, based on 33 per cent of those surveyed saying they weren’t “completely factual and accurate” in their loan applications.
There are about $ 1500 billion of home loans out there, so do the math, again as they say in the good ‘ ole USA, and you get the “liar loans” headline.
Importantly though, almost all those “liars” would more accurately be dubbed “fibbers”. Some 25 per cent of those polled said their application was “mostly ( my emphasis) and accurate”.
So only 8 per cent or so were really in the “liar, liar” category; and even that was the somewhat ambiguous “partially factual and accurate”. Who’s to know how significant the variation from absolute accuracy was or might be?
In my judgment, the survey was really telling us that at least 92 per cent of borrowers essentially told the truth.
On the one hand that should be comforting – both to the banks themselves and to the rest of us. That would strongly suggest we are not going to see wholesale loan defaults.
On the other hand, banks have factual been, to put it politely, “eager to lend”: even telling the truth on an application doesn’t necessary guarantee the borrower is a really solid credit risk.
That said there are a number of dynamics that ‘ lock in’ an ever- declining risk of both individual and system default with home loans – including, if not as strongly, even with investor loans.
The biggest is time: essentially the way that even if a borrower only pays interest, as the years pass their equity in the property increases. So, if you “gilded the lily” on a loan application, say, five and even more 10 years ago, time would have made it OK.
Obviously, that not only does not apply to recent borrowers – you might have paid too much, especially for an apartment – but the ‘ liars’ and even the ‘ fibbers’ have likely really overstretched with such low interest rates.
The three keys to whether a large number of individual borrowers – and then the banks and the system – end up with “a problem” are: property prices ( especially apartments), wages and jobs, and interest rates.
That brings us to the second myth: that the Reserve Bank is just going to put up interest rates whatever is happening either in the world economy or the local economy or even just in the property market.
We are not going to see the Aussie dollar heading towards US90c and rates going up.
If the Aussie goes up the RBA will just hold off hiking. Indeed, depending on wide range of ‘ events’, it could even up cutting.
Let me hasten to add, it certainly doesn’t want to – the RBA not only believes we are headed towards a stronger economy and rising rates, it really does want that to happen. But it will always respond to ( and indeed, try to anticipate future) reality not wishful thinking.
Right now the Aussie’s heading up because the US dollar is going down. It’s going down not because of North Korea ( or the Hurricanes) – Wall St heading back towards its ( very) alltime high shows that; but rather in response to two- way trading with the euro.
The idea that wages are going down is also something of a myth. They are not rising as fast as they used to, but – in across the board terms – they are persistently edging higher.
If rates stay low and property doesn’t implode, borrowers will slowly get more equity in their properties and their debt servicing will, again very slowly, become more manageable.