Category Archives: APRA
by Alison Ryan
The Reserve Bank’s dramatic interest rate decision this week appears to ignore the economic reality facing many households. In announcing a steep 0.5 per cent rise in the official cash rate, the RBA Governor Philip Lowe made the following claims: “Inflation is expected to increase further, but then decline back towards the 2-3 per cent range next year. … The Australian economy is resilient… Household and business balance sheets are generally in good shape… One source of uncertainty about the economic outlook is how household spending evolves, given the increasing pressure on Australian households’ budgets from higher inflation. The household saving rate also remains higher than it was before the pandemic and many households have built up large financial buffers.” (Emphasis added.)
(To see how much this statement is worth, consider that in his November and December 2021 statements on monetary policy, Lowe had given a strong indication that interest rates wouldn’t rise until after 2023; based on that, many Australians borrowed money and have now been smashed by two rises that have taken the cash rate from 0.10 per cent to 0.85 per cent.)
The RBA is one of the institutions, along with successive governments and the Australian Prudential Regulation Authority (APRA), which deliberately inflated a housing bubble in Australia from the year 2000 onwards. To boost the profits of the banks, and to cover up the effects of shrinking manufacturing and rural industries, they encouraged the banks to focus their lending on housing at the expense of all else—especially housing affordability.
One of the measures of housing affordability is so-called mortgage stress, which is a measure the RBA has long ignored. It’s hanging its decision on the claim that many households have built up large financial buffers, but Digital Finance Analytics’ Martin North reports from his comprehensive survey of more than 50,000 households—the biggest survey in Australia—that more than 43 per cent of households, 1.5 million households in total, were mortgage stressed before the recent rate rises. As North explained to Channel Nine’s 8 June Today program, these households were already foregoing expenses such as dental, children’s clothes, etc., to prioritise paying their mortgages. “If interest rates go up another one per cent, that’s a 15 per cent increase in the monthly repayment on the mortgage, so we’re going to see more people really struggling”, he warned.
We’ve seen this disconnect between financial reality and the delusions of financial authorities before—at the time of the 2008 global financial crisis in the United States. US authorities denied the danger of the financial derivatives banks had written on their mortgages; consequently, their decision to let Lehman Brothers collapse set off a chain reaction in its derivatives contracts that blew up the financial world.
In the 2008 GFC, the trigger was the rise in mortgage defaults that started in 2007. In Australia in 2007, a secret APRA report predicted a spike in mortgage defaults to 7 per cent of mortgages, which would trigger an Australian banking crisis and recession; only the massive bank bailouts and housing subsidies of 2008 averted that scenario.
Fourteen years later, the bubble is bigger, households have much more debt, inflation is rampant, and, globally, insiders like JPMorgan Chase CEO Jamie Dimon are warning that an economic “hurricane is right out there, down the road, coming our way”. If the RBA has miscalculated, it may decide in a few months to reverse interest rates, but it may be too late—it may already have triggered an unstoppable chain reaction to a crash of Australia’s debt-laden financial system. The RBA’s latest data shows Australian banks have almost $44 trillion in exposure to financial derivatives— the greatest danger to Australia’s banks and their customers.