Download Banks can handle home price fall, says Glenn Stevens

Banks can handle home price fall, says
Glenn Stevens
Governor of the Reserve Bank Glenn Stevens: ‘We wouldn’t have major institutions getting even close to failure.’
Picture: Adam Yip
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The Australian
12:00AM August 17, 2016
DAVID UREN
Economics Editor
Canberra
Household debt is a record 125 per cent of GDP — more than almost any
other advanced country — but Reserve Bank governor Glenn Stevens is
confident Australia’s banks would survive a large fall in house prices.
Mr Stevens told the The Australian and The Wall Street Journal that the
future of China, which was simultaneously trying an unprecedented transition
away from export dependence while also managing huge excesses in debt,
was his biggest concern.
“It’s quite a tall order to kind of bring all this back down to earth gently,” he
said.
Mr Stevens said that whether a property price fall was damaging depended
on how much debt was behind it.
“You care, of course, whether asset prices seem divorced from their
fundamentals. That’s often in the eye of the beholder,’’ he said.
“But the thing you most care about is, ‘is there a lot of borrowed money
behind the assets’.
“(With) housing, the debt being carried there is pretty significant now, but I
don’t think we’re seeing another massive step up in leverage at the moment,
and, as you know, we’ve been watching that fairly carefully. Every attempt
to stress-test housing portfolios that I’m aware of ... none of those show a
very bad outcome for the system.
“Now, some losses get incurred, but by and large the system manages with
that OK.
“We wouldn’t have major institutions getting even close to failure. Not even
close.
“They’d wear some losses and they’d have to, again, strengthen balance
sheets at some point, but you wouldn’t have a systemic event.’’
The Reserve Bank’s decision this month to cut its benchmark rate to a record
low of 1.5 per cent reflected its belief that the housing market was cooling,
with credit growth slowing, lenders being more cautious and the financial
service regulator influencing a tightening in lending standards.
“Whatever you thought the risks posed to financial stability and
macroeconomic stability might’ve been from the housing sector a year ago,
they’ve probably diminished a bit since then,’’ Mr Stevens said.
But he does not have the same level of confidence about the outlook for the
Chinese economy.
It allowed a huge expansion of debt in the wake of the financial crisis and
was attempting to shift its economy from the very successful Asian post-war
model of a low currency supporting exports of low-cost manufactured goods
to the world, to a greater reliance on domestic demand.
“They’ve made quite a bit of progress here, but nobody’s done this transition
on this scale this quickly ever before,’’ Mr Stevens said.
“So how will this all turn out? We can’t know. There is no way of knowing.
And, you know, that’s a source of discomfort and uncertainty, but it’s
inevitable.”
The retiring governor said his bigger concern about the housing market was
the effect high prices were having on the next generation.
“I think that’s actually a bigger question ... than questions like, ‘is there a
bubble or not’, that people tend to spend a lot of time debating,’’ he said.
“A lot of people of my generation are actually going to find themselves, if
they haven’t already, helping their children into the housing market.
“That, of course, means that for people of my age, that the wealth we think
we have in our house, actually, we don’t have quite as much as we thought
because we’re going to have to give some of it to the next generation.
“Of course, if we come from a rental household ourselves, then we’re not
going to have that equity to pass to the next generation, and certain types of
disadvantage, therefore, are going to be perpetuated into that next
generation.”