Australian Financial Deregulation

In 1996, the banker Michael Waterhouse, with the Westpac Banking Corporation published the review: How Does Regulation Affect the Future Role and Competitiveness of Banks?  The document highlighted three primary criteria that were used to determine that deregulation had been a success.  These were:

 •  the outcome of deregulating savings and deposit rates, removing lending controls and opening the financial markets...

•  deregulation has resulted in significantly greater competition, convenience and diversity of choice for both individual and business users of financial services; and

•  the stability and integrity of the financial system has largely been maintained.


Previous posts on this blog show how all of the shareholding of Australia's major banks are dominated and controlled by exactly the same shareholders which questions any statement about real competition.    Comments about the integrity of the financial system were premature.  What's often forgotten is that regulations that controlled the lending of money had been in place to stop a re-run of the great depression.


Removing lending controls...

Michael Waterhouse discussed the benefit of "removing lending controls" in providing easier access to cheap loans.  The document goes further by stating that under previous regulations, "lower income earners were often excluded from borrowing from banks".  

Apparently, "with the removal of lending controls, banks were in a position to meet a greater share of the borrowing needs of ordinary Australians".  A lot has changed since 1996.

Australian Mortgage Lending

The removal of regulations in regard to lending can be seen with the graph of Australian debt below.  

Personal Debt levels have doubled over the past decade.

Government Debt rapidly increased after the Global Financial Crisis with the stimulus packages.
Housing Debt accounts for the vast majority of debt created since lending controls were removed

Housing related debt growth is not due to an increase in the number of loans because of population pressure in Australia.

The Popping Bubble Blogspot uses data from the Australian Bureau of Statistics to try and plot the relationship between the supply and demand for housing in Australia.  Measuring "demand" is difficult to do but the figures do show that the housing debt boom is clearly not driven by population pressure on the number of dwellings.  

These observations correlate with observations made by the Reserve Bank in 2008 as to the relationship of traditional forces upon house prices.  The graph below is taken from Anthony Richard's Reserve Bank presentation which shows the initial spike in house prices starting with the 1988 reintroduction of Australia's First Home Owner's Assistance scheme.  Instead of assisting with the affordability of housing, the grant has done the opposite as house prices have risen to meet available reserves.

Bob Hawke's home-owner's grant was abolished in 1990 which was followed by a noticeable drop in house prices and stagnation in property value increases for almost a decade. An updated scheme was introduced by John Howard in 2000 and (not shown) was increases by Kevin Rudd in 2008.  Quite clearly, the availability of "easy" money has been a deciding factor in the cost of housing.  

In a "chicken & egg" situation of money availability driving up the costs of housing & then justifying larger loans due to demonstrated value of the asset being purchased - banks have been willing to approve ever greater loans with longer repayment periods.  At the time of the 2008 crash is was quite easy to obtain 105% mortgages where no deposit at all was required for purchasing a house. 

The graph below shows after tax profits (in millions of Australian dollars) attributed to shareholders of the big four banks

What's not surprising is that the explosion in housing debt shows a greater relation to the bank profits posted for shareholders.  We can clearly see that deregulation and ballooning debt crisis has occurred while benefiting the shareholders of Australia's banks.