Hockey's inherited a house of cards

At a presentation in Melbourne yesterday, the CEO of Roy Morgan Research, Michele Levine, tried to get the audience to remember what life was like the last time a Coalition government launched a review into the financial services market – the Wallis inquiry in 1997.

Back then only 40 per cent of us had mobile phones, she pointed out, and none of us knew those phones weren’t ‘smart’.

To keep up with the news, 85 per cent of us read the paper in hard copy, and only 15 per cent of us had a degree – half the current level.

And, more importantly for the current government, most of the worrying imbalances in the financial services market didn’t exist.

Imbalances? Well, yes, that remains a subjective term until something goes horribly wrong.

Anyone who tried convincing former Federal Reserve chairman Alan Greenspan before the GFC that growth in securitised debt markets was an ‘imbalance’ was likely to be laughed right out of the room ... until he reached his moment of “shocked disbelief” in 2008.

But here we are, in the nation that weathered the GFC better than any other, throwing around that term around again.

In the space of 17 years, the value of our financial services sector has burgeoned from a nominal $867 billion to $3.4 trillion – a 291 per cent increase.

Within that sector – which comprises the swelling superannuation savings pool, loans, accounts, various forms of insurance and so on – loans have grown even more rapidly, from $400 billion to $1.7 trillion, or a 324 per cent increase, according to the latest Roy Morgan State of the Nation report.

So where’s the imbalance? Well for one, wages growth has not kept pace with loans. The average for total full time adult earnings (that is, the amount actually earned including overtime) was just $732 per week in 1997. Today, that has increased 204 per cent to $1495.

In short, wages have doubled but loans have more than tripled, due mostly to an explosion in the residential mortgage market.

While it’s true that female participation in the workforce has increased over that time (from 52 per cent to 58 per cent), that is not enough to explain the debt blow-out – we’re just borrowing larger sums.

Is that, in itself, an imbalance that the government has to rein in through some kind of intervention? Through the difficult years of the GFC many arguments were made that there was no problem – though a handful of economists, with a couple of tag-along journalists, walked from Canberra to the top of Kosciusco in 2010 to spread the idea that, actually, there was.

That ‘debt march’ might have been premature, but as the banks trip over each other to let the Murray inquiry know why they need to be free to grow even further – and not just in mortgages – even the Reserve Bank is starting to note that the security for much of that debt (i.e. houses) can go down in value as well as up.

Treasure Hockey first raised the idea of a new financial services inquiry when he was in opposition in 2010. At that time, the big four banks were hiking interest rates ahead of the RBA’s increases. It was smart politics to demand that something be done.

Now that Hockey is the one overseeing the process, he is faced with some nasty political landmines.

Chief among these is the fact that the big four control around 85 per cent of the mortgage market, and despite the erosion of their interest margins in recent years their strong profits foster the perception they are milking home-owners.

The perception that Hockey played to in 2010 – that banks were abusing their oligopoly status to rip off consumers – can now be used by his Labor opponents. 

If the inquiry bats away such criticisms, Labor can question why Hockey appointed a former bank CEO, David Murray, to question big-four dominance.

Alternatively, if the inquiry recommends a mechanism for re-invigorating the non-banks or regional banks to compete – such as charging the big four for the implied guarantee of their liabilities by the government – Hockey will have to choose between offending a powerful business lobby and offending consumers who would like to see more competition.

But the inquiry could shine a light on some even nastier political problems.

With median house prices hitting $630,000 in Sydney and between $515,000 and $547,000 in Melbourne, Perth, Canberra and Darwin, it’s clear our finance sector is structured to pump too much capital into houses - supply constraints notwithstanding (as the Australia Institute points out, there is no mass homelessness - we're essentially all housed).

As explained previously, there is a money-go-round in play. First home buyers cannot reasonably be expected to save deposits to meet the 20 per cent threshold at which they avoid captial-eroding ‘mortgage insurance’ ­ – meaning they must ask the older generation for money to help them get started.

One bank lending manager told me this week that he has not written a loan with mortgage insurance in six months. That’s extraordinary. Young home buyers he deals with are, he says, frequently being gifted $60,000 to $100,000 by their parents to get ‘onto the ladder’.

Retirees have that money in part because of generous superannuation tax concessions which not only blow a hole in the federal budget, but store up wealth with individuals who cannot reasonably spend it – so gifting large chunks to their children is almost de rigueur.

What’s wrong with that? Well Hockey continually speaks of a “budget emergency”, but has also reversed Labor’s small attempts to begin addressing the super-tax-concessions problem.

Our financial system is recycling money through the super system and back into existing housing stock, including via SMSF direct investments, and blowing prices way out of reach of average Australians.

An inquiry, or a government, that allows that cycle to continue much longer should be judged a failure. It's a massive imbalance that does nothing to help build the productive economy Australia needs.

And despite its own rather meek actions to address this problem while in power, Labor in opposition will seek political capital by telling younger Australians what they instinctively know - no financial services market should be this skewed to housing.