21 Nov The power and influence of APRA – Simon Pressley
The police force of the finance industry comes up for discussion when we catch up with Simon Pressley. We look at the power of APRA, its influence and its difficult role in troubled banking times.
Kevin: Well, as we know, the two major influencing forces in finance in Australia are APRA and also the RBA. But we’re going to focus very much in this interview on APRA. Almost it could be called the policeman of the finance industry. They’ve certainly come into a lot of focus in recent times with the inquest into, or the banking inquiry. Joining me to talk about this and the true importance and how much impact I do have on you and I, Simon Pressley from Propertyology. G’day Simon.
Simon: Hi Kevin.
Kevin: Good to be connected again. Simon, I went through the RBA and APRA. Let’s talk about APRA. Your view on how powerful they are, what their influence is, and what message, if you had, to the Chairman of APRA, you could deliver.
Simon: Yeah. Look, they’ve had a very difficult role, it’s fair to say over the last few years. And I’m sure they mean well. I’ve become increasingly concerned about the decisions and policies they’ve been changing, Kevin. I think a lot of this does stem from the Royal Commission into the banking inquiry, and obviously APRA’s charter is to oversee the conduct of our banks. But what we have seen, and it started back in May 2015, was APRA round one. At that point, they made it a little bit … I guess the way they scrutinised borrowers’ ability to afford a loan. They made that a little bit tighter, but over more recent times they’ve made that much tighter, and it’s not just investors. It’s first home buyers, it’s upgraders, it’s renovators. It’s anyone who wants to buy any property.
Simon: Banks are certainly lending money, but they’re running scared at the moment. I guess because of some the things that came out of the Royal Commission. And instead of punishing the banks, they’re punishing the Kevin Turners, Simon Pressleys, and anyone else who wants to make important life decisions. My concern with that is not just the individual borrowers I think have been unfairly punished, is that could have very soon some widespread impacts on Australia’s economy more broadly.
Kevin: If I could just pick up on that point that you’ve made there about who’s going to feel the most pain or who’s actually delivering those tough messages, is it APRA delivering those messages to the banks or is it the banks overreacting from the inquiry?
Simon: Look, it’s probably a bit of both. There were certainly some rules handed down from APRA to the banks saying, “When you assess a loan application, you must now do this,” that they didn’t have to do. And that largely relates to the information they need to get from an individual borrower and what they take into account, A, for the income they can rely on from that borrower, and then B, how they work out what that borrower’s living expense is. So their household budget excluding loan payments. We’re talking groceries and things like that.
Simon: And look, all our clients, whilst they’re buying investment properties, they need to get a loan in order to do that. So the feedback we’re getting from all of those is that the income that … They might’ve been earning the same income for last five years. Any variable component in that income, banks are less likely to rely on that. And I think if someone’s been earning, say consistent commissions or consistent bonuses or working regular overtime for many years, that should be taken into account. But in a lot of cases it’s not. And then the household budget, they’re really getting down to, “How many haircuts have you had?” And what does it cost for a haircut? And what are you spending on pet food? I’m sure they mean well, but there are a lot of good quality borrowers who have a sound track record, reliable incomes that aren’t getting loans approved. I mean, not just talking about investors.
Kevin: Yeah, it makes you wonder, doesn’t it, just how much information they can get. And of course, there’s a lot of information available now, but how much should be made available to them? We carried a story in the show just recently where we talked about be careful if you actually get takeaway food from Uber Eats that you don’t pay on your credit card, which I think you have to do anyway, because all of those expenditures are being picked up by the bank, and they can tell how often you’re having takeaway food.
Simon: What a great example. I mean, that’s just living. You’re just going about your business existing, and I argue strongly that shouldn’t affect how a bank assesses someone’s ability to repay a loan at all. And I wonder where all this has come from, Kevin. We’ve actually got round figures here. Two percent of all Australian mortgages are in arrears. I mean, that’s an all-time low. Bankruptcies in this country are at an all-time low. No one’s talking about interest rates skyrocketing through the roof. There’s not an economist in the world that’s anticipating that will happen. But even when rates do rise, banks have always, before all this tightening, have always factored in about one-and-a-half percent interest rate increases. So one-and-a-half percent is six interest rate rises, and they haven’t increased interest rates now for 26 months. How long will it take before we see six interest rate rises? So I really question the need for any of this tightening at all, and I feel it’s APRA’s way of punishing the banks for some things that have come out of the Royal Commission. Now it sounds like banks do need a lot of punishment. Well, punish them. Don’t punish the Australian borrowers. There’s about $30 billon that Australia’s four big banks get in profits each year. Hit them with a year’s profit, hit them where it hurts. Don’t punish Kevin Turner and Simon Pressley for doing what we’ve always done, getting on with our lives and making important life decisions.
Kevin: The reality there, though, I think, Simon, is that anything you bring down on the banks, they’re probably going to pass on to the public anyway.
Simon: Well, maybe. They might pass it on if their costs go up. That’s true with interest rates. But how they’re doing it at the moment is a first home buyer today is finding it harder to get a loan approved compared to two years ago. Why? I really don’t understand why that is. Now, the widespread implications of this … Money that circulates through the economy is what every nation needs. Now the money that circulates comes in two forms. It’s what we earn, and it’s what we borrow. Now what we’ve earned hasn’t grown much for several years, has it? We keep hearing about wage growth and how we all are looking forward to when that occurs again. So that’s not happening. And the only other sources of revenue that circulates through the economy, we’re now really tightening the tap on. I feel the more we do that, and if someone doesn’t intervene soon, the prospect of wage growth will diminish because you need more money to circulate through the economy more frequently.
Simon: And we’re turning one of those sources off. And property transactions is the biggest source of revenue for federal and state governments. So if you make it harder for someone to transact in property, they’re going to be significantly reducing all government revenues. Now, the entire nation relies on those government revenues for infrastructure projects and for funding welfare and basic public services. So to me, all this APRA stuff, I’m sure they mean well. I know they’ve got a job to do, but the only thing that occurs to me is this is happening in response to bad banking behaviour, and okay, they feel the need to punish banks. But I feel that they’re punishing 25 million Australians, and before too long they’ll be having an adverse effect on the Australian economy. Someone needs to step in.
Kevin: Just before you go, a message for the APRA chairman?
Simon: A message for the chairman. Well, he’s got a job to do, but I think there just needs to be more coordination between APRA’s primary role and all of the other departments that collectively have a role in the important things for the Australian economy. Because if they’re not coordinated, and we’ve seen this before, when APRA first stepped in in 2015 they tightened credit policy, and then two months later the reserve bank dropped interest rates. So they contradicted each other. All government departments need to get together and coordinate this because the Australian economy has got some good ingredients there, but if not well managed the grunt work we’ve done over the last couple of years could all become undone.
Kevin: Always good talking to you. Simon Pressley from Propertyology. Thanks for your time, mate.
Simon: Thanks, Kevin.