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Is the Australian housing market ready to burst after decades of gorging on debt?SUPPLIED: MONTY PYTHON
It's one of Monty Python's finest skits.
Mr Creosote waddles into a posh French restaurant, a regular, welcomed fawningly by the maître d'.
After ordering everything on the menu, served mixed in a bucket — with the quails' eggs on top, of course — he sits, gorged even by his standards.
It is at this point the maître d' — John Cleese at his best — returns to offer him an after-dinner mint.
Creosote tells him to "bugger off", but the waiter leans in, a master in the art of persuasion: "It is wafer thin", he coos.
The glutton caves in and accepts the mint on his tongue, like a holy communion.
Cleese's character flees the scene, diving behind a row of plants as Creosote explodes.
YOUTUBE:Mr Creosote blows up: Monty Python (warning, this is gross)We asked for your thoughts on Australia's bloated housing market. Read the discussion in the comments.
But what on earth does this have to do with finance?
Australia's housing market has become Mr Creosote.
Not satisfied with merely getting a place to live in, thousands of investors are leveraging up, borrowing millions based on the rising value of their existing properties to purchase more, pursuing the dream of a "passive income" — a polite way to describe doing nothing and living off the effort of others.
More than 2 million Australians now own at least one rental property, and more than a quarter of them own two or more.
Nearly 20,000 taxpayers report income from six or more rental properties. They're living the passive income dream — for now.
Household debt kills growth
The Bank for International Settlements warns high household debt will drag on economic growth for years to come.
But this orgy of investment, fuelled by the assistance of negative gearing income tax deductions and the lure of a 50 per cent capital gains tax discount, has severely bloated Australia's property prices and debt levels as owner-occupiers have scrambled to keep up.
Australian property prices have roughly doubled nationally over the past decade, led by massive gains for Sydney where the typical house now costs more than $1 million.
The rise in prices has been largely debt-funded, particularly over recent years as incomes have stagnated.
The Reserve Bank's measure of household debt to incomes has reached a new record of 194 per cent and is heading towards 200 — it's risen 16 per cent during the latest Sydney-Melbourne boom over the past five years, from already-high levels.
Throughout this process, Australia's banks have played John Cleese's role of maître d'.
Whatever homebuyers wanted, the banks served up — particularly the big four.
YOUTUBE:Mr Creosote orders: Monty Python (warning, this is also gross)
As the housing Creosote gobbled up Australia's savings, in the early 2000s the big banks and their non-bank rivals went offshore to feed the beast with foreign debt.
But this binge is coming to an end.
Creosote is bloated and, as in the skit, the banks are standing there offering just a bit more lending to keep their profits growing and executive bonuses flowing.
But this time the bank regulator, APRA, until recent years absent from the scene, is stepping in.
Within months of taking over in mid-2014, APRA's current chairman, Wayne Byres, announced unprecedented limits on investor-lending growth and tougher rules around stress-testing borrowers (basically how much debt each individual Creosote could take on before they blew up).
Banks dodge a bullet
The big banks dodge one bullet, with APRA's relatively modest capital increase, but the regulator still has mortgages in its sights.
Those moves were needed, following APRA research conducted after Mr Byres took over that exposed just how lax many banks' lending standards were.
And they worked, for a while.
But, funnily enough, as caps were imposed on investor loans and rates for investment loans rose, many people (and their banks) suddenly realised they were owner-occupiers.
The property market again picked up steam, leading to a firmer investor-lending cap and a new limit on interest-only loans, imposed earlier this year.
These have again taken steam out of the major markets, especially Sydney, the market most like Creosote — ugly and bloated in beautiful surrounds.
Stopping the housing Creosote from eating itself
But APRA still sees the banks waving that mint around in front of a hungry mouth, this time with first homebuyers the prime target, given the limits on investor loans.
VIDEO 5:56The Business investigates how many people don't understand their home loansTHE BUSINESS
The remaining risk that has never been fully addressed is the woeful debt-servicing testing most of the banks persist with.
In his latest speech, Mr Byres revealed living-expense benchmarks were still being used for well over half of loan assessments, and more than three-quarters of the time for low- to middle-income borrowers.
EXTERNAL LINKWayne Byres APRA speech Nov 21 2017
APRA has been concerned about these benchmarks for the past few years, with many set around the poverty line and not accounting for people's real spending levels and financial commitments, including other debt obligations.
The measures are considered so inadequate, corporate regulator ASIC is pursuing Westpac in court over potential breaches of responsible lending laws for its previous use of a similar measure between 2011 and 2015.
Property bust triggers
We're at record levels of household debt, but it's not just debt that's threatening the housing market, writes Ian Verrender.
Mr Byres' latest message to lenders is that they need to tighten up on the amount of money they'll lend to people, or APRA will do it for them.
He said too many people were still borrowing six times their incomes or more, exposing them to repayments that would soak up half of their net pay when interest rates go back to normal.
If the banks don't heed his message, APRA's next move seems likely to be an enforced cap on loan-to-income ratios.
It would be the regulator's last desperate move to keep that mint away from Creosote's mouth and avert the explosion.
The risk is that he's already eaten too much anyway and the only thing that's wafer thin is the financial buffer held by many recent homebuyers.POSTED TUE AT 2:45PM