If a company trebled sales and doubled profits in a decade, you’d have to wonder how long the winning streak would continue. What if it was an entire sector was performing that way? And what if it was a sector that didn’t actually make anything, except money?
Banking is a beast, and a hungry one at that. To ensure the industry continued to deliver the profit growth shareholders demand, Aussie banks have kept lending out money. Ignoring the warning bells from overseas, banks have continued to provide bigger and bigger loans for property and personal goods.
The star performer is the Commonwealth Bank, which increased its housing loans from $75.8 billion in 2002, to $254.4 billion in June this year — more than a threefold increase, helping to raise profits 2.5 times over the same period. Westpac has more, but its growth was helped by the acquisition of St George, which had almost $70 billion of household loans at the time of the purchase. Pain felt by the global financial crisis: nilch!
It’s not just housing loans that have catapulted over the last decade. Credit card debt owed to the Big Four has doubled, over a time when CPI has risen only 30 percent. And, despite all that talk of de-leveraging, that debt continues to mount. We owe twice what we did (in actual terms) ten years ago.
Looking at other household loans (for our plasma televisions and luxury yachts), we see that things have levelled off over the last year and are even down a little on 2008 levels; but loans are still 86 percent up on where they were back in 2002.
So the demand for money is driving profits, and arguably the availability of credit is pushing up house prices. But what would happen if, as many are predicting, that demand were to drop?
The obvious question is, where do banks go from here? Their business model has clearly been driven by a higher quantity of lower margin loans. If increased borrowing is unsustainable, the only option is for banks to lend less and increase the margins on their loans.
It’s a quandary though isn’t it? The resulting higher interest rates (apart from creating a tirade of criticism) will push house prices down. People with insufficient equity in their home will default and the total value of loans will fall. The only alternative is to keep encouraging us to borrow more, making more credit available for house purchases. That could continue to be inflationary for existing properties, but
I suspect we’re at last becoming wise to the idea that house prices cannot keep going on at the same rate.
So the banks are stymied, as far as household lending goes, unless a whole new market sector emerges. That’s why we’re starting to see the re-emergence of 110 percent home loans (eg, Suncorp openly advertise this on their site) and interest-only loans (offered by Westpac among others).
If you bring in high growth for a period, shareholders expect it to continue. Yet there doesn’t seem to be anywhere for the banks to go — and panic tactics could be detrimental to householders and naive first homebuyers.