Given the recent changes in the mortgage data set between owner occupied and investor loans, some would suggest the regulators have been flying blind. I discussed this with Ross Greenwood on 2GB tonight. Whilst that may be an overstatement, the reasons for the recent changes are beginning to become clearer. In a speech today RBA Deputy Governor Philip Lowe addressed this head on. More importantly, he highlights that the apparently dramatic switch away from investment loans may be overstated.
The basis of good analysis is good data. Improvements over time in the quality and comprehensiveness of the data on housing prices have, for example, helped improve the general understanding of housing market developments. In contrast, unfortunately, recent problems with the data relating to banks’ owner-occupier and investor housing loans have worked in the other direction, complicating our understanding of what is going on in the housing market.
These data problems have emerged as lenders have taken a closer look at their housing loans following increased supervisory scrutiny. As lenders have looked more closely, what they have found has surprised and, to some extent, concerned us.
There are two issues that are worth drawing your attention to.
The first is that over the past six months there have been very large upward revisions to the value of investor loans outstanding, with offsetting downward revisions to owner-occupier loans. Material revisions have been made by more than 10 institutions, including two of the largest lenders. The scale of these revisions can be seen in Graph 1, which shows the stock of investor credit outstanding as reported in each of May, June and September this year. The cumulative effect of the upward revisions has been to increase the stock of investor credit outstanding by around $50 billion, or 10 per cent. According to these new data, investor loans now account for 40 per cent of total housing loans outstanding, not the 35 per cent reported earlier in the year.
Graph 1
While the reasons for some of these earlier errors have been identified, in other cases the reasons are unclear and lenders have not been able to provide comprehensive back data. As a result, when calculating growth rates for investor and owner-occupier credit, the RBA has had to make adjustments for what are effectively breaks in the series.
The second data issue has emerged over the past couple of months and has worked in the other direction, with lenders reporting that some loans that were previously recorded as investor loans were really loans to owner-occupiers. This is partly because, when faced with the higher interest rate on investor loans, some borrowers have indicated to their bank that they are not an investor, but rather an owner-occupier, and so should not have to pay the higher rate. Our liaison with lenders suggests that further reclassifications of this nature could be expected over coming months.
The effect of these recent reclassifications on measured growth rates can be seen in Graph 2. Taken at face value, the data suggest a very sharp slowing in growth in investor credit and a sharp pick-up in owner-occupier credit (shown as the dotted lines). However, if we make adjustments for these reclassifications then the changes in growth rates are much less pronounced (the solid lines).
Graph 2
These various data problems have reinforced our view that the supervisory focus on investor lending has been entirely appropriate. And it is disappointing that some lenders’ internal systems have not been up to the task of reporting accurate data on the split between investor and owner-occupied housing loans.
This issue was discussed at the most recent meeting of the Council of Financial Regulators, with Council members considering what steps could be taken to improve the quality of data. Among other things, it has been decided that APRA, the RBA and the Australian Bureau of Statistics will, next year, undertake a thorough review of the data collected from authorised deposit-taking institutions regarding their domestic books.
However, what incentives are there for lenders to provide the right data to the regulators? And what penalties should be imposed when they fail to provide adequate data? Without good data, we are all flying blind.
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