Banks’ housing bias bad for economy

Australian banks’ preference for writing home loans rather than lending to business may pose a risk to the banking system and the overall economy, according to a leading banker.

Joseph Healy, business banking head of National Australia Bank, said the bias of banks toward retail mortgage lending could hobble the economy’s long-term growth by skimping on loans to small businesses. The money flowing into housing may create other distortions such as fuelling excessive investment, he said.

”With the apparent bias towards to the household sector, we shouldn’t discard the possibility of asset bubbles being created there,” Mr Healy said.

”We’re not saying we believe there is an asset bubble but shouldn’t close our minds to the possibility of that happening.”

Since the emergence of the global financial crisis, small businesses have complained that they have borne the brunt of tighter lending requirements, with interest rates on their loans falling less than other borrowers. In addition, competition among banks has been reduced as several smaller lenders either exited the market or where swallowed up by bigger rivals.

Mr Healy said banks’ tilt towards home loans meant fewer loans are available for business, effectively crimping the economy’s growth engine.

”This is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end bad for Australia,” he said.

In 2000, every $1000 of home lending was matched by roughly the same amount for business. That ratio has since shifted so that today, for every $1000 of home lending, only about $600 is available for business, according to NAB research.

Home lending comprised 43 per cent of the lending of the big four banks – Commonwealth Bank, Westpac, NAB and ANZ – in 2000, but rose to 57 per cent this year. In the same time, business lending has dropped from 46 per cent to 35 per cent, according to NAB’s figures.

”The lack of access of finance has been a problem but also the cost of finance,” said Peter Strong executive director of Council of Small Business of Australia.

Banks are currently charging as much as 2 percentage points more than the standard mortgage rate to many small businesses, Mr Strong said.

Among the big four banks, NAB has the largest small-to-medium business loan book and the smallest residential mortgage book.

Most-overvalued market

In contrast to the trends in most rich nations, Australia’s house prices have continued to rise even during the global economic slowdown. Analysts have cited loan availability but also a relatively strong economy and a shortage of affordable stock for the divergence.

Some of that price fizz is coming off, though, with home price growth moderating in the past few months. Even so, the recent prices gains have pushed the national city median home price to $468,000, according to RP Data-Rismark.

The Economist magazine last week said a ”fair value” analysis of global property shows Australian property the most overvalued of any of the 20 countries the publication tracks, based on a comparison of the current ratio of rents to prices to a long-term average.

Mr Healy’s comments come as analysts speculate that Australia’s major banks may be squeezed in coming months by rising off-shore funding costs, with the banks’ exposure to the residential mortgage market drawing greater scrutiny on global markets.

Mr Healy delivered a speech on business lending to the American Chamber of Commerce in Sydney this afternoon.

Professor of Economics & Finance at the University of Western Sydney Steve Keen lauded Mr Healy’s comments.

”I’m delighted to see somebody in the banking sector come out and say this because it’s really about speculation being funded by the banks rather than investment.”

”To me the essential thing banks should be doing is providing working capital to firms.”

Story by Chris Zappone – czappone@fairfax.com.au