The living expenses debate
OK, who wants to go first in having a “bash” at anyone of our banks?
Forget the AFL and NRL football finals, or even the cricket and our quest to retain the Ashes, No people, its bank bashing that really is our national sport!
Why I ask you? You do understand that without our banks and the incredibly sound banking system that we have that very few of you would be able to buy your home, or that investment property don’t you.
Even more so, what about those of you that have done well enough with capital growth from your home or investment, that now allows you the choice of whether you may want to send the kids to a private school or go on that European holiday.
We are very quick to forget the important role that our banks play in our society.
So spare a thought for Justice Nye Perram of the Federal Court.
He tried to introduce a little colour and humour into the generally boring business of a legal judgement, only to have sanctimonious souls attack him for being “out of touch” with reality.
Justice Perram’s “crime” (in the eyes of some) was to use an exaggerated example of how people might economise in order to service a mortgage, how their discretionary spending could change once they had to meet a big commitment to the bank each month.
“I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare,” said His Honour last month while deciding for Westpac and against the Australian Securities and Investments Commission (ASIC) on a legal question of what Westpac should consider before responsibly giving someone a loan.
The worthy folk of the Consumer Action Law Centre and Financial Rights Legal Centre were outraged.
Cardigans were flapped, Birkenstocks stamped.
“To suggest that borrowers ditch wagyu steaks and Shiraz for cheaper food really is out of touch with the realities faced by most Australians,” CALC chief Executive Gerard Brody told any media who wanted to know.
“The decision suggests that banks do not have to have regard to people’s actual expenses when they lend – which in turn will allow lenders to continue to extend unsustainable loans which set people up to fail,” said FRLC chief executive Karen Cox.
What a load of codswallop!
I mean it’s these sanctimonious souls that should be hauled in front of everyone to explain why they are so damn miserable and intent on everyone having a miserable existence.
Remember when Australia was known as “The lucky country”.
Well it appears these squeaky wheels, do-gooders and anyone else with an axe to grind have forgotten this very simple motto.
Every day, people modify their habits based on their current day circumstances – this is fact!
Next thing these sanctimonious souls will be passing judgement on your ability to have a family, raise children, go on holidays or anything else that they don’t deem mandatory in your lives.
Discretion remains, still to this day, one of the most underestimated skills that everyday Australians have and it’s this very discretion that Justice Perram, Westpac bank and for that matter, most banks, have been exercising for years.
And it makes sense.
But Bank-bashing still remains one of our favourite sports, elevated to Olympic status by the Hayne royal commission.
Banks were shown to indeed deserve a good thrashing over a number of issues.
And don’t get me wrong, they are definitely answerable to a number of issues when it has been proven that they, in fact, did not act in a client’s best interest.
That was proven and now changes have been made or are still being made, this is good.
No-one should ever shy away from accountability.
But there’s a danger that the bank-bashing momentum is going too far if we start expecting banks to take all the responsibility for loans and the borrowers none.
Not being able to get a loan can be worse than suffering “mortgage stress”.
No, I’m not being a salesman, these are just the realities.
What if the great Australian dream is now taken away from us and you can never own a home because we get this wrong and just simply make it too hard.
The right to have the opportunity to own your home – 1 day – should always be every Australians opportunity.
There have been and always will be shonks, spivs, spruikers, conmen and conwomen who talk people into making bad financial decisions, into borrowing to make bad investments.
The Storm Financial scandal remains the prime example of bad advice matched with reckless bank lending to create appalling hardship.
There also are people who make bad financial decisions all by themselves and others who are simply unlucky when circumstances turn against them.
The financial illiteracy in our country is still something that sadly lacks.
Who passed Year 9 budgeting?
Or who was taught in your teenage years about the value of a dollar, how hard it is to earn, yet how easy it is to spend. Or even worse, to lose?
So take the “bad eggs” out, the facts are, people make mistakes.
Whether this be intended or not doesn’t matter, but people do.
And we should not try to undermine the Australian dream because some people might make a mistake, should we?
When a loan goes bad, it’s a delicate business trying to work out where responsibility resides.
The pendulum has swung so far now that it seems everyone wants to blame the bank for granting the loan and not the borrower for taking it on.
Taking out a loan is a risk.
There’s no guarantee that any investment won’t turn bad, or that misfortune won’t befall the borrower.
No, No, No people.
I think it’s time for everyone to have a good hard look in the mirror because 99 times out of 100, the person actually responsible for your circumstances is staring straight back at you.
What the Hayne royal commission and Reserve Bank data show is that the vast majority of loans are responsibly serviced.
Only around 1.5 per cent of loans are 30 days in arrears – historically, not a bad figure. And that’s just arrears, not in default.
What most commonly causes serious problems with a mortgage isn’t the size of the loan, whether the borrower wants to continue eating wagyu and drinking Grange, or falling property values – it’s the stuff beyond the lender’s ability to forecast.
Divorce, unemployment, serious sickness – they’re the things that most commonly send mortgages bad.
The geographical pockets of dud loans in Australia match areas that have had rising unemployment.
It’s why arrears are higher in Western Australia.
Contrary to common opinion, banks rarely make money out of failed loans.
The idea that banks “set people up to fail” doesn’t make financial sense.
How could it?
The problem clearly exposed by the royal commission was when a sales-and-bonus culture within a bank encouraged individuals to push lending to or beyond the limit, when brokers or employees had personal upside but no responsibility for the eventual outcome.
Occasionally, vulnerable people are indeed led astray.
No question and that is a bad result.
But in society, there will always be some people who are looking to “graft” the system.
Fact, otherwise we wouldn’t have gaols and they certainly wouldn’t be as full as they are!
The royal commission has achieved its purpose in exposing abuses, and ASIC and APRA have been emboldened to actually do their jobs.
Banks and brokers are being much more careful to lend “responsibly”.
The rules have changed and now it’s time to embrace them for the long term sustainability of our market(s).
Justice Perram’s ASIC v Westpac case was about an old war – it was a historical case about how Westpac used to measure the ability of borrowers to repay a loan – not how it now does.
And to this day, no-one, not a bank, not a politician, not a do-gooder, no clients, No-one has proven that this has been an unreliable measure.
There are people, some of them prominent in the media, who would like banks to be much more miserable when it comes to lending money.
I suspect such people have no knowledge of what it was like trying to get a loan back in the days when banks were very tight indeed, using a formula of only lending a multiple of how much cash had been held on deposit.
That tended to disadvantage people on the margin, people trying to get a start on the property ladder, while the well-off had no difficulties at all.
The danger now is that we could repeat that scenario.
A key reason the previous RBA governor, Glenn Stevens, was wary of imposing macro-prudential lending restraints was that, if not careful, they would primarily disadvantage first-home buyers. The Law of Unintended Consequences is always working.
As it turned out, investors were the prime target as APRA tightened lending standards, letting more first-home buyers back in the game.
For anyone applying for a loan, what the bank is prepared to lend is obviously important, but some self-knowledge and personal responsibility should play an equal role.
It still staggers me today when I meet people how little of a grasp they have on their own spending habits.
Or even a clue as to what they spend their money on.
And in these circumstances, we also have to be very careful not to generalise as we see many people who have worked hard and saved harder to get their foot onto the property ladder.
If you have enough motivation, you will find a way. And if you don’t, you will find an excuse.
This fact of human behaviour probably hasn’t changed in hundreds of years, nor will it. But it’s not the banks fault, ok.
The I was given by a friend when I first came to Melbourne decades ago from the much-cheaper country Victoria was that, if you want to live in the expensive city, you have to be prepared to bite off a bit more than you can chew and then chew like mad.
I’m still chewing…
There’s a risk in that. It is sometimes far from easy.
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