I recently watched The Big Short, a film based on the eponymous book about the investors who made millions betting against the US housing market before its collapse in 2007-2008.
Along with the GFC itself, I think the film and the book are the best thing that's happened to Australian banks and property owners all decade. Economic struggles during the GFC here were relatively modest, yet we got all of the benefits like:
- Sharpened investor scepticism
Often in financial media, on Twitter, or in newspapers, commentators analyse the property bubble (or not-bubble, depending on who you ask). Did you know that Sydney's median house price to income ratio is currently about 9 times? Or that it peaked at 10 times in Los Angeles before the crash?
Did you know that Westpac Banking Corp (ASX: WBC) makes 50% of its loans to interest-only borrowers? About 40% of Commonwealth Bank of Australia (ASX: CBA) loans are interest-only, while Australia and New Zealand Banking Group (ASX: ANZ) is the best off with 'just' 37%. Interest-only loans peaked at about 25% in USA prior to the GFC.
A growing number of businesses like CoreLogic are also collating and providing valuable data in a way that was not accessible previously. The property market has growing visibility and is becoming easier to scrutinise.
- Sharpened lender standards (sort of)
Much as I sometimes think banks would lend to anybody with property ambitions and a pulse if the Australian Prudential Regulatory Authority (APRA) let them, the truth is that banks have sharpened up their reporting and lending standards.
For example, Commbank now discloses in its reports that it doesn't hold any Collateralised Debt Obligations (CDOs), which were a key ingredient in the US subprime crisis. Banks also require interest-only borrowers to be able to meet principle and interest loan repayments before lending to them.
There is renewed scrutiny on low-doc, no-doc, and alt-doc loans (more key GFC ingredients) from all involved parties. Genworth Mortgage Insurance Australia (ASX: GMA) is highly incentivised to keep risky loan practices to a minimum, and occasionally publishes useful research on the Australian mortgage market.
- Sharpened regulatory oversight
After Fed Chairman Alan Greenspan was trashed by myriad commentators and the US plunged into a 'Great Recession', Australian regulators of all stripes have stepped up their game. There's been precious little done to stem bank abuses of customer trust, but overall the structure of the banks and the Australian finance industry has become much safer in the post-GFC years. Banks were forced to strengthen their balance sheets and recently instructed to curb interest-only lending. The Australian government is now also being compensated (via the bank levy) for the implicit 'too big to fail' guarantee attached to the Big 4 banks.
None of that means that the banks are a good investment today, but they are safer than they could have been and it's not hard to see why – we've all seen what happens when it goes wrong.
