'No such thing as the Australian housing market', says CBA

Speaking at the Morningstar Individual Investor Conference in Sydney on Friday (6 October), the outgoing CEO of the Commonwealth Bank (CBA), Ian Narev, delivered a frank and open speech to delegates.

First touching on the recent AUSTRAC allegations into the bank’s supposed breaches of anti-money laundering and counter-terrorism laws, Mr Narev said: “We did not reach the standards we should have… We let down our stakeholders and, regardless of the ins and outs of the legal claim, I am sorry for that, as the Chief Executive.

“I take accountability for it and can assure you that we are taking it extremely seriously.”

Noting that there was “no suggestion of bad intent” or “deliberate endeavours” to circumvent the legislation, the CEO said: “But we did not hit the standards that we need to hit and we are very determined to put that right.”

He later added: “[W]e have a lot of work that we have to do, that we are going to do, and certainly this is my priority in my remaining time as Chief Executive, to really restore that trust.”

Mr Narev later gave delegates a “guarantee that the next Chief Executive of the Commonwealth Bank will be better than the current one”.

'Australia has about 2,000 housing markets'

Touching on the housing market, Mr Narev highlighted that CBA had 1.8 million mortgage customers and therefore had a “few perspectives” on the topic.

Mr Narev started by noting the disparity in real estate markets across the country, saying: “[T]here is no such thing as the Australian housing market. Australia has about 2,000 housing markets. And the market within a five-kilometre radius of where we are now [in Sydney] or within a five-kilometre radius of the CBD in Melbourne has very different characteristics from what you might see in other parts of those states, or indeed in other parts of the country.”

He continued: “If you could take a blank map of Australia and just draw where you would assume housing prices would be going up the most, you would get it right. Because we have got underlying characteristics of population growth — both organic and migration — urbanisation, slow supply-side responses building up new places where people can live with good infrastructure for them to be able to commute to where they want to work and live, and increasing general foreign interest in participating in the Australian property and buying property in the Australian economy.”

Noting that property markets “will go up and down”, Mr Narev said that he believes the “vast majority” of borrowers will be able to afford their mortgage repayments if and when interest rates rise.

The CBA CEO said: “[W]hen people apply for a loan, we need to make sure they can service the loan even if interest rates go up, and the current buffer is around about 2.5 per cent in round numbers.

“So what that says is, if interest rates go up without wage growth, and that is a big ‘if’… assuming all your income remains constant and only the interest rates go up, we know that people can still pay, the vast majority of them.

“However, and this is the reason why both the Reserve Bank and APRA have been concerned, and were right to be concerned, if people are not earning more but they are paying more in the interest rates, they can still afford the mortgage but that must mean they are spending less somewhere else.”

Mr Narev said that his concerns around household indebtedness are therefore “not so much about if interest rates go up quarter of a per cent or half a per cent”, but that “in meeting their mortgages [borrowers] will have to consume less over the medium to long term”.

He said that this was of concern because that would lead to people tightening their purse strings, which would potentially “weaken the economy”.

Noting that unemployment has dropped a little, underemployment rate has improved, job vacancies have risen and business confidence show that “things sort of look OK”, Mr Narev revealed that “Commonwealth Bank economists would certainly say that it feels likely that interest rates will remain at their current level for a little while yet into 2018”.

He elaborated: “Now, we all know that can change, but that feels to be that the current trajectory at the moment; that the Reserve Bank realises that the current rates are reasonably good for the economy; that it would only look to increase them if it feels the inflationary pressures are requiring it to increase them; and that it feels the inflationary pressures are reasonably well under control.”

Mr Narev concluded: “So, the very simple prescription for all policy debate on the economy, from our perspective, should be: Create a sense of stability, predictability for businesses to create the jobs [and] let the normal market forces help that stimulate wage growth to have households feel more comfortable. And those should be the repeated themes in the economic debate.”

[Related: Australian households ‘too big to fail’: Morningstar]