According to the Reserve Bank, Australians appear to have their finances in good order, the banks have low levels of problem loans while, as we know, the economy is going very well.
Good enough to put interest rates up next week after the April board meeting if need be.
And while there are some areas where there are problems, the overwhelming story from the latest RBA look at the stability of the country’s financial system is of no deep concerns.
In fact when read with stats like retail sales, employment, housing finance and the national accounts, the economy and the financial system are almost in tandem.
The only black mark is the unacceptably high level of foreign debt (mostly private) which is driving the current account deficit (AKA the yawning black hole).
But looking at the benign commentary in the latest RBA Review (and it is no rosy coloured glasses stuff), you can well understand how retailing is doing well, the banks are doing well: why some sector are not doing well but not causing concerns.
Isolated companies, such as Coles, stand against this background, for their managerial incompetence and inability to exploit these very favourable conditions.
Those worried about high levels of personal debt are not looking at the high levels of equity and financial assets many households possess.
Even younger consumers with high debts are like the poor folk in Western Sydney with dodgy housing deals: unfortunate exceptions, not the precursor to bad times in the future.
And even if they were some sort of warning the household sector and banks are more than adequately provided for to withstand an explosion in loan losses.
For all the alarmist talk of academics looking for a headline and some in the media looking for a beat up, the bank’s report makes it clear that there are no real worries: not even the dodgy no doc, low doc loans in Western Sydney, nor credit card debt, nor the level of debt banks are lending to private equity, or creating for people as margin loans to invest in the stockmarket.
In fact the real story would be of prudent borrowers, especially among householders who have been doing something far cleverer than any financial planner could think of (and more cheaply).
They have been paying off their mortgage debts in particular faster than they have to and have been doing so while the value of their houses and therefore the level of equity has risen.
The best warning the RBA could summonsed up was “The downside risk that has attracted most attention over recent years is the possibility that adjustments in household balance sheets following the housing boom could amplify an economic downturn.
“There are, however, very few signs of this risk materialising, although households are taking a more cautious approach to their finances than they were a few years ago.”
The RBA said that households were generally positive about the outlook for their personal finances, and while mortgage arrears had increases due to a lowering in lending standards, they were still relatively low by both historical and international standards.
The bank said there were some pockets of concerns “where household finances are under strain, particularly in western Sydney, and among households that took out loans with high loan-to-valuation ratios in 2003 and 2004, but the overall picture remains, at present, quite reassuring”.
This is reflected in the low levels of non-performing loans, which has helped the banking and insurance sectors continue to record high rates of return.
However, the RBA has warned that lenders should be wary about reducing lending standards amid tough competition.
“While there has been robust competition in lending to households for a number of years, recently there has also been a noticeable pick-up in competition for business lending, with margins under downward pressure and an easing of lending conditions,” it said.
“Over the past decade, the Australian business sector has had a relatively low level of gearing after the problems in the early 1990s.
“There are, however, some signs that this period of conservative leverage may be starting to draw to a close, with growth in business credit up significantly on rates a few years ago.
“Perhaps the clearest manifestation of this change has been the recent spate of leveraged buyout activity by private equity funds, which has led to pockets of significantly increased leverage within the corporate sector.
“Overall though, while this trend may well have some way to run, business balance sheets currently remain in good shape.
“In the financial sector, both the banking and insurance sectors continue to record high rates of return on equity, benefiting from continued balance sheet expansion, low levels of non-performing loans and the strong performance of equity markets.
“While there has been robust competition in lending to households for a number of years, recently there has also been a noticeable pick-up in competition for business lending, with margins under downward pressure and an easing of lending conditions.
“As has been the case for some time, the challenge for financial institutions is how best to measure, and price for, risk in an economy that is now in its 16th year of expansion.”
Even in property, the traditional Achilles heel for many Australian corporate and financiers,there doesn’t seem to be too much worry.
Even after a sharp rises in prices in 2006 the bank says that “‘while the fast growth in property prices and borrowing suggests some potential for an increase in risks in the commercial property market, at an aggregate level developments are much sounder than those seen prior to the collapse in the market in the early 1990s.
“Office property prices, in real terms, remain well below their late 1980s peak, while construction activity is also below the level
