Fletcher Building chairman and former Commonwealth Bank chief executive Ralph Norris says property price growth in Australia is poised to “top out’’, but he remains confident that the mortgage books of the major banks are “sound’’ and can withstand any economic shock.
In a wide-ranging interview after assuming the chairmanship of trans-Tasman building and construction giant Fletcher Building yesterday, Sir Ralph also played down concerns about the current levels of sharemarket volatility, declaring: “I don’t think the world is going to end tomorrow.’’
He also praised the Reserve Bank’s regulation of the banking sector after RBA assistant governor Guy Debelle controversially warned last week that markets could suffer violent disruptions when interest rates rise.
The RBA has warned that new macroprudential tools could be used to cool housing markets in Sydney and Melbourne as the amount of mortgage debt Australians hold relative to their incomes hit a record high of 137.1 per cent in June.
The central bank and the Australian Prudential Regulatory Authority have become increasingly worried about the emergence of a housing bubble in the two leading capital city markets.
The financial system inquiry, led by another former CBA chief executive, David Murray, is expected to call for higher bank capital levels to reduce bank leverage and provide a larger buffer against future shocks.
Fitch Ratings said last week that the growth of investor and interest-only loans could “increase the risk profile of banks’ mortgage assets in the event of adverse market movements such as higher interest rates and a general macroeconomic slowdown”.
But Sir Ralph said there were “a lot of mitigants’’ in regard to the mortgage books of the major banks.
“I think the mortgage books of the banks are sound and have been sound,” he said.
“The banks have learnt a lot since the crisis of 1991. I think the risk management practices of the banks, the way they manage their loan books, has significantly improved from those days. We just have to look at the way that the Australian banking sector was able to weather the GFC.”
He said one of those “mitigants’’ was the fact that loans were 100 per cent insured where the loan-to-value ratio was above 80 per cent.
“When you look at the existing books, there is a significant level of headroom between loan values and valuations. In most of the books, based on the advance of market values since the time of the loan, the outstanding debts are on average about 50 per cent loan-to-valuation ratios,’’ he said.
Current CBA chief executive Ian Narev said last week that the bank was satisfied it was holding appropriate levels of equity to withstand a shock to housing markets after stress-testing the bank’s $400 billion mortgage book at a board meeting ahead of its annual general meeting.
ANZ chief executive Mike Smith has also said he was not worried about the prospect of central bank intervention to curb lending.
But Mr Smith has warned home buyers to heed warnings that house prices can fall, a point echoed yesterday by Sir Ralph.
“There is no doubt we will not continue to see the rate of price increases we have seen over the past decade,” he said.
“That is an issue around ultimate affordability. Therefore I would take the view that house prices will stabilise.
“Personally, I would suspect we are reaching a point where a significant increase in property prices is topping out.’’
On the broader issue of global sharemarket instability, which has waned in recent trading sessions, Sir Ralph acknowledged that the world was in “somewhat uncharted waters’’ as the US Federal Reserve unwinds quantitative easing at the same time as the European Central Bank is considering further increasing money supply to offset deflation in Europe. But he said the lessons of history showed that markets always recovered from periods of turmoil.
“We are obviously going through a period that is somewhat uncharted waters with quantitative easing in the US and the economies in Europe have had a lot of expansion in money suppy. We are going to see some reactions to that but I would be confident that it is just a period of adjustment,” he said.
“I don’t think the world is going to end tomorrow, put it that way.’’
At Fletcher’s annual meeting in Auckland yesterday, Sir Ralph officially took over as chairman of the company from Ralph Waters.
Chief executive Mark Adamson said the company was forecasting full-year earnings of up to $NZ690 million ($626m), underpinned by booming conditions in its core New Zealand market.
The company’s earnings have been boosted by Mr Adamson’s strong cost-cutting agenda, coupled with new investments in IT and the company’s supply chain. Sir Ralph said the strategy would not change under his chairmanship.
Asked whether he would be a hands-on chairman with the sometimes outspoken Mr Adamson, Mr Norris replied that the job of the board was to both test and support management.
“I will not be a shrinking violet when it comes to testing and questioning management’s view on different initiatives or activities that they wish to undertake,’’ he said.
“I have found Mark someone who is very open. There is no guile. He is a person that I have a lot of respect for and I think that the relationship between he and I will be a very productive one.’’
This article first appeared in The Australian Business Review.