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One of the reasons the Australian sharemarket underperforms the US is that the impact of the current credit squeeze is gathering momentum.

It’s a credit squeeze without any Australian precedent.

And since the Wentworth by-election, the squeeze’s effects are being multiplied by the fear of ALP policies that were conceived before the squeeze had taken hold. At this stage, the squeeze is restricted to dwelling prices and developers but it’s about to spread to retail and beyond.


Why is the 2018 credit squeeze without precedent?

The first part is fairly straightforward. Bank credit standards have been too low. So the banks have been told they must raise those standards, which effectively cuts at least 20 per cent from what they would loan on a property. But the normal reduction is about one third.

But then comes the unconventional credit clamps. They’re like a cancer growing below the surface, and no one’s talking about them.

Specific areas of the residential property market have been singled out for special attention. For example, it has been made very difficult for investors to gain interest-only loans. That same group of borrowers - who in the boom were more than 60 per cent of the bank housing market - now also pay higher interest rates. And if you happen to be overseas Chinese, then there’s no money for you.

Residential developers have become the lending equivalent of the plague, and are usually told to go to non-bank lenders who can accommodate them but where the rates are higher.

There’s also another, even more sinister aspect to this credit squeeze which is very difficult to quantify: the attack on bank management. The management of our banks has been bad, and I am not excusing it. But when you attack managers at the same time as a credit squeeze a strange new inner fear phenomena develops among bank people at all levels.

Bank regulators are set to walk into banks to check what they are doing. That’s what bank boards are supposed to do. But because they did not do their jobs, their role will be reduced. And then we have a royal commission which will recommend a whole new series of attacks on bank management and practices.

ASIC has correctly been attacked for being too soft on banks. Had ASIC and APRA done their jobs in past years (granted, that’s a hindsight judgement) the property boom would not have got out of hand. Now they are about to show us that they have learned their lesson.

ASIC says that there are around 50 charges, many criminal, that are likely to be laid on banks, their executives and possibly board members.

It’s seeking vast new sums of money to prosecute them. Most of that money may be levied on the banks who will then pay for their own defence. It possible that many bank people will be jailed. That may also be a cost to banks, something like the old days in the Tower of London where the rich paid for their “accommodation”.

Add to that the huge payments set to be made to customers who were wrongly charged. As property falls in the light of the credit squeeze, many of those who borrowed from the bank will sue because the lending to them was “irresponsible”.

It’s true that sometimes high-pressure, commission-driven bank sales people did cajole customers into taking too much debt. But the customers accepted risks for big gains. Nevertheless, litigation lawyers are preparing for a harvest.

I could go on, but each of these actions is part of the same un-coordinated credit squeeze, one which is without precedent.

Out there in borrower land, borrowers and their accountants are dealing with bankers at all levels who have an inner fear that they don’t talk about.

Bankers who are confident enough to exercise sensible discretion are hard to find. So every detail of a transaction must be right, even when security is not an issue. That makes the borrower nervous. Under this sort of indirect attack, the residential property market does not collapse. It just edges lower as each week goes by and auction clearance rates fall.

Now enter Bill Shorten and Chris Bowen with their negative gearing plan. When it was announced many years ago it would have curbed the boom. But its impact would have been muted by the virtually unlimited bank credit that was then flooding the market.

Now what will happen is that an investor will seek to buy a dwelling being built or about to be built for, let’s say, $800,000. The investor will be able to negatively gear interest and depreciate the new property.

But $800,000 is not the worth of the dwelling because, if it is sold, the buyer can’t negatively gear or claim depreciation. Theoretically, banks will take 20 over cent off to determine their loan levels so, to the banker, the $800,000 property is now only worth $640,000. The bank will lend, say, 70 per cent of $640,000, or about $450,000. Those sums are merely indicative. But, in rough terms, bank lending is restricted to around 55 per cent.

To get building going, the value of the property has to fall to a level where there is positive gearing. That will be helped via higher rents as supply is restricted, lower land prices and by state governments and local councils slashing their boom time charges. It will be a very nasty period and the adjustment will be further delayed by Bill Shorten’s higher wages campaign.

And there is a chance that our banks will have lower credit ratings, which puts up interest rates. Some banks may need to lower dividends and/or raise capital.

And remember this is the area that has dominated the Australian sharemarket.

The above scenario may not take place if our uncoordinated regulators wake up in time or the royal commissioner understands the dangers ahead. Banks shares plus AMP have been slashed and if anything that increases the fear factor.

With a federal election about to hit, the competition to bash banks for votes intensifies. This credit squeeze could not have come at a worse time. Hopefully after the election whoever wins will wake up to what is happening. But that will mean going back on the bank bashing promises.

ROBERT GOTTLIEBSENBUSINESS COLUMNIST