The Reserve Bank revealed today that financial institutions have substantially underreported the amount of housing loans held by investors. Not only does this lead to an understatement of the risk in the housing market, it raises serious question about the supervision of our banks, writes Stephen Long.

How on earth did Australia's banks understate investor housing loans by $50 billion?

What does it say about policy that we now have a situation where landlord loans make up 40 per cent - 40 per cent! - of all outstanding residential mortgages?

These are just some of the questions that arise from the revelations today by Reserve Bank deputy Governor Philip Lowe.

The new estimate of the investor loans apparently came as lenders took a closer look at their books after the bank regulator, the Australian Prudential Regulation Authority (APRA), increased scrutiny, as it tried to get the banks to rein in investor credit growth.

Some 10 financial institutions, including two of the largest banks, restated their mortgage books, leading to a cumulative upward revision of investor credit outstanding by $50 billion, or 10 per cent.

There's a further complication: in the last couple of months, following APRA's crack down on investor lending, lenders have claimed that some loans previously classified as investor loans were in fact owner-occupier mortgages.

This has skewed the figures, making a very minor downward trend in investor loans look like a pronounced fall in investor credit and corresponding rise in loans to owner-occupiers.

In a slap-down to the lenders, Lowe observed that bad data can lead to poor oversight.

"Now this might seem a rather obscure issue to highlight," Lowe said at a conference in Sydney. "But the basis of good analysis is good data," observing that problems with the banks' data on owner-occupied and investor loans are "complicating our understanding of what is going on in the housing market."

It's a serious issue: investor loans are more risky than loans to owner-occupiers and the poor data clearly led to an understatement of risks in the housing market.

It might make the RBA a little more reluctant to cut the cash rate again.

But the failing of the banks begs questions about why APRA missed the problems. What does this say about the adequacy of its supervision of the banks?

This in the wake of APRA chairman Wayne Byres's admission to a Senate committee last month that the regulator had been surprised by a lapse in lending standards last year - that the banks had been issuing loans that "lacked common sense", and that APRA had failed to get onto the problem quickly enough.

Then there's the question of why the lenders incorrectly classified so much investor lending as owner-occupied. Could it have anything to do with the higher risk weights, and higher capital required, for investor housing credit?

If that is the case, what to make of the lenders' discovery over the past two months that, "Golly, these loans we had down as investor loans are really to owner occupiers".

"This is partly because, when faced with the higher interest rate on investor loans, some borrowers have indicated to their bank that they are not an investor, but rather an owner-occupier, and so should not have to pay the higher rate," Lowe said.

Can we believe that, or are they having a lend of the banks?



Is it mere coincidence that this restatement comes after APRA nudged the banks to tighten up their lending standards on investor loans and imposed a 10 per cent "speed limit" on investor loan growth?

Was the massive misstatement of mortgages a rort by the banks or a stuff up?

At this stage there are more questions than answers.

The growth in investor housing credit also reinforces the foolishness of Australia's policy of negative gearing and concessional capital gains taxes which allow landlords to dodge income tax by gearing up on residential property.

Four in ten housing loans with landlords equals a whole lot of home buyers priced out of the market.

Stephen Long is an investigative reporter with the ABC, covering business and finance.