Nor is there any appetite at the federal level to cut the overly generous tax concessions available to property investors using negative gearing. Negative gearing is now the preferred tool for young home buyers able to get a parental or grandparental guarantee to become home buyers.

In keeping with the uncoordinated policy mess, the federal politicians have actually gone out of their way to make property more attractive than other forms of tax-enhanced investment options.

The recent changes to superannuation would have encouraged many people to shift their flow of discretionary savings from super into property. Super remains a tax-advantaged place to invest, but the property moves to the top of the preferred investment list when you combine low interest rates, capital gains concessions and negative gearing.

Property investors have been supremely confident about making money from property thanks to the sustained growth in residential housing demand caused by annual permanent migration of about 190,000, demand from Chinese investors, and glacial moves to increase the supply of land for fresh housing.

At the state level, politicians have failed to move quickly enough to open up new areas of land for development, let alone land with adequate transport infrastructure.

Low interest rates underpin the attractiveness of property investment. These are not changing any time soon judging from the comments by the Reserve Bank of Australia governor, Philip Lowe in his monetary policy decision and in a speech on Tuesday night.

Lowe, in effect praised APRA for its recent moves to reinforce lending standards. But he also heaped pressure on Byres to act in relation to the explosion in interest-only housing loans.

These sorts of loans are heavily favoured by investors wanting to gain additional leverage for investing in property and shares. They are also very attractive to mortgage brokers who can maximise their commission payments.


Chanticleer has heard stories of people wanting a $1 million variable rate loan going to a mortgage broker and ending up with a $2 million interest-only loan with $1 million used to buy the property and $1 million left on deposit in an interest offset account.

So what are the consequences of Byres being the only person in the policy-making landscape with levers to pull in relation to housing?

The simple answer is more of the same.

It is a little bit more complicated than that, but basically his strategy, as laid out in his speech yesterday, is to crank up the amount of capital that must be held by banks against residential housing loans.

Remember, Byres was already going down the path towards making Australia's big four banks hold about $20 billion in extra capital to make them "unquestionably strong".

Now, he will force the banks to hold more capital by changing the risk weighting for mortgages. This will lead to quite profound changes in the capital of Australia's big banks relative to their compatriots overseas.

This will happen at the same time as the multilateral, bipartisan system for bank regulation is splintering.

The European banks are refusing to budge on their opposition to the last leg of the Basel III regulatory reforms which relate to the risk weighting of mortgages. The American banks are going their own way on capital with the full backing of Washington.


Australia is heading towards having the toughest capital requirements in the world at a time when it already has one of the most highly capitalised banking systems.

You only need look at the latest financial results for the big four to see that on an internationally comparable basis they are holding higher levels of capital than most banks in Europe, the United Kingdom and the US.

For example, Commonwealth Bank of Australia's internationally comparable common equity tier 1 capital was 15.4 per cent at December 31. The gap between its Australian tier 1 capital and its international comparable capital has never been wider.

It will only get wider as Byres moves to force the banks to hold more capital to cover the emerging risks in the housing market.

One of the consequences of this move is that our banking system will be safer but it will also ensure that they never contemplate expansion offshore.

Given that there are multiple examples of poorly executed overseas adventures by our banks, that could be seen as a good thing.

But if Australia wants to have a regulatory system that severely limits the strategic options of the major players, then there should not be complaints when the entire energy of the banks is devoted to making the maximum amount of money from the domestic economy.

Higher capital can be generated organically if the time frames for raising it are reasonable. That is likely to be the case judging from Byres' comments yesterday.


More capital is not such a bad thing. Every $1 of capital adds $1 to book value, and Australia's banks trade at a premium to book. Also, higher capital does not put downward pressure on net interest margins.

When APRA changed the risk weighting for mortgages in 2015 from an average of about 18 per cent up to 25 per cent, it caused the big four banks to raise about $16 billion in capital.

CLSA analyst Brian Johnson says that every 10 percentage point increase in the risk weighting on mortgages will require the big four to raise another $5 billion in capital. But Johnson says the risk weighting on investor loans could be raised to 50 per cent, which would mean they were being treated in a fashion similar to commercial property lending.

The other lever available to Byres is in relation to remuneration.

Fahmi Hosain, who is head of governance, culture and remuneration at APRA, says the regulator wants to stick to its principles-based approach to governing remuneration but it is benchmarking its approach against countries that have imposed caps on bonuses.

He is concerned about the link between remuneration and culture and the poor lending practices found in the system last year, particularly in relation to interest-only loans.

Carol Schwartz, a director of Stockland and the RBA, told the summit that remuneration was directly linked to culture.

She says we have to start thinking about remuneration structures differently. We need to move away from structures based on old paradigms.

Steve Sedgwick, who is leading a review of conflicted remuneration in banks, says he will release his final report after Easter. He is concerned primarily about the incentives paid to middle managers rather than those paid to senior executives and staff on the front line.