The slow process of establishing an inquiry into the banks is taking another step in parliament this week, with a private member’s bill establishing a commission of inquiry to be debated in the Senate. It has the support of much of the crossbench, the Greens, Labor and the Senate’s most dogged bank scrutineer, Nationals Senator John Williams.

The government has to decide whether it continues to defend the banks against an inquiry, or tries to control the inquiry to make it less onerous on them. So far, its stopgap measures to defend the banks, who are major donors to the Liberal Party, have involved a prime ministerial tongue-lashing, partially restoring funding for the Australian Securities and Investments Commission, and summoning the banks for periodic appearances before a committee. But the pressure for an inquiry continues to build.

Meanwhile, the issue of bank lending to housing investors has suddenly escalated in the wake of the Reserve Bank’s minutes from its March board meeting, released yesterday.

Since last October, the Reserve Bank has been warning of an apartment glut looming in Brisbane and some parts of Melbourne that have experienced concentrations of new developments, although it believed Sydney, where apartment construction has been more geographically distributed, was OK. This potentially presents risks to the wider economy both because financial crunches tend to start in the property sector when prices fall or developers run out of money, and because, at the moment, dwelling construction is powering the economy — in last month’s first Statement on Monetary Policy for 2017, the RBA pointed out that dwelling investment (detached and other dwellings, including apartments) reached an estimated 12% of GDP in late 2016, and would continue at a high level for some time to come. This is higher than the level for the mining investment boom at its peak of around 10%. 

This month, the RBA’s assistant governor (financial system) Michelle Bullock warned of looming regulatory pressure to once again cool the pace of growth of property investment lending. That followed a warning from the financial regulator, the Australian Prudential Regulation Authority (APRA), to lenders detailing concerns about lending for apartments and the financing of apartment developments.

In 2015, APRA forced banks and other lenders to tighten their lending criteria to investors, and forced them to slow the rate of investor loan growth to less than 10%. But, as Bullock noted in her speech, the impact of the 2015 restrictions appears to be wearing off. And January housing finance data showed the proportion of home loans taken out by investors had climbed above 50% again ($13.8 billion lent to investors, $13.6 billion to owner-occupiers — and only $1.2 billion was lent for building new homes). 

But yesterday’s minutes show a further escalation of RBA concern:

“Recent data continued to suggest that there had been a build-up of risks associated with the housing market. In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years. Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.”

That is a significant contrast to the February board meeting, which made similar points but noted “conditions in housing markets varied considerably across the country”. And the bank is no longer specifying individual markets — it now says “in the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years”.

But there are two really big changes in wording. The bank dropped a comment from February that “some lenders were taking a more cautious attitude to lending in certain segments”. This is not an accident or pointless editing, but hardly a commentator noticed it. It suggests the RBA suspects the banks have begun ignoring APRA’s restrictions, such as the 10% limit, thus accounting for the kind of figures we saw in January.

And the new phrase “a build-up of risks” is particularly significant and concerning. This is about investors and apartments; investor activity in detached housing will be examined, but that’s not the problem. And the risks are not just to the buyers and sellers of apartments, but to the banks and other financiers many of whom are on both sides of the equation — lending to developers to build apartments, lending to investors and owners to buy them. 

According to the Financial Review, the RBA, APRA and ASIC (which together make up the Council of Financial Regulators) have established a new working group to develop measures to curb investor lending, with the involvement of Treasurer Scott Morrison. Morrison is right to push the issue — although you get the sense that the government sees tougher lending criteria, or a lower speed limit on the banks’ investor lending, as a de facto way to improve housing affordability without having to do the hard work of fixing the tax system — and you can always blame the regulators if things go wrong.

But clearly both the regulators and the government are worried the banks are running too many risks around property lending — risks that could crunch the sector and, along with it, the entire economy, if they eventuate. That’s why the banks are now in everyone’s sights — not just the advocates of a royal commission.