Earlier this month I warned of the unintended consequences of increased bank competition. This article described how the intensification of competition for mortgage lending in Australia from the mid-1990s caused credit standards to drop and offshore borrowings to explode. The resulting increase in the availability of credit arising from this increased competition, combined with unresponsive housing supply, has caused the housing bubble that Australia experiences today, with housing affordability now near all time lows.
Just when you thought mortgage lending standards in Australia couldn’t get much lower, Westpac has announced possibly the most irresponsible relaxing of lending standards by a major bank ever seen in Australia.
Today, Banking Day reported the following from Westpac:
Rent Equals Savings for Westpac:
One year’s worth of rent payments will count as savings at one Westpac brand.
Westpac is changing its treatment of savings, through St George.
Defining one year’s rent payments as being equivalent to savings widens the target market for the bank’s home loans, including plenty of genuine prospects.
Dean Rushton of Loan Market yesterday publicised the shift in credit standards.
Rushton said St George will accept rent as a form of savings for a home deposit if there is evidence of a minimum of 12 months’ continuous satisfactory rental history and the property is leased through a licensed property manager.
He applauded the stance in an email yesterday.
“Australian lenders require a percentage of the purchase price – normally a five per cent minimum – to be saved for all loans, but it is extremely difficult for people paying the exorbitant rents customary these days to save money.”Rushton wrote that “we expect other lenders to follow suit.”
I love the way that Rushton attempts to sell this as a housing affordability measure when it is obvious that, if widely adopted, the extra funds available to borrowers under this scheme would get quickly capitalised into house prices, making homes even less affordable for younger Australians. What’s worse, a large chunk of the funds used to underwrite these loans would need to be borrowed from the wholesale debt markets, resulting in a even heavier reliance on unstable offshore funding by Australia’s banks. Australia’s financial stability would be significantly weakened as a result.
As Delusional Economics once said:
Affordability is the measure of a cost relative to income. It is not a measure of how easy it is to go into debt. Buyers are “priced out of the market” because prices are too high relative to incomes, not relative to the home loan they can receive from a lender with dodgy standards. Lowering credit criteria or shovelling incentives at people will do what it did last time. Create false short-term demand, push up prices that will then create an even bigger problem. What do we do next? Offer 125% LVR loans?
Lowering LVRs will in no way lead to more affordable housing, it will simply mean that more poor fools go into debt in the belief that they are on the road to riches while paying over-inflated prices for an asset that is already oversupplied.
Australian banks under the guidance of the RBA should be attempting to slowly deflate the Australian market to remove the massive systematic risk it now presents the country. It seems to have got so big now that the banks feel the need to constantly misinform and fudge figures to keep it going.
It seems Australia’s banks have learned nothing from the Global Financial Crisis, in particular the dramatic housing crashes experienced in the United States, Ireland, Spain, and elsewhere. You would hope that Australia’s ‘conservative’ and ‘well-run’ banking system would have studied these markets in depth, learned from their mistakes, and implemented more prudent and sustainable lending standards.
Anyone still seeking to understand the damage that can be caused by intense banking competition and lax mortgage lending standards are encouraged to watch the below video extracts from the excellent Irish documentary “Freefall”.
When will Australia learn: WE ARE NOT DIFFERENT!