Homebuilders demand lower mortgage standards

Reserve Bank governor Philip Lowe suggested on 14 August that responsible lending restrictions implemented in the wake of the banking royal commission are impacting on credit growth.

Lowe’s comments before federal parliament’s Standing Committee on Economics have been used as ammunition by the the Housing Industry Association (HIA) to argue for eased restrictions on mortgage lending to assist first home buyers (FHBs) get a foothold in the market:

“A decade of reactive regulatory restrictions have made it significantly harder for First Home Buyers to obtain a mortgage for purchasing their first home,” stated HIA’s Chief Economist, Tim Reardon.

“A raft of restrictions imposed by APRA and ASIC since the 2007 Global Financial Crisis has seen the number of home loans issued with a 10 per cent deposit fall from 21 per cent of all loans to just 7 per cent,” added Mr Reardon.

“Analysis by HIA shows a direct correlation between each additional ‘reform’ and a further step down in lending for the purchase of a home.

At the Standing Committee on Economics on Friday, the Governor of the Reserve Bank, Phillip Lowe, reinforced this concern:

“What has happened is that those principles have turned into hundreds of pages of guidance. Once the compliance people, the lawyers, the regulators and the media get involved, these high-level principles put in law get turned into a lot of guidance, because people don’t want to offend these kinds of regulatory requirements.”

“I think the principles in the legislation are sound, but I think the way we’ve translated those principles into reality needs looking at again.”

“A decade of reforms in residential mortgage lending have been successful in creating an ‘unquestionably strong’ financial system. The problem is in the pursuit of this ‘unquestionably strong’ financial system, the regulatory squeeze has forced the banking sector to eliminate much of the flexibility in the mortgage market that made home ownership accessible for households of variable credit quality,” added Mr Reardon.

In the same address, Governor Lowe also stated:

“The pendulum has probably swung a bit too far to blaming the bank if a loan goes bad, because the bank didn’t understand the customer; if it had done proper due diligence—this is the mindset of some—the bank would never have made the loan. So some of the banks have had this mindset, ‘Well, we can’t make loans that go bad.’ I would have to say, though, that in the past three or four months I’ve heard fewer concerns from the banks about the responsible lending laws. ASIC introduced new guidance. Institutions are gradually coming to grips with those.”

“Having an ‘unquestionably strong’ financial system is essential to the future of the building industry, but home ownership must remain an attainable goal for all Australian households,” concluded Mr Reardon.

Sure, lowering credit standards will suck in more sub-prime buyers. But in doing so, it will bid-up prices (other things equal) and actually make the affordability situation worse.

The collapse in home ownership rates among 25 to 34 year olds as interest rates have cratered is bonafide evidence of this:

The secret to improving housing affordability is lower prices.

Thus, if the HIA genuinely wanted to ‘fix’ the housing affordability issue, it would argue for demand and supply-side reforms, including:

  • Permanently normalising Australia’s immigration program back to the level that existed before John Howard ramped-up it up in the early-2000s – i.e. below 100,000 [reduces demand];
  • Tax reforms like unwinding negative gearing and the CGT discount [reduces speculative demand];
  • Tightening rules and enforcement on foreign ownership [reduces foreign demand];
  • Extending anti-money laundering rules to real estate gatekeepers [reduces foreign demand];
  • Banning borrowing into property by SMSFs [reduces speculative demand]; and
  • Providing the states with incentive payments to:
    • undertake land-use and planning reforms, as well as provide housing-related infrastructure [boosts supply];
    • swap stamp duties for land taxes [boosts effective supply];
    • reform rental tenancy laws to give greater security of tenure [reduces demand for home ownership and reduces rental turnover]; and
    • forcing developers to supply housing for lower income earners via inclusionary zoning [boosts supply of affordable rentals].

Obviously, the HIA has no intention of actually fixing the housing affordability problem and instead resorts to policy band aids, like loosening mortgage credit, which is designed purely to boost demand and act as a new profit centre for the rent-seeking property industry.

Leith van Onselen
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  1. “Aussie Warehouse: Where lowest standards are guaranteed*!”

    * If you can find lower standards anywhere in the developed world, we’ll lower ours by 15%.

    • lol. “Apply now and we will defer your mortgage til 2023*”
      * Only for approved applicants on jobseeker.

      • Can I put my mortgage repayments on AfterPay, and use my CC to meet the AfterPay repayments? Someone please advise.

        • You should nimble it instead. And then consolidate it all into one easy to manage loan with latitude.

          Or start a go fund me campaign where people can sponsor bricks in your house.

  2. working class hamMEMBER

    Lowe is the problem. I’m pretty sure if 25k couldn’t get them buying, a bit more debt won’t.
    Has anyone checked this guys clown licence? It may be up for renewal.

  3. Jumping jack flash

    “…responsible lending restrictions implemented in the wake of the banking royal commission are impacting on credit growth”

    Uh oh.. well that was pretty dumb. Who decided that was a god idea? Phil? I’m looking at you. You should know that credit growth is all we have.

    “it will bid-up prices (other things equal) and actually make the affordability situation worse”

    Pish posh. It just means that banks will need to further reduce lending (debt eligibility) standards.
    No biggie. Isn’t that what interest rate manipulation essentially did anyway?

    Now that we’re at zero the question becomes “how do we lower debt eligibility standards without just coming out and saying we’re lowering the standards?”.

    It sounds a lot worse if you actually say that you’re lowering lending/eligibility standards, instead of saying “we’re cutting interest rates to create jobs and increase wages” even though that’s pretty much an impossibility, and the result of lowering interest rates is simply becoming eligible for more debt at the same financial situation, ie, lowering the standards.

    • The govt cares about people who have a go.

      It’s great that two tentacles of the same vampire squid are facing off to fight each other.

    • Jumping jack flash

      “If they cared about first home buyers they would want banks to give them more debt so they could pay over the asking price to buy their dream home and make everyone including the banks instantly rich and happy in the process”


    • That’s a disturbing article.
      “Instead of the borrower either catching up, or the mortgage going into foreclosure, the mortgage is put on ice during forbearance. The borrower doesn’t need to make payments. And the lender, after putting the delinquent mortgage into forbearance, may no longer consider the mortgage delinquent, and may therefore still show the mortgages as “performing,” and may still show interest income from it, though no one is making payments.

      There are now 4.2 million mortgages in forbearance, according to estimates by the MBA. Meaning 4.2 million homeowners have stopped making payments, in addition to the homeowners that have stopped making payments but are not in forbearance programs.”

  4. Banks know whats up- behind the scenes they are doing everything they can to keep repayment history reporting for the tens of thousands of mortgages currently deferred from looking too bad …need to get these serfs back on the debt gear asap

  5. State Governments have no incentive to lower land prices when their income is tied to increasing house prices through stamp duty and land tax.