Axing responsible lending will throw petrol on the housing bonfire

Economists and consumer groups have warned that the Morrison Government’s announced axing of responsible lending laws will fuel property inflation by enabling borrowers to take on more debt and bid up prices.

Under the Government’s consumer credit amendment bill, which was introduced in December, responsible lending obligations will be removed from the national consumer credit rules, with the exception of small-amount credit contracts and consumer leases, where enhanced obligations will be introduced.

A reported in The SMH, consumer groups have jointly written to RBA governor Philip Lowe, who is also chair of the Council of Financial Regulators (CFR), urging it to roll back comments made in October stating that abolishing responsible lending rules “would support the supply of credit”.

The consumer groups, which comprise Choice, the Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre, believe these comments are imprudent given the recent acceleration in mortgage demand and property prices. They also warn that abolishing responsible lending laws would further inflate property prices by pushing more credit into the system.

Independent economist Saul Eslake and IFM Investors chief economist Alex Joiner have also come out against abolishing responsible lending rules:

“We’ve got 50 years of evidence that anything that allows Australians to pay more for housing results in more expensive housing” [Saul Eslake said]…

“It’s really a situation where you don’t need further fuel on this fire” [Alex Joiner said].

The consumer groups will have a difficult time convincing the CFR to change its stance given its two key members – RBA and Treasury – last year explicitly endorsed abolishing responsible lending rules, in the process contravening the very first recommendation of the Hayne Banking Royal Commission that such rules remain intact:

The Hayne Banking Royal Commission’s central recommendation was to keep responsible lending laws.

Treasurer Josh Frydenberg also used Philip Lowe’s statement that credit had become too tight as ammunition to abolish the responsible lending rules.

Thus, the CFR – RBA and Treasury in particular – would have to perform a U-turn and admit they were wrong – something they will be loath to do.

The only hope for retaining responsible lending rules, and upholding the number one finding from the Hayne Banking Royal Commission, is for Labor, The Greens and the Senate cross-bench to block the legislation.

Unconventional Economist
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  1. pfh007.comMEMBER

    “..Axing responsible lending will throw petrol on the housing bonfire..”

    That is the plan Stan.

    • I love watching those Darwin Awards type videos where some drunken buffoon approaches a fire with a Jerry can. Inevitably they lose their eyebrows or do the Nikki Lauder dance routine.

      Applying this desire for schadenfreude to the current situation I’m happy to stand back and watch everyone that goes near it get burned.

      Perhaps Captain Phil can assume the lotus position and self immolate.

      Burn the whole rotten thing down.

  2. Display NameMEMBER

    Come on lets bin responsible lending and see just how fcuked up it can get. LVR limits are for wimps. Interest rate buffers? Why bother? Loan to income ratios? Hey the banks only lend to people who can afford the loans

  3. kiwikarynMEMBER

    “Axing responsible lending will throw petrol on the housing bonfire”
    You say that like its a bad thing?

  4. Australians have a right to expect their largest asset to increase in price year after year. This should be enshrined in our constitution to ensure the continued prosperity of the Australian peoples.

  5. Goldstandard1MEMBER

    Aussies love a bonfire. It’s not petrol, they are throwing themselves onto the fire as there is no petrol left!

  6. reusachtigeMEMBER

    Oh FFS come on now! It’s not a bonfire. It’s boom times and every bit of extra boom is a great thing. Everyone except the weirdos know this.

  7. To be honest, I’m quite relaxed about the prospect. I’d take no greater joy than seeing Australia utterly wrecked. Whether housing keeps going up or down, this just means more misery. I’m there for it. Australia deserves it all.

    It’s not like we live in a society anymore.

  8. No, the reason for this is so that legally, it isn’t the banks that are left holding the bag on these mortgages and that no one should say “they shouldn’t have lent this money out under responsible lending laws…” The instant this law gets pushed through, all banks will refinance their dud and high risk borrowers onto new contracts that are under these new laws. This would mean they can wash their hands off this stuff.

    This law is required to allow the thing to fail. Without it, the losses are too large for the banks. This is akin to GS on-selling their CDFs to the insurance company.. was it AIG while pretending the collateral was still AAA rated. Once it was off their books and on to the insurance company, they were finally allowed to reprice the risk and let it fail.

    The closer we get to D-day, the louder the calls will get to push this law through. In fact, I am going to say that even in the middle of the impending crash, they will axe these laws in order to minimise the banks bailout bill.

      • darklydrawlMEMBER

        Probably not, but the banks and their lawyers certainly are. They know they are on the hook right now. What better way to get off the hook than to swap places with the customer! The best bit is they can pretend to be helping the customer by providing easier credit, all whilst minimising their risk and responsibility. Winner, winner! Moral Hazard anyone?

        • Jumping jack flash

          Who doesn’t want easier credit when credit is absolutely essential? And we’re not talking just a few hundred bucks on tic, we’re talking many hundred thousands of them. Access to enormous piles of credit is now just as important as access to clean water, energy and food.

          Responsible lending just gets in the way of growth and actually prevents their system from working at full potential:

          There’s no such thing as “responsible” or “irresponsible” there is just availability. So long as enough credit is injected into the economy by the banks, there will be enough available to bail out any “problematic” borrowers. This is why “responsible lending” is such a problematic concept in the New Economy, and it makes perfect sense to get rid of it.

      • +1 Banks and their lawyers indeed.
        No reason why this would not have been part of the deal in bank support for covid. I.e. we will defer mortgages etc if you guys provide us with a legal pathway out of the dud loans at the end of this.

        • Spot on. Would have been a grubby back room conference call with Scrotomo and bank execs, much horse trading will have been done. Banks have done their bit now the scrote has to deliver in return.

    • darklydrawlMEMBER

      I vote with you Divya. I suspect this a driver behind all this. I also believe the Government know this will juice house prices in the meantime, which is a winner for them even if it will ultimately blow up (hopefully on someone else’s watch!).

    • Nice analysis, Divya. I think you are right. It certainly makes sense. The people in the banks see how unstable it is and want their backs covered.

      When the whole thing goes down fingers will be pointed at all the irresponsible Australians. Which I guess would kind of suit the government as well. “Not our fault folks”. Those closest to the government will have long got out with all their gains, leaving the majority holding the bag. It all fits.

  9. rob barrattMEMBER

    Boom then bail-in. Don’t people understand? Housing IS the Aus economy. We left manufacturing aons ago.
    Never mind the rocks – More Sail!!!

    • Jumping jack flash

      Debt is our primary product. A “bail-in” is simply a subsidy that effects the “production cost” or “sale price” of our debt commodity.

  10. two plus twoMEMBER

    It’ll be fine, UE! Just have to remember the $120m savings war chest you’ve been spruiking! A bit of additional irresponsible lending is surely ok with that sort of backing!

    • Jumping jack flash

      But I wonder how much is left, or will be left once this run on debt is over?

  11. Jumping jack flash

    Responsible lending implies there is risk. We all know there is no risk. Risk was abolished long ago. Nobody likes risk, least of all the banks.

    The banks have set their system up so they can control the risk by controlling the amount of debt that is poured into the ecomomy.

    The more debt, and the faster it is poured in, the less risk. The more debt that is created, the richer the banks get. It is surely win/win for the banks. What a wonderful system.

    All that needs to be done is the banks ensure that their debt is attached to something that rises in value the more debt is attached to it. Houses are a good choice, and of course the only measure of risk that is considered is LVR.

    Create the debt
    Attach to houses.
    Repeat forever. (Provided a couple of other parameters are met)
    No risk at all.
    Let the good times roll. Everyone can get instantly rich from a pile of someone else’s debt.

    • darklydrawlMEMBER

      “Let the good times roll. Everyone can get instantly rich from a pile of someone else’s debt.” heh… It really is a 101 example of a ponzi scheme. It is amazing how many people don’t see it that way though.

      • Jumping jack flash

        For sure.
        Pretty much every aspect of the New Economy of debt, the banker’s utopia, can be equivalenced to a ponzi.