Australia: the land of easy mortgage credit

Recall the Hayne Banking Royal Commission’s very first recommendation, which was to maintain responsible lending laws:

Hayne royal commission recommendation 1

Source: Hayne Banking Royal Commission Final Report.

Hayne arrived at this recommendation after observing multiple cases of predatory lending over the Royal Commission’s 12 month deliberation.

Also recall that Treasurer Josh Frydenberg tried to repeal these responsible lending laws, claiming they are essential to helping the economy recover from COVID:

“Ensuring consumers and small businesses can get timely access to credit as the economy continues to recover from the COVID crisis”.

“The reforms are intended to improve efficiency, reducing the time and cost associated with the provision of credit for consumers and small businesses”, [Treasurer Josh Frydenbeg said].

The Fact Sheet supporting the legislation to repeal responsible lending rules claimed they were restricting the flow of credit:

The importance of credit to households and businesses makes access to credit vital to Australia’s economic success. Economic studies have consistently demonstrated a positive relationship between credit growth and economic growth, with the cost and availability of credit a strong determinant of credit growth.

Credit underpins the Australian dream of home ownership…

Now, more than ever, it is important that there are no unnecessary barriers to the flow of credit to households and business, especially small and medium sized businesses, as the economy recovers…

As the Governor of the Reserve Bank of Australia observed recently, what began as responsible lending principles has translated into a practice that has become imbalanced between a lender and its customer, leading to the undesirable consequence of unduly restricting lending.

Macquarie Research’s annual mortgage broker survey comprehensively debunks the Coalition’s suggestion that credit is being restricted, revealing that “borrowing capacity in Australia remains very elevated compared to the rest of the world”. From The AFR:

  • Brokers told Macquarie that on a weighted average basis, about 38 per cent of customers borrowed close to their maximum capacity in the 2021 financial year.
  • Macquarie estimates that the borrowing capacity of owner occupiers rose by about 7 per cent in 2021 (and about 5 per cent across the major banks) thanks mainly to lower interest rates.
  • Borrowing capacity in Australia remains very elevated compared to the rest of the world. Macquarie says Australian banks were prepared to lend at about 7 times a borrower’s gross income, which is much higher than the 4.2 times to 5.2 times seen across Britain, the United States, Canada and Sweden.
  • Australian banks continue to offer their clients between 35 per cent and 65 per cent more credit than their global peers.
  • APRA’s own statistics show that 22 per cent of loans in the June quarter had a debt-to-income ratio equal to or greater than 6 times, up from about 16 per cent last year.

Thus, the entire justification for axing responsible lending obligations has been obliterated. Australia is in fact the land of easy mortgage credit.

Instead of enacting reforms to make lending easier, APRA should implement macro-prudential curbs on mortgage lending.

Mortgage demand is white hot and new investor lending is now tracking near prior peaks when macro-prudential curbs were implemented by APRA:


Instead of letting property prices and mortgage debt levels inflate even further, APRA should get on the front foot and take macro-prudential action now. What is the benefit of waiting?

Unconventional Economist
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  1. chuckmuscleMEMBER

    But Chris Joye said the other day Wayne Byers is the best regulator we have ever had. Why can’t we just be grateful!

  2. Ee Zed Eff Kaye Ay

    Whilst house prices are rising, the credit standards are inflated away.

    This site gives Nathan Birch a hard time, but he has played the game well. He worked out early that this economic zone will not let house prices fall.

    • darklydrawlMEMBER

      Ironically, this was something Mr Byres was seemingly attempting to ‘bat away’ when questioned about it (from the ABC link in my post below).

      “Mr Byres pointed to a decline in high loan-to-valuation ratio and interest-only loans as counterbalances to any perception of rising risk. Although, it must be noted that strongly rising house prices dramatically push down the loan-to-value ratio of existing loans.

      Despite denying evidence of a deterioration in lending quality, Mr Byres did admit APRA was “cautious of the current environment and the way it could play out.””

  3. darklydrawlMEMBER

    The ABC also pointed this out earlier this week:

    With a hat tip to Spunky:
    “Guess who’s back
    Back again
    Cheating’s back
    Tell a friend
    Guess who’s back, guess who’s back
    Guess who’s back, guess who’s back
    Guess who’s back, guess who’s back
    Guess who’s back”

    A record 41 per cent of loan applications contain factual inaccuracies.
    The most common fudges are under-representing living costs and financial commitments.
    The banking regulator says it has seen “no obvious poor-quality lending. <– cause they are not looking!!

    • I thought there were already too many “home owners” with, 13 credit cards, rolling car leases, harvey poorman’s 60 month interest free fridges, sofas, movie screen tvs, laptops, eating coles homebrand $1.20 bread toast with homebrand margarine for dinner, still managing to obesify the whole family.

      You’re saying there will be more to come? oh no….

      I must stop living well below my means, I’m begining to feel rich.

      • darklydrawlMEMBER

        You are correct. Most people’s wealth is illusionary. You can determine this by checking how long they could remain solvent if they lost their job.

        Many people are close to being broke. Comfortably broke, but still broke.

        I would argue real wealth is a stable passive income and little/no debt – just kick back and relax.

        Oh, and no-one is a property millionaire if everyone is a property millionaire. We are mostly playing with easy credit, inflated monopoly money. Easy come, easy go, if folks aren’t careful.

        Don’t get me wrong. There are pleny of genuinely wealth people out there, but there are many times more showboaters that don’t seem to understand the risks.

  4. Display NameMEMBER

    APRA just does prudential management that relates to “financial stability”

    That means if the banks need to rob you blind to be stable. So be it. The banks and their profits are clearly their first concern.
    Unquestionably strong is the quote I believe. The big four may have a loan book that is almost 70% residential mortgages with many of these being 6 x debt to income, but they are backstopped by the Australian tax payer whose deposits form unsecured loans to our banks.

    I think the nearest OECD country whose banks are as exposed as ours are to residential mortgages is Norway at about 45%. The conflagration will be epic.