Banks must now apply much greater scrutiny on the income and living expenses of applicants; there are tighter criteria for assessing loan serviceability buffers; lenders are required to discount non-salary income (such as rental income, bonuses, overtime etc.) when establishing an applicant’s income; there are more restrictive criteria for assessing applications for interest-only loans; and guidelines were added for mortgage lending to self-managed super funds.
This credit crunch was the primary cause of a 20 per cent decline in the number of homes under construction between the end of 2017 and 2019. It also led to a decline in home ownership rates as banks increasingly lent to households that already owned a home.
Since 2009, the share of loans issued to customers with a 10 per cent deposit or less has fallen from 21 per cent to less than seven per cent. The high point in 2009 coincides with the boom in first home buyer activity in response to the GFC stimulus measures. The ability to access finance with a high LVR was a factor that assisted many first home buyers to enter the market. This is no longer an option for most. In addition, lending to buyers with an LVR between 10 and 20 per cent dropped from 20 per cent of new lending to 15 per cent of new lending.
Just as the post-GFC stimulus caused a rise in first home buyer participation in the market, the post-COVID first home buyer incentives and HomeBuilder grant have also led to a cyclical rise in first home buyer activity. In the absence of these initiatives, and as their impact on the market declines, the structural problems will become increasingly evident.
These reforms over the past decade in residential mortgage lending have been successful in creating an ‘unquestionably strong’ financial system. Lenders have increased their capitalisation, they have cut back lending on terms that are perceived to be high risk and they managed to implement temporary measures to lean against a property boom.
The problem is that 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 achievable. Lenders have been forced to increase their capitalisation and as a result they have cut back lending on terms to buyers with a 10 per cent deposit. They are perceived to be high risk despite the presence of mortgage insurance and their demonstrated capacity to service a mortgage.
Ensuring that home ownership remains an attainable aspiration for Australian households should be an equally important objective. To achieve this outcome requires banks to determine the risk of lending money to individual borrowers, not regulators.
The repeal of consumer credit provisions, known as responsible lending guidelines, is a very small part of the regulatory reform task needed to ease household’s access to finance.