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The Coalition is considering stripping the prudential regulator of some of its powers to regulate mortgage borrowing, and overhauling credit laws that MPs fear are locking first homebuyers out of the property market.
The opposition launched a Senate inquiry into mortgage regulations in August, fuelled by concerns that rules aimed at reducing the riskiest forms of borrowing had gone too far and made banks too cautious about lending to first homebuyers.
The concern is shared by some of the major banks, including ANZ, which warned the inquiry that stringent regulations meant banks were increasingly only able to offer mortgages to wealthy households.
Housing has become a major battleground for the main parties, as record prices, an acute shortage of rental properties and high interest rates combine to significantly reduce affordability.
Shadow treasurer Angus Taylor said the Coalition was concerned the trade-off between minimising risk and consumer access to mortgages and other banking products had become tilted in the wrong direction.
“An Australia that is under-banked, under-advised and under-insured is not a recipe for a productive economy. We cannot allow access to home ownership and financial services to become a privilege only the rich can afford,” he said.
“The Coalition will consider sensible proposals to ensure proportionate prudential regulation that secures our financial stability while boosting consumer outcomes to support home ownership, small business finance, and more affordable insurance.”
Of particular concern among Coalition MPs is APRA’s mortgage serviceability test, which assesses whether a prospective borrower would be able to afford loan repayments if the RBA raised the cash rate by 3 percentage points above its current level of 4.35 per cent.
With the average new home loan interest rate at 6.3 per cent in July, prospective borrowers are currently assessed on whether they can afford to pay an interest rate of more than 9 per cent on their mortgage at a hypothetical RBA cash rate of 7.35 per cent.
Some MPs also want to scrap responsible lending laws which put the onus on the banks to verify borrowers’ ability to make mortgage repayments, a requirement critics have called overly conservative.
The Senate inquiry is considering whether the Australian Prudential Regulation Authority (APRA) has too much power over lending, and whether some of its responsibilities should be transferred to parliament or come under more scrutiny from legislators.
Prime Minister Anthony Albanese confirmed last week that Treasury was modelling options to curb the use of negative gearing and the capital gains tax discount for property investors, as the government tries to win back renters who have shifted their support to the Greens.
In the lead up to the federal election, which must be held by May 2025, the Coalition is trying to woo aspirational first homebuyers with a policy that allows them to access a portion of their superannuation to use as a deposit.
In its submission to the Senate inquiry ANZ said serviceability assessments were potentially restricting access to credit for some households, along with high house prices.
“We have seen that, over time, the average gross income of ANZ’s home loan customers has increased to a greater degree than Australian average gross household incomes,” the bank said.
“Building on this, we are conscious that the impact over time of regulation and bank caution, among other factors, is relevant to the amount of credit that is available to some people.”
More than two years after the Reserve Bank of Australia (RBA) started its most rapid interest rate tightening cycle in decades, mortgage arrears remain close to pre-pandemic levels. Fewer than 1 per cent of borrowers are more than 90 days behind on their home loan, the central bank said on Thursday.
ANZ chief executive Shayne Elliott in June warned “regulators were locking out middle Australia” from accessing home loans due to lending rules such as the 3 per cent serviceability buffer. APRA chairman John Lonsdale hit back, describing the criticisms as one-sided and saying it was “not the time to wind back the clock on financial safety”.
Calls to overhaul serviceability test
Liberal MPs are concerned a combination of legislation and regulation has made banks too cautious in their lending to prospective home buyers.
Keith Wolahan, the Liberal MP for the seat of Menzies in Melbourne’s north-east, said a 3 per cent mortgage buffer was excessive in the current environment of high interest rates.
While a 3 per cent buffer may have made sense when the cash rate was just 0.1 per cent, Mr Wolahan said the serviceability test should change over time to reflect where the cash rate is at and where it is expected to go.
“The buffer should reflect both risk and homeownership. APRA must take the interest rate cycle into account for a fairer approach,” he said.
Under such an approach, the serviceability test would be less stringent when markets expect interest rates to fall.
While the Coalition has no current policy to adjust the serviceability buffer, Mr Taylor said he would consider the outcomes of the Senate inquiry and other industry reports as the opposition formed its lending policy.
APRA increased the buffer to 3 per cent from 2.5 per cent in October 2021 to ensure borrowers would be able to withstand an increase in the cash rate, which was just 0.1 per cent at the time.
The Council of Financial Regulators – made up of the RBA, APRA, Treasury and the Australian Securities and Investments Commission – backed in the buffer in June, arguing the 3 per cent level remained appropriate given the “high degree of uncertainty and risks to the economic outlook”.
Andrew Bragg, the Coalition’s home ownership spokesman, said the Senate inquiry was examining whether the interaction of responsible lending laws, APRA’s 3 per cent mortgage buffer, and other legislation were locking borrowers out of the housing market.
The inquiry will examine whether APRA’s mandate and powers should be altered so that its regulations, such as the 3 per cent mortgage buffer, could come under parliamentary scrutiny or direction. Legislation would be required to give parliament more power over APRA.
While he said APRA had done a good job, Senator Bragg said the regulator had been given a lot of delegated authority that was “exercised in the dark” away from parliament.
“I think the fact that mortgage delinquencies are next to zero is actually a problem. It tells you the banks can’t take any risk, or won’t take any risk, and that’s bad because we want banks to take risks on first home buyers,” Senator Bragg said.
“If you’re at the top of a tightening cycle, and you’re adding 3 per cent, you’ve got to be rubbing a lot of first home buyers out.”
Banks also must comply with responsible lending laws administered by ASIC. Bankers say these are just as big a constraint on lending as the prudential policies set by the prudential regulator.
The Morrison government announced in September 2020 that it would repeal the responsible lending laws, but failed to secure enough support to get the measure through the Senate.
Liberal senator Maria Kovacic, who ran an ANZ franchise for 16 years, said there was a case for reviewing whether the responsible lending laws and the serviceability test were too prohibitive, especially for young Australians.
“We have to ensure that we haven’t not only shut the gate, but locked it and bolted it and then welded it shut,” she said.
Review of policy levers
Senator Kovacic said the challenge with the serviceability test was that APRA was always much quicker to raise it than it was to reduce it.
“A good interest rate at the moment is about 6.09 per cent for an owner occupier, which means you’re being assessed at 9.09 per cent. That’s extraordinarily prohibitive, particularly for young people,” she said.
Jenny Ware, the Liberal MP for Hughes in Sydney’s south, said the 3 per cent buffer was a potential example of over-regulation that needed review.
“We need to look at whether or not 3 per cent is still appropriate, or whether it could come down,” she said.
Aaron Violi, the Liberal MP for Casey in Melbourne’s outer-east, said he thought the 3 per cent buffer had served the country well over the past few years.
He said, however, the scale of the housing crisis meant all policy levers needed to be reviewed.
“Given it’s been four years since the buffer was implemented, now would be an appropriate time to review the impact and any unintended consequences,” he said.
The Housing Industry Association recommended APRA adopt an RBA-style 2 to 3 per cent target band for mortgage arrears rates to encourage banks to take on riskier borrowers. Currently just 0.8 per cent of borrowers are more than 90 days behind on their home loans, according to the RBA.
Senator Bragg described the HIA’s idea as “interesting” and something the Coalition would examine in the inquiry.