Matthew Cranston| Australian Financial Review| 26 September 2019
Treasurer Josh Frydenberg has pushed back against regulators being too stringent in enforcing responsible lending rules, warning that this could penalise “hard-working families” trying to get a housing loan and hurt the economy.
In a speech to The Australian Financial Review’s Property Summit in Sydney on Thursday, Mr Frydenberg welcomed the pick-up in capital city housing prices, citing Treasury research that a 10 per cent increase in house prices could boost GDP by 0.5 per cent.
Mr Frydenberg said he “appropriate” application of responsible lending obligations legislated a decade ago was central to strong and competitive credit markets.
But he added that the shadow of the banking royal commission and the Australian Securities and Investments Commission’s litigation against the banks have given rise to uncertainty about how the laws should be implemented, calling for “personal responsibility and personal accountability” to remain central to bank lending.
“It’s in everyone’s interest that the aspirations of hard-working families are not collateral damage in this regulatory process,” Mr Frydenberg said.
“If responsible lending laws are applied too stringently, they will also negatively impact consumer behaviour…”
The Treasurer’s views back up Prime Minister Scott Morrison’s warning to banks on Tuesday not to be too “sheepish” and to do away with an “instinctiveness” towards overly tough lending standards.
While regulations such as the 10 per cent cap on investor lending growth, the 30 per cent cap on interest-only loans and the 7 per cent serviceability buffer have been lifted in the past year, signs of improved home loan lending have only just started to show.
“Clearly, the risk that the provision of credit may cause substantial hardship to some should not result in a significantly reduced ability to access credit by the vast majority of borrowers,” Mr Frydenberg will say.
“To date, the Australian Securities and Investments Commission has adopted a principles-based and scalable approach. This has allowed flexibility for lenders to appropriately take into account the facts and circumstances of each case and vary the degree of inquiry and verification depending on the customer risk involved.
“Common sense dictates that a sensible balance needs to be struck because an unduly restrictive application of these obligations can do as much harm as an overly lax one.”
Earlier this month, ASIC launched an appeal against a Federal Court judgment in the so-called “Wagyu and shiraz” case that found Westpac had not breached responsible lending laws more than a quarter of a million times.
ASIC claimed Westpac used a “frugal” benchmark – the household expenditure measure (HEM) – to estimate potential borrowers’ living expenses. It argued that Westpac approved some loans using the HEM, when the customers’ actual declared expenses were higher than the benchmark.
The case was dismissed by Justice Nye Perram, who said: “I may eat Wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.”
Mr Frydenberg warned against too much responsibility being thrown on to bank lenders rather than mortgage borrowers.
“The value of personal responsibility and personal accountability must remain central to our society and if the pendulum swings too far in the abrogation of these values, then it will inevitably reduce the availability of credit and increase its price,” he told the Financial Review Summit.
Home lending on the rise
ASIC is currently updating its guidelines for responsible lending and received 72 submissions earlier this year from stakeholders and observers over its proposal.
While the banks have tightened up lending following the royal commission into banking and superannuation, home lending has already started to pick up again, along with property prices in the main cities.
Home lending jumped 5.1 per cent in July, marking its biggest monthly gain in four years, as owner-occupiers and investors roared back into action as sentiment changed and credit curbs eased.
The monthly increase picked up on June’s 3.2 per cent gain and lifted the total of monthly new loan commitments to $17.9 billion.
This pick-up in lending has been followed by a surge in prices in Australia’s two biggest property markets over August. Property values increased 1.6 per cent in Sydney and 1.4 per cent in Melbourne, after much milder growth in June and July.
Mr Frydenberg noted that Treasury estimates that a 10 per cent increase in house prices could result in a corresponding lift to GDP of about 0.5 per cent. The RBA expects that a 10 per cent rise in household wealth could increase the level of consumer spending by up to 1.5 per cent.
Reserve Bank of Australia governor Philip Lowe said on Tuesday that he foresaw another upswing in property prices and that he had no concerns with that as long as there was no surge in credit growth.
“It seems to me quite possible that we could have a period now of rising housing prices, because construction activity is slowing while the population is still rising quite quickly the world. So there are some underlying drivers of housing prices,” Dr Lowe said.
Credit growth figures for home and business lending will be released by the RBA on Friday.
Mr Lowe also said lower interest rates and rebounding house prices were not having the same effect on consumption as he had hoped in the past.
“Once upon a time, when we lowered interest rates, people would run off to the bank to borrow to kind of go on a holiday or buy furniture or kind of do some spending, they don’t do that anymore.”
“When we lower interest rates, they are more likely to go to the bank and say, ‘Look, I want to pay off my mortgage’,” Dr Lowe said.
Household consumption growth slowed in the June quarter to 0.4 per cent, and moderated to 1.4 per cent on an annual basis according to the Australian Bureau of Statistics, just above the RBA’s revised forecast of 1.3 per cent.
“The main source of domestic uncertainty continues to be the strength of household spending,” Dr Lowe said.