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After hearing evidence from the banking industry in the final hearing for the Senate home ownership inquiry, Senator Andrew Bragg has said lending laws are too rigid.
On Thursday (24 October), the second and final hearings for the Senate inquiry into the financial regulatory framework and home ownership was held by the economics references committee – chaired by Senator Bragg.
While the inquiry had last week called up members of the broking industry, this week it was the turn of members of the banking industry and the regulators.
Among those giving evidence on Thursday were three of the four major banks (CBA, NAB, and Westpac) and the Australian Banking Association (ABA).
The representatives were asked their thoughts on whether the 3 per cent serviceability buffer set by APRA was preventing home buyers from accessing mortgages - and their thoughts on potentially reducing it for first home buyers.
The bankers appeared split on the matter; both the ABA and NAB (whose CEO, Andrew Irvine, currently chairs the ABA) suggested they would be open to looking at creating more flexibility or “modest” changes to the current buffer.
For example, the ABA suggested it could be beneficial to have a “higher degree of flexibility” so that banks can issue loans to prospective borrowers, while NAB said a change to the buffer would provide “first home buyers with additional borrowing power” (but warned that any change would require the close consideration of other credit risk elements to ensure it’s done safely).
Meanwhile, Westpac and CBA argued the buffer was necessary to prevent inappropriate lending and overburdening first home buyers.
Following the hearings, Senator Andrew Bragg concluded that the evidence given “exposed the blunt rigidity of the mortgage rules set by bureaucrats”, noting that “even the prudential regulator has described these interventions as ‘broad’”.
Bragg commented: “The committee heard three main pieces of evidence:
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The blunt 3 per cent serviceability buffer is damaging first home ownership;
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There is no structural focus on home ownership; and
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Different risk weightings would change pricing and access.
“First home buyers are missing out on loans and are facing reduced borrowing capacity,” he continued, echoing his sentiments following the first hearings.
“The serviceability buffer has been unresponsive to market events and monetary policy.
“As we reach the likely top of the tightening cycle, the hypothetical 3 per cent buffer no longer reflects the reality of mortgage serviceability.”
Bragg also concluded that first home buyers “could benefit from cheaper mortgages if there was a lower capital risk weighting”.
Other suggestions put to the inquiry on Thursday included adjusting Responsible Lending Obligations to take into consideration a first home buyer's future earnings growth.
The ABA chief of policy, Chris Taylor, told the Senate inquiry: “Current obligations for assessing a first home buyer’s serviceability do not account for their strong income growth potential, compared to other borrowers.
“First home buyers are assessed on their ability to repay a 30-year loan based, essentially, on their first year of income.
“Existing regulatory guidance could allow more flexibility for lenders to consider a borrower’s future income growth where it’s prudent to do so," he said.
In his conclusion, the committee chair and Liberal Senator seemingly lamented that APRA’s mandate does not take first home ownership into consideration when setting lending standards.
He concluded: “Labor does not want a more flexible system to help first home buyers enter the market.
“Labor has presided over a housing nightmare. It has done nothing creative to help first home buyers.”
With hearings having now concluded, the Senate economics references committee will now review all the evidence and create a final report, which is due by 5 December.
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