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Jennifer Hewett

Nothing to worry about? Maybe APRA chief should attend an auction

The housing market is sizzling, the small business market is flat. But changes to responsible lending laws won’t make as much difference as claimed.

Jennifer HewettColumnist

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Wayne Byres says it’s not obvious there’s any cause for immediate alarm when it comes to Australia’s roaring housing market and rapidly rising prices. Maybe the APRA chairman should attend an auction in disguise next weekend.

It is quite true, as bankers and regulators keep insisting, there’s no evidence yet of lax lending standards or any risks to the system’s financial stability.

Low interest rates for the indefinite future mean the cost of servicing the debt is far lower than suggested by the eye-watering amounts it’s now necessary to borrow for even a modest apartment. Cheap money is also supposed to make it more attractive for businesses to invest, while higher house prices also offer the broader economic benefit of greater consumer confidence and willingness to spend.

Bidders are turning up to auctions in Sydney rain, hail or shine. Peter Rae

But as well as being the head of the Australian Banking Association, Anna Bligh is a former Queensland premier and she understands political pain will build along with prices this year, particularly ahead of an election.

“Housing affordability always becomes a bit of a political football,” she told The Australian Financial Review Banking Summit. “People will be feeling that pressure.”

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What to do about it is far less obvious. Raising interest rates overall would clearly have all sorts of unwanted economic impacts, meaning the talk is all about a potential re-emergence of the sort of macroprudential controls and restrictions on lending that stopped the previous price surge in its tracks a few years ago.

But unlike that cycle, the current sharp price escalation is not being driven by investors but by owner-occupiers, particularly first-home buyers. Making it harder for new would-be home owners to borrow by adding restrictions and imposing lending limits hardly makes good political or financial sense.

Even the usual measures of curbing high loan-to-value ratios and high debt-to-income ratios are problematic if this merely reflects the number of first-home buyers stretching themselves to get into the market.

This naturally translates into the housing market with fears too many of another generation are being priced out of home ownership unless they can call on the Bank of Mum and Dad.

At the Summit, Westpac chief executive Peter King and the Bank of Queensland’s George Frazis insisted the problem is more the fundamental mismatch between supply and demand in the housing market and that solutions can really only come from increasing the supply. But that’s a longer-term proposition at best for what seems a much more immediate problem.

Not that this dilemma is confined to Australia. A world of very low interest rates is unleashing asset inflation globally and exacerbating wealth inequality.

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In Australia this naturally translates most pointedly into the housing market with fears too many of another generation are being priced out of home ownership unless they can call on the Bank of Mum and Dad. (For those that do use this fast-growing facility, the average level of parental contribution to help fund a deposit is now $89,000, up 20 per cent in the last 12 months ... while four in 10 Australians think they will need family support to buy a first home. Just letting you know, parents.)

Nor will the stand-off in the Senate over abolishing responsible-lending laws do much to help despite the claims from both sides of politics that change is either absolutely crucial (government) or reprehensible (Labor and Greens).

The Morrison government has been determined to overturn these laws to boost the availability of credit, especially to small business, as the economic focus quickly turned from the Hayne era of berating the banks to encouraging growth.

Clearly, a booming mortgage market demonstrates the application of existing laws on lending for housing is hardly a problem.

But while responsible-lending laws only apply to consumer credit rather than business credit, the line becomes blurred because small businesses often use their homes as security for business loans.

Particularly following the royal commission, banks became ever more apprehensive about being pinged for breaches of lending standards, with the Australian Securities and Investments Commission even taking Westpac to court over the issue (to Josh Frydenberg’s fury).

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Although the regulator eventually lost, Westpac in particular had become extremely cautious in its approach to lending over that period – evident in its dismal results in its small business lending area.

Yet King now sounds just as cautious about how much overturning responsible lending laws will do to bolster access to credit for small and medium enterprises.

“It will make a difference more in the velocity of lending than the amount of lending,” he said.

That’s because it will make the process less onerous and time-consuming, according to King. But he still insists the reason small business lending is flat is due far more to lack of demand and the timing of the cycle rather than any difficulties in getting access to credit.

“What you get is businesses build up cash, so there’s actually a lot of deposits at the moment in the system including for business deposits,” he said.

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“They draw down the deposits first before they use debt. I think we’ve still got to wait around before deposits are used up and then debt will be a feature that people will build, provided we see good confidence and a good outlook because businesses invest to grow.”

So King’s focus now is on “finessing” the bank’s ability to look forward to those growth prospects when assessing business applications rather than maintaining the focus of traditional mortgage lending which relies more on looking backwards to the customer’s record and income.

“We don’t want to lend to people that can’t pay us back,” he said. “Likewise, I think most businesses or consumers don’t want to take on debt that they can’t afford. So there’s alignment there. It’s just about how do we do it in practice.”

Call it responsible lending.

Jennifer Hewett is the National Affairs columnist. She writes a daily column on politics, business and the economy. Connect with Jennifer on Twitter. Email Jennifer at jennifer.hewett@afr.com

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