The Hon Josh Frydenberg MP
Federal Member for Kooyong
KEYNOTE ADDRESS TO THE AFG NATIONAL BROKER CONFERENCE
28 October 2019
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Good afternoon. Thank you to AFG for the opportunity to address today’s National Broker Conference.
With over half of Australia’s household wealth tied up in the housing market and economic activity in the sector directly impacting the nation’s GDP, it is vital that the housing market remains strong.
The Morrison Government also understands the importance of mortgage brokers — who account for close to 60 per cent of home loans — in supporting competition in the mortgage market and in helping borrowers to access finance.
Given that, today I’d like to focus my remarks on:
- the economic outlook and some of the messages that I heard recently at meetings in the United States;
- the current state of the property market; and
- the importance of getting the policy settings right to better align the interests of consumers and mortgage brokers.
The economic outlook is challenging but the fundamentals of the economy remain sound.
I recently returned from the annual meeting of international finance ministers and central bank governors in Washington.
The mood was serious but not panicked. The IMF highlighted the ‘synchronised downturn’ in the global economy and downgraded its global growth forecast to 3 per cent for 2019.
While global growth at 3 per cent is slower than the growth rates recently recorded, it is still reasonable.
Some countries face more challenges than others. Germany, the UK and Singapore have all recently experienced negative quarters of growth.
The trade dispute between the US and China hovers over the global economy like a dark cloud. There has been little growth in the volume of global trade this year. But the language from both the US and China on trade was more positive.
And in this environment the Australian economy continues to perform comparatively well.
The IMF forecasts our economy to grow 2.3 per cent next year — ahead of forecasts for other developed economies such as the US, Britain, Germany, France, Canada and Japan.
Our AAA credit rating has been maintained, welfare dependency is at a 30-year low, we have a current account surplus for the first time since 1975 and after 11 years the budget is back in balance.
Labour market conditions continue to be strong. The latest labour force figures show that in September, employment grew by 2.5 per cent through the year. Nearly 1.5 million jobs have been created since the election of the Coalition Government in September 2013.
The participation rate has risen and is now 66.1 per cent. In other words, more working age people remain attracted to looking for work and joining the workforce. This is a validation of the strength of our labour market and the more positive outlook held by jobseekers.
The combination of the Government’s tax relief and RBA’s interest rate cuts will provide an important and timely boost to household disposable incomes while high levels of public infrastructure spending, and a revival in the mining sector will support confidence and economic activity.
But it must be said that the drought is continuing to be a major economic and social challenge with communities doing it really tough.
In New South Wales, 95 per cent of the state is impacted by drought while in Queensland it is two-thirds. Farm GDP was down 8.3 per cent through the year to June with the drought estimated to have detracted around 0.2 percentage points from activity across the economy in 2018-19.
Better times ahead for the property market
There are also signs that the established housing market is starting to stabilise.
From 2012 to 2017, combined capital city housing prices increased by almost 50 per cent.
In Melbourne, the median house price rose from around $440,000 in 2012 to over $770,000 at its peak in early 2018.
From 2012-13 to 2017-18, following a period of subdued residential construction activity relative to population growth during the mid-to-late 2000s, dwelling investment growth picked up noticeably. It averaged above 5 per cent per year, and contributed around 0.3 percentage points on average to annual real GDP growth – significant when you consider that dwelling investment represents just under 6 per cent of the economy.
As new dwellings came on line, there was a significant increase in supply relative to the pace of population growth. This is likely to have contributed to housing price falls, which started from late 2017.
Following price declines, new residential building approvals also started to trend down with approvals in August 2019 at their lowest level in six and a half years.
Encouragingly, the housing market and economy more broadly was able to manage the gradual decline in house prices without triggering a more significant slowdown or economic shock and today, prices are still around 35 per cent higher than in 2012.
Notwithstanding, dwelling investment is forecast in the 2019-20 Budget to fall by 7 per cent in 2019-20 and by a further 4 per cent in 2020-21, as existing projects are completed and recent weakness in building approvals flows through to activity.
More recently, after falling since late 2017, combined capital city dwelling prices rose in July for the first time in almost two years and national auction clearance rates have also returned back to their early 2017 levels, now tracking at above 70 per cent compared to around 50 per cent this time last year.
In recent months, the improvement in sales volumes is also reflected in increased lending activity.
In trend terms, after declining for 15 consecutive months, the total value of housing finance commitments has risen since April 2019, reflecting growth in both owner-occupier and investor finance.
An encouraging feature of the turnaround in lending has been the lift in the share of loans for first home buyers. These account for nearly a third of total owner-occupier loans, up from around 20 per cent in mid-2017.
This stabilisation in the housing sector has occurred against the backdrop of the Federal Election, a continuation of strong jobs growth, the passage through the Parliament of the largest tax cuts in more than twenty years and recent interest rate cuts by the Reserve Bank.
Noting that it typically takes around one to two years for the full effect of changes in monetary policy to flow through the economy, we should expect the recent interest rate cuts by the Reserve Bank to continue to support demand for housing.
Better understanding pricing of mortgage products
As you know, the Government directed the ACCC to undertake an inquiry into the pricing of residential mortgage products.
The inquiry will ensure the pricing practices of Australia’s financial institutions are better understood and made more transparent.
The inquiry supports the Government’s commitment to promoting competition and good consumer outcomes in the residential mortgage market and follows a number of reforms to increase competition across the banking sector, including:
- Passing legislation relating to the Consumer Data Right which empowers consumers to seek out banking products better suited to their needs;
- Allowing APRA to streamline the creation of new banks which has resulted in five new banks being established in the last two years; and
- Providing co-operative and mutual banks more flexibility to access capital to enable them to compete more effectively with larger banks.
First Home Buyers
Assisting more first home buyers into the market has been and remains a key area of focus.
Under our First Home Super Saver Scheme which allows potential new buyers to save for a deposit on their first home inside their super, more than 4,000 individuals have already accessed it to help buy their first home.
Building on that Scheme, earlier this month, Parliament passed legislation to implement the First Home Loan Deposit Scheme.
For many, saving a deposit has become a more significant barrier to entering the housing market than the ability to service a home loan. It can now take ten years for the average first home buyer to save a 20 per cent deposit.
The First Home Loan Deposit Scheme will commence at the start of 2020 and provide up to 10,000 guarantees for first home buyers, per year, to purchase a home with a deposit of as little as 5 per cent, allowing them to get into the market earlier.
Applicants will be subject to eligibility criteria, including having taxable incomes up to $125,000 per annum for singles and up to $200,000 per annum for couples.
Importantly, the Scheme is designed to complement the First Home Buyer Super Saver Scheme as well as other state based Schemes to help more Australians get their foot on the first rung of the housing ladder.
The Scheme will be available nationally, with property price caps varying by region, to reflect Australia’s housing market. The price caps are being set at an appropriate level to ensure that the Scheme is properly targeted.
Lenders Mortgage Insurance (LMI) will still be an important option for many first home buyers and the Scheme will be designed to complement the LMI market – not to replace it.
Aligning the interests of consumers and mortgage brokers
With mortgage brokers being an important competitive dynamic in the market another objective of the Government is to better align the interests of consumers and brokers.
ASIC’s 2017 review of mortgage brokers recognised that brokers were ‘exerting downward pressure on home loan pricing, by forcing lenders to compete more strongly’.
Brokers also provide a valuable channel for lenders to access customers — especially smaller lenders who don’t have their own distribution or branch network.
The Productivity Commission found that if broker services were not available, smaller lenders would need to have an extensive branch network to maintain their market shares.
The Productivity Commission also reported that consumers use brokers to:
- gain access to a wider range of loans
- get a better interest rate
- get help on processes, and
- increase their chance of getting an application approved.
Indeed, three in ten mortgages arranged by brokers are for customers in regional and rural areas.
What these findings demonstrate is why the Government is committed to the continued success of the sector, and why we have carefully considered our response to the Royal Commission insofar as it impacts on the sector.
Responding to the Royal Commission
As you know, the Royal Commission shone a spotlight on the extent of wrongdoing and misconduct across the financial system. No part of the financial sector was immune — including mortgage broking —with Commission Hayne making a number of specific recommendations.
We have carefully considered each of these recommendations against the implications for consumers and competition and decided to hold a review in three years’ time about upfront and trailing commissions.
That review will be conducted by the Council of Financial Regulators, whose members are the Australian Prudential Regulation Authority (APRA), the Australian Securities and
Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia, along with the ACCC.
This review will follow the introduction of a number of new measures that the Government has already announced including: the best interests duty; a new requirement that the value of upfront commissions be linked to the amount drawn‑down by borrowers; a ban on campaign and volume-based commissions; as well as a two year limit on claw-back, starting from 1 July 2020.
It will examine the impact of these reforms and the implications for consumer outcomes and competition of moving to a borrower pays remuneration structure and away from commissions paid by lenders for mortgage broking.
Best interests duty
Before concluding my remarks, I want to say a few words about the best interests duty and the remuneration reforms that the Government is implementing.
Like every other financial service, mortgage broking relies on consumers being prepared to place their trust in you.
Our collective goal should be to ensure that the introduction of a best interests duty serves as an important signal to consumers that gives them even more confidence to engage with your sector to seek out a mortgage broker to assist them with their borrowing or refinancing needs.
It is, of course, important that we get the duty right. It should not impose an unreasonable compliance burden nor lead to a tick-a-box approach.
The duty will also need to be able to be applied in the context of responsible lending obligations without further restricting the availability of credit.
For all these reasons, from 26 August to 4 October, we held a public consultation on draft legislation requiring mortgage brokers to act in the best interests of consumers and reforming mortgage broker remuneration.
Treasury also undertook further stakeholder consultation in the form of roundtables. This was an important part of the legislative process, and gave stakeholders an opportunity to better understand the legislation and put their views forward.
Treasury received written submissions from a range of stakeholders, including mortgage brokers, aggregators, lenders, industry bodies and consumer advocacy groups.
Overall, the submissions confirmed that stakeholders generally approve of the policy intent within the draft legislation.
A number of the issues raised related to technicalities around the functioning of specific provisions.
The Government has listened carefully and taken on board this feedback.
For example, some stakeholders voiced concern that the 90-day cap for determining the maximum drawdown amount on which commissions can be paid on home loans was too short.
As a result, this cap will be extended to 365 days, allowing brokers to be more fairly remunerated for the funds they arrange for the consumer.
Some stakeholders argued for more clarity in the law around how to comply with the best interests duty.
In my view, though, a principles-based approach is fundamental to improving consumer outcomes and is in the interests of mortgage brokers as well.
Of course the industry should work with ASIC in how it believes it should comply with this duty and take appropriate feedback. But it is for the industry to take the lead on how brokers will demonstrate they have acted in the best interest of their customers. Now is the time for leadership and I strongly encourage organisations such as AFG to be working closely with their brokers to develop guidance on how they will satisfy the duty.
Legislation will be introduced into the Parliament later this year and the reforms will come into force on 1 July 2020 so this work can be happening now.
We do know that many brokers always put their customers first and so already act in the best interests of consumers.
So this should not be seen as simply a compliance burden for mortgage brokers, but instead an opportunity to make explicit what best-practice for mortgage brokers already is.
The Morrison Government’s plan is for a strong economy as we secure a better future for all Australians.
And, as outlined today, despite headwinds both globally and domestically, the Australian economy is continuing to grow.
The housing market is showing signs of stabilisation and our practical policy approach continues to support community housing, improved housing data and first home buyers.
We are taking action on all of Commissioner Hayne’s recommendations and we are taking a principled approach to better align the interests of consumers and mortgage brokers.
Thank you for the opportunity to talk about each of these important areas.