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Housing market needs stability, certainty

Opinion Piece

Date : 27 September 2019

Author: The Hon Josh Frydenberg MP

Publication: The Australian Financial Review

In the face of global economic headwinds abroad and a punishing drought at home, the fundamentals of the Australian economy remain strong. With the budget back in balance for the first time in 11 years and our AAA credit rating maintained, we are in a strong position to respond to future economic shocks.

The stabilisation we have seen in the housing market since the election is significant for both the sector and the wider economy.

Combined capital city dwelling prices rose in July 2019 for the first time in almost two years and clearance rates in the major markets of Sydney and Melbourne are above 70 per cent compared to around 50 per cent this time last year. Treasury estimates that a 10 per cent increase in house prices could result in a corresponding lift to GDP of about half a per cent.

Similarly, the RBA (Reserve Bank of Australia) has said that a 10 per cent increase in household wealth is expected to increase the level of consumer spending by up to 1.5 per cent. This matters because household consumption represents about 60 per cent of GDP. There has been a number of contributing factors to the stabilisation in the housing market, including the RBA’s combined 50 basis point rate cut and the easing of a series of macro prudential measures which were at the time designed to reduce the rapid growth in investor lending and improve the resilience of the banking system. Now, APRA’s (Australian Prudential Regulation Authority) 10 per cent cap on investor lending growth, the 30 per cent cap on interestonly loans and the 7 per cent serviceability buffer have all been lifted. With Australia’s annual population growth continuing to be strong at 1.6 per cent and the government’s record $100 billion 10-year infrastructure pipeline helping to unlock new housing supply and reduce congestion in our cities, the fundamentals of the housing sector are sound. Beyond these changes to the macroprudential settings which impact the flow of credit, the Morrison government continues to support the sector through a series of initiatives designed to boost supply and demand.

This includes the National Housing Finance and Investment Corporation through its $1 billion infrastructure facility and its role as an affordable housing bond aggregator which has already supported the delivery of an additional 560 social and affordable rental dwellings.

The First Home Super Savers Scheme which enables new home buyers to save for a deposit inside their super with more than 3,700 individuals already having accessed over $45 million of their savings.

And the soon-to-be-launched First Home Loan Deposit Scheme which will enable up to 10,000 first home buyers per year to purchase a home with a deposit as little as 5 per cent.

Applicants will be subject to eligibility criteria including having taxable incomes up to $125,000 per annum for singles and up to $200,000 for couples. The property caps, which will vary by region, will be announced by the Assistant Treasurer and will be set at an appropriate level to ensure the scheme is properly targeted.

Notwithstanding the importance of these various initiatives they are no substitute for strong and competitive credit markets. Central to achieving this is the appropriate application of responsible lending obligations.

These obligations which are designed to protect the consumer apply to the provision of consumer credit including home loans, credit cards and personal finance.

They require lenders to make reasonable enquiries about a consumer’s requirements and objectives, to take reasonable steps to verify a consumer’s financial situation and to assess whether the credit will be unsuitable for the consumer.

While these obligations were first legislated back in 2009, the shadow of the royal commission and recent litigation has given rise to uncertainty as to how they ought to be implemented in practice. To date, ASIC (Australian Securities Investment Commission) has adopted a principlesbased 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.

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. It’s in everyone’s interest that the aspirations of hard working families are not collateral damage in this regulatory process.

The values 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.

Indeed, if responsible lending laws are applied too stringently, they will also negatively impact consumer behaviour with consumers more likely to remain with their current provider than go through the red tape burden associated with looking for alternatives. Indeed, an existing borrower could save up to $850 a year in reduced interest payments by being treated as a new borrower as highlighted by the ACCC’s (Australian Competition and Consumer Commission) Residential Mortgage Price Inquiry which was released last year. With over half of Australia’s household wealth tied up in the housing market and the level of economic activity in the sector directly impacting the nation’s GDP, it’s vitally important that the housing market remains strong. This requires a stable domestic macro economic environment, supply and demand side measures which the government is implementing including those designed to help first home buyers, and a sensible balanced approach to the application of responsible lending laws so that they do not unnecessarily constrain the free flow of credit.

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