A shocking theory about what’s driving the new banking policy.
I was talking to a banking industry insider the other day about the irresponsible lending obligations, and I’ve got a bit of a conspiracy theory for you.
But first, let’s zoom out a little bit.
So I noted last week that the government has reversed the responsible lending obligations on banks, in an attempt to free up the flow of credit into the market.
While the policy details are still landing, it now seems that banks will no longer be on the hook if a borrower takes on more debt than they can handle.
That gives banks the power to take mortgage applications at face value, and to rely on spending benchmarks, rather than going through and calculating a borrower’s actual living expenses.
Now, obviously anything that gets the credit flowing more quickly is a boost for property prices.
In fact, one analyst reckons it could add $70K to the median house price in Australia.
The average buyer could expect to have an extra $70,000 to spend on a home after changes to responsible lending rules, one consumer expert says, in a move that could push up property prices.
Responsible lending laws are set to be wound back in a bid to allow banks to lend money to customers more easily, Federal Treasurer Josh Frydenberg announced last week.
Although the details of the change are not yet clear, customer expenses have been in the spotlight after banks clamped down on lending practices under scrutiny from the financial services royal commission, refusing to grant loans to borrowers who spent too much on Uber trips or takeaway.
If requirements to assess borrowers’ expenses ease, an average buyer may see a jump in their purchasing power by about $70,000, Canstar group executive of financial services Steve Mickenbecker says.
Based on an average income of about $80,000 and a 20 per cent deposit, he said a would-be buyer might have the amount they could borrow increase from $440,000 to about $510,000.
“I don’t have a crystal ball for this,” he said. “That’s a hypothetical number.
“The banks were grilled rather ferociously over their assessment of lending [during the financial services royal commission], in particular their assessment on people’s budgets.
“[They] will be likely to move some distance from that and return to formulaic thinking.”
I think that could be right. Remember when the APRA restrictions came in, prices fell about 10% over the next 18 months. So a 10% rebound is definitely within the realms of possibility.
But where is this coming from?
Remember, no one was talking about this a month ago. No one thought these changes coming.
But my mate has a theory.
He reckons that the big banks are worried about the borrowers they currently have on deferral. Remember about 20% of them are ghosting the banks – they’re not returning calls.
So the big banks are wanting to off-load these customers on to other banks, before the crap really hits the fan.
But there’s a problem. These borrowers are problematic by definition, and if a smaller lender looked too closely at their situation, they wouldn’t want to lend to them, and that would leave them stuck on the big bank’s books.
Remove the requirement to look closely at their situation.
Remove the responsible lending obligations, let these borrowers mis-represent themselves to their new lender, and bon-voyage – it’s no longer a problem for the big banks.
Maybe, these changes are purely about helping the big banks offload their worst customers onto smaller, unsuspecting banks, and preserve their profit margins.
What do you think?
We’re in the realm of conspiracy theory here, but you know, I wouldn’t put it past them.
Banking profits are banking profits, after all.
Oh, did I mention there are space lizards involved?