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.
The solution?
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?
JG
Brenda Phillips says
I haven’t talk with Josh B. No appointment was made.
Brenda says
I have not signed up for anything BlueSky, etc. So I do not know much about BlueSky.
I don’t have enough money to invest in Blue Sky.
Brenda says
No comment except I’m curious about what this is all about and where this is going…
Brenda says
None. Won’t talk until you do.
ERIC says
I agree with you totally. The Banking Royal Commission was a total disaster for Banks, borrowers, and property prices. Why were the banks blamed for irresponsible lending? I can’t refinance my loans because of the Haney Banking Royal Commission and the disastrous outcomes for banks and smart borrowers. Borrowing money needs to be taught to would-be borrowers. If you want to invest in Real Estate, then do the Real Estate training courses available here because these / your courses are the best. We have Dymphna Boholt (Accountant, Economist, Real Estate Expert), and Knowledge Source (Jon Giann) who provides so much help and so many real estate learning materials. This training offered here should be an absolute must for anyone who wants to borrow money, even for people buying just their own house to live in. If you don’t want to do it, then rent a property and you can’t get into trouble. There are plenty of rental houses and apartments for people to rent. The only ‘irresponsibles’ were the borrowers mostly and not much to blame the banks. Learning to borrow responsibly is just as important as ‘which house’. I recommend people to avail themselves of the many learning resources on offer here, and the costs are very reasonable and will repay themselves, perhaps in just one property purchase. I have done many property courses, and I still just keep on learning more and more and never miss out on what you have here. That is responsible lending right here – knowing what You are about to do when you want to buy a home. Thanks.
ERIC says
Hi Jon, I quote you, <>. So, here is the problem, “borrowers will misrepresent themselves” once again and will take every opportunity to do so, but the big banks will be more guarded. I owned a finance company and roughly 30% lied and misrepresented themselves, and we caught most of them out, before declining their applications. Loans gone bad? Collateralize them into Debt Obligations (CDOs) and flip them on to whatever market will buy them. No conspiracy and no space lizards, but human behaviour is predictable.
ERIC says
Sorry, I got your quote wrong Jon, but the intent is the same. Before “irresponsible lending” comes the onus of ‘responsible representation’ of one’s own financial ability to pay a loan/mortgage back. I have multiple properties that I rent to people who just want to rent and they stay years with me, and I only increase the rent little by little, and they understand why. I am proactive and I look after them, because they just want to rent. And that is a great thing, nothing wrong with that, and which justifies why some of us decide to buy investment properties. These renters are totally responsible about their finances, worries, anxieties, etc, and they don’t want to buy – they want to sleep at night and don’t understand finances/mortages which frightens them. So that is one of the reasons why I own rental properties because I solve their problems. My properties are always rented, and if they become vacant, they are soon rented out again, well presented and clean. In reality, not everyone wants to buy “the great Australian dream” and they know their limits. I know this because I talk to my tenants.