Massive policy U-turn out of Canberra with huge implications for the property market:
I’m still digesting the news that the government is over-turning the responsible lending laws. That’s now not something the banks have to deal with.
It’s pretty wild.
I mean, whatever you think of it, it seems to have come out of nowhere. Nobody was complaining about it. The banks (as much as we could see) weren’t lobbying for it.
In fact, it was recommendation 1.1 out of the Hayne Royal Commission – Keep the laws, make them work.
But nope. It’s gone.
I mean, it does seem a bit shameless – relieving the banks of a fairly reasonable obligation, 18 months after a Royal Commission recommended that you do exactly not that.
It does seem like a free kick to the banks – and the share markets last week reflected that.
And I’m starting to get the sense that Canberra is moving out of crisis management mode and into sneaking-through-anything-we-can-get-away-with mode.
Remember the Coalition fought hard against ever bringing the banks under the scrutiny of a Royal Commission – even though the RC dug up a bunch of dirt that was literally gob-smacking.
So this might be the LNPs way of saying, “Sorry you had to go through all that chaps. Here’s a little treatie for you.”
That said, the responsible lending laws were always a bit odd. The law put all the responsibility for making sure you didn’t end up with more debt on your plate than you could handle, on the banks.
So it was the banks’ job to make sure you could afford it – and to make sure that you’re expenses were reasonable and accurate, and you weren’t telling a few porkie-pies on your loan application.
That did seem to me to create a misalignment of incentives – consumers were incentivised to load up as much as they could, and if it went wrong, then they could push it on to the banks.
(In theory, though most consumers don’t have the pockets to take the banks through the courts.)
So, I’m open to the idea that we needed shared-responsibility lending obligations.
But to take it a full 180 and put all the responsibility back on the buyer?
It’s hard to see the logic of that.
At the risk of sounding paternal, I think a lot of people really have no idea how much debt they can handle over the long term. Many people don’t actually know how to calculate a percentage.
And many borrowers will be egged on by developers or builders who just want them to buy. “Sure, bro. You can totally afford this. Go for it!”
And at the same time, the banks have nothing to lose. That’s what the deposit guarantees. If you default, the bank gets your house. The only risk the bank has is if the property values falls more than the deposit, so that the final sales price doesn’t cover what’s outstanding on the mortgage.
But from a risk management perspective, that’s a pretty low bar to clear.
So we’re moving to a situation where borrowers are incentivised to load up more, and banks have no qualms about lending to them. They’re not longer on the hook for it.
That’s obviously a bullish signal for credit growth and house prices.
It could actually be substantial, especially if its coinciding with the emergent boom most analysts seem to be expecting mid next year now.
So I don’t know. I’ll keep looking into it.
For now, it’s a good day for house prices.
Probably not such a great day for democracy.