Consumer
Lending in Australia
EXECUTIVE SUMMARY
Consumer credit dips in 2010
Whilst Australia’s economy continues
to perform in a resilient manner, gross consumer lending experienced negative
growth in 2010 as interest rates rose and the impact of Government stimulus
packages subsided. Such negative growth was contained within demand for
mortgages, however, due to the termination of one of the most important
components of the stimulus package, the First Home Owners Grant, which was
targeted specifically at new mortgage holders. All forms of consumer credit
experienced strengthening growth as demand for credit returned and lenders
returned to the market.
Mortgage lending supported by
Government stimulus package
Similar to other Governments around
the world, 2009 saw the Australian Government introduce a stimulus package in
order to stimulate consumption in the aftermath of the global financial crisis.
One especially popular measure was the extension to the first home owners
grant, through which A$14,000 was offered to first home buyers, with A$21,000
on offer for a newly constructed house. There was a subsequent rush towards
first home ownership in Australia, which provided the demand necessary to
prevent housing prices falling, and thereby avoid mortgage lending from sliding
into an abyss. The decision by the Reserve Bank of Australia (RBA) to lower
interest rates to their lowest levels since the 1950s was also a significant
driver of growth during 2009.
CBA and Westpac focus on mortgages
With the Australian Government
providing much support to mortgage lenders, and with Australia’s ‘big four’
banks amongst the best performing and most secure in the world, two of these
banks, Westpac and the Commonwealth Bank Of Australia, made a concerted effort
to gain as large a slice of the mortgage lending pie as they could in 2009/10.
Both lenders significantly increased their respective value shares in the
process, squeezing out many smaller players which did not have the same easy
access to credit. By the end of 2009, the ‘big four’ banks constituted three
quarters of mortgage lending value, at which point they collectively changed
tack again and focused on cross-selling and increasing their competition in
other forms of consumer lending.
Education lending continues to soar
Education lending, facilitated by
the Australian Government’s HECS and FEE-HELP schemes, continues to experience
strong growth as competition for jobs is encouraging Australians to continue
educating themselves, not only when they are young, but throughout their lives.
The removal in 2009 of full-fee paying courses from undergraduate programmes
for domestic students means that there is little choice for these local
students but to take out a HECS loan, creating further upward pressure on
education lending growth.
Australia’s economic resilience set
to attract more competition
The resilience of the Australian
economy, with interest rates significantly higher than elsewhere in the
developed world, is set to make Australia a particularly attractive consumer
lending market in which to compete over the forecast period, particularly given
the domination of the ‘big four’ major banks in 2010, which serves to provide
plentiful opportunities to attract niche consumers that are not being catered
to by the ‘big four’.
KEY TRENDS AND DEVELOPMENTS
Australia escapes the worst effects of the global economic recession
2008
and 2009 were a shaky couple of years for the Australian economy, and with a
sovereign debt crisis emerging in Europe, 2010 is also likely to be a
challenging year. Despite this potential fetter on any otherwise positive
economic forecast, Australia has largely left the global financial crisis
behind, having been one of only a handful of nations not to experience a
full-blown recession between 2008 and 2010. The fallout from the global
economic crisis was limited to just an economic slowdown in Australia, with
unemployment rates rising by far less than what was initially feared, up from
4.1% in April 2008 to 5.7% in August 2009. By the second half of 2009, interest
rates had even begun to rise again as the Reserve Bank of Australia endeavoured
to stop the economy from growing too rapidly, which would have had the effect
of creating inflationary pressure. From September 2009, when interest rates were
3%, the lowest rates since the 1950s, they rose again to 4.5% by April 2010.
That interest rates rose at such a rapid pace showed the concern that the RBA
had that the Australian economy was in danger of overheating.
Much
of the reason for Australia’s relatively strong performance compared to rest of
the developed world is due to continued economic growth in China and the
concomitant Chinese demand for Australia’s abundant natural resources. Natural
resources thus led the Australian economy out of the recession, virtually
guaranteeing that the economy will remain safe from all but the most extreme
shocks over the forecast period.
The
most important factor in preventing the Australian economy from spiralling into
recession was, however, the strength of the Australian Government’s stimulus
package, most notably the stimulus payments of A$900 to each Australian worker,
much of which was used to pay off debts, most notably credit card debt.
Furthermore, Australian consumers also benefited from the government deposit
guarantee and the temporary enhancement of the first home owners grant.
Current Impact
Despite
the economic slowdown which resulted from the global financial crisis, mortgage
lending experienced a minor boom in 2009 due to a combination of low interest
rates and an enhanced first home owners grant. The first home owners grant
entailed the payment of A$14,000 by the Australian Government to first home
buyers purchasing an existing home, and A$21,000 to first home buyers
purchasing a newly constructed home. The difference in the amount of money
available under the grant scheme was introduced in the hope that this would
generate additional supply in Australia’s housing stock. This measure, part of
the Australian Government’s stimulus package, only took place over the first
nine months of 2009, and gave a much needed boost to mortgage lending over that
period. Record low interest rates also encouraged borrowers to refinance their
loans in order to take advantage of these attractive rates, with many Australians
going as far as negotiating a new mortgage at a fixed rate. This put further
upward pressure on the value of mortgage lending in Australia.
The
rise in interest rates which coincided with the easing off of the first home
owners grant had a strong and sudden impact on mortgage lending, which had
previously experienced impressive growth rates of 17% in 2009. Without the
support of these stimulatory policies, mortgage lending crumbled as total value
declined by 9% in 2010.
Whilst
the combination of the first home owners grant and record low interest rates
combined were potent enough to stimulate mortgage lending, they were rendered
even more influential through the dedication of two of Australia’s ‘big four’
banks, Westpac and the Commonwealth Bank, to secure as much of this increase in
mortgage lending as possible. The eagerness with which the ‘big four’ banks
competed for mortgage customers during the mortgage boom created by the first
home owners grant led to Australia being one of few countries in the world
where credit requirements for mortgages were actually relaxed during the
economic slowdown following from the global financial crisis.
With
Westpac and the Commonwealth Bank concentrating on the more profitable mortgage
lending, other forms of consumer lending were more or less ignored by
comparison. This was part of the reason for the declines registered in durables
lending in 2008 and 2009, although another reason for this decline was the drop
in consumer confidence which occurred in Australia, according to such polls as
the Roy Morgan Poll, meaning that Australian consumers did not feel fully
confident that they would be able to afford to accumulate additional debt.
Since
the withdrawal of the first home owners grant, not only first home buyers but
owner-occupiers in general, have been increasingly absent from the market,
whilst foreign investors, hoping to benefit from rising property prices, have
infiltrated the Australian real property market and are part of the reason for
rising property prices, further discouraging many Australians from entering the
housing market.
Outlook
With
the global economy still at risk of entering another crisis due to the several
sovereign debt crises currently ongoing in Europe, interest rates in Australia
are expected to rise only slowly over the forecast period. The political need
of the Australian Labor Government, pressured by the Liberal opposition to pay
down Australia’s budget deficit, is set to limit the Government’s scope to use
fiscal policy to stimulate the economy. The current intention of the Government
is to hold back on expenditure and raise taxes in order to bring the budget
back into surplus, meaning that the remainder of the recovery will be slow and
long. This shall ensure that interest rates will rise slowly, thereby
encouraging growth in mortgage lending, not only in new mortgages but also in
the refinancing of old mortgages, as ongoing financial difficulties will lead
many borrowers to refinance their mortgage loans. It may also mean, however,
that if the global economy does suffer a double-dip recession and fall into
another economic crisis, that the Government will feel less inclined to prop
the economy up through the application of stimulus packages.
Australia’s
economic performance will therefore continue to be reliant upon the continued
growth of the Chinese economy and the voracious Chinese appetite for
Australia’s natural resources. Thus, there are also concerns that Australia’s
economic recovery might be excessively rapid and inflationary. Certainly, this
is the concern of the RBA, which consequently raised interest rates from 3% to
4.5% over the course of just over six months between September 2009 and April
2010. This rapid rise in interest rates is unlikely to characterise the
forecast period however, with interest rates more likely to rise only
gradually. This will encourage consumers to borrow more, particularly as the
‘big four’ banks, after grabbing the lion’s share of mortgage lending in 2009,
begin to engage in cross-selling activities in order to widen the popularity of
other consumer credit products.
Future Impact
With
the possibility that contagion from the Greek sovereign debt crisis will also
lead Australia into an extended economic slowdown, the eagerness with which
both Westpac and the Commonwealth Bank went after the 2009 boom in mortgage
loans generated by the first home owners grant may come back to haunt them.
These loans were often granted to borrowers that, without the grant, would not
have been able to afford the deposit for a mortgage. Many of these borrowers
were subject to high loan to valuation ratios (LVR), often over 90%. If the
economic slowdown extends into the long term, Australia may experience its own
version of a sub-prime mortgage crisis, with a consequent rise in non-performing
loans. This is, however, a worst-case scenario, and for the majority of
mortgages, the effect of the first home owners grant on the applicants’ ability
to obtain credit was not taken into consideration when assessing the
applicants’ ability to repay their mortgage, and was instead used to pay the
stamp duty. Furthermore, no rise in non-performing loans has eventuated so far,
although it is early days yet, and most concerns in relation to late payment
have instead been experienced in commercial property rather than residential
property.
One
phenomenon which is unlikely to return within the short-term future is the
popularity of ‘no-doc’ and ‘lo-doc loans’, which offer the self-employed and
others without the necessary paperwork to obtain a mortgage under less
favourable terms. This is not only due to the caution engendered by the fact
that ‘no-doc’ and ‘lo-doc’ loans played a key role in triggering the global
financial crisis, but also due to the fact that the ‘big four’ are holding back
from mortgage lending and consumer credit in general, thus opening the market
up to relatively easy competition from smaller players without the need for a
race to the bottom in terms of which bank can offer the least resistance to
issuing loans. Despite this, the LVRs of smaller players will likely be
noticeably, although not dramatically, lower that the ‘big four’ as smaller
players attempt to claw back the value share that they lost to the ‘big four’
during the global financial crisis.
Big banks get even bigger
With
the Australian Government offering enhanced first home owners grants as a key
part of its stimulus package in 2009, an irresistible opportunity was created
for Australia’s banks, particularly in an environment in which their other
major product, business loans, was suffering from a lack of demand due to low
business confidence. With demand for business loans in retreat, the ‘big four’
became attracted to mortgage lending, which proved to be far more resilient due
not only to the first home owners grant, but also to the lowest interest rates
since the 1950s.
Two
of the ‘big four’ were particularly aggressive in competing for mortgage
customers. Westpac and the Commonwealth Bank competed so aggressively that they
attracted a level of business that they were not able to deal with effectively,
creating a major backlog of mortgages for each lender to process. One reason
behind this was the extensive branch networks of Westpac and Commonwealth Bank,
the two largest banks in Australia, thus enabling them to service mortgage
applications more readily, whilst also aggressively making extensive use of
mortgage brokers.
One
of the reasons for the dominance of the ‘big four’ banks in consumer lending,
particularly in mortgage lending which makes up the bulk of non-card lending,
was the Government Guarantee Scheme which the Australian Government introduced
during the depths of the global financial crisis. Under this scheme, the
Government guaranteed any deposits in Australia’s financial institutions, with
the fee required to join being determined by the credit rating of the
institution. Since Australia’s ‘big four’ were amongst only a handful of banks
worldwide to survive the global financial crisis with their AA credit ratings
intact, access to the Government Guarantee Scheme was a simple and inexpensive
process for many Australians.
Credit
unions typically had a lower credit rating than the major banks and it was
therefore difficult for them to gain access to this guarantee. As a result of
this, many consumers concerned that their financial institution might fail
decided to take their savings elsewhere. Since the majority of the funds
deposited in credit unions are sourced from the savings of members, this flight
towards the larger banks put credit unions at a significant disadvantage in
relation to offering competitive interest rates to borrowers. A similar effect
was also experienced by smaller banks, which likewise lost both depositors and
borrowers and consequently were effectively forced to sit the global financial
crisis out.
Current Impact
It
hasn’t only been the credit unions, the presence of which is largely limited to
the state of Queensland, that have seen their value share diminish, but also
wholesale lenders, foreign banks, and smaller players in general, each of which
had previously benefited from the growing popularity of mortgage brokers in
Australia. During the global financial crisis, however, Australian consumers
were increasingly attracted to the security offered by the ‘big four’, meaning
that the decision to obtain credit was simplified, and the role of mortgage
brokers therefore faded.
Foreign
banks suffered particularly badly, since mortgage brokers were able to offer
the promotion and distribution of their mortgage products, something that, due
to their lack of a branch network, they were unable to accomplish themselves.
During the global financial crisis, foreign banks, tied to their often badly
performing headquarters in their home country, found it impossible to compete
with the cheaper funds capable of being accessed by the ‘big four’ due to the
AA credit rating enjoyed by Australia’s four major banks. Foreign banks were,
therefore, also forced to sit the global financial crisis out.
The
slowdown seen in the growth of mortgage brokers in Australia was due equally as
much to a plateau being reached in the growth of mortgage brokers following a
decade of increasing influence and popularity. Immediately prior to the advent
of the global financial crisis, mortgage brokers were responsible for some 50%
of all mortgages in Australia. However, as the market became concentrated due
to the Commonwealth Bank acquiring BankWest and Westpac’s acquisition of St
George Bank, Australian consumers were attracted to the security offered by the
‘big four’. This clear advantage enjoyed by the ‘big four’ simplified
purchasing decisions, significantly reducing the role of mortgage brokers.
Much
of the dominance of the ‘big four’ is due to the activities of only two of the
banks, the Commonwealth Bank and Westpac and the eagerness of these two players
to grab the largest possible slice of the Government’s first home owners grant.
With Westpac CEO Gail Kelly describe this combination of circumstances as a
‘once in a decade event’, the flurry of activity experienced during 2009 is
unlikely to be extended into the long term, and in fact both Westpac and the
Commonwealth Bank are now significantly holding back from further lending. The
remaining two of the ‘big four’, ANZ and National Australia Bank, each
considered the decision to target first home owners to be unwise since they
considered the borrowers, who without the first home owners grant would be
unable to afford to achieve the necessary deposit, to be an excessively high
credit risk.
Outlook
This
rush towards the ‘big four’ banks happened suddenly in late 2008, stabilised in
2009, and has already begun to fade in 2010, as both the Commonwealth Bank and
Westpac decide to step back from mortgage lending and consolidate the gains
they had made during the mortgage lending gold rush. At the same time, both
banks are expected to refocus their sights on the business community, which is
rediscovering its appetite for credit after having engaged with caution during
the economic slowdown. It is in business lending, therefore, that the new
financial lending battle will be fought in Australia during the forecast
period.
The
demand for credit among consumers is not likely to fade, however, and with the
Commonwealth Bank and Westpac holding back, there will be significant excess
demand up for grabs for smaller players. Over 2008 and 2009, the ‘big four’
banks hit new highs, while their smaller competitors sunk to new lows. This is,
of course, only temporary, and as mortgage brokers, credit unions and the
smaller banks fight back to regain their lost value shares, another period of
product innovation is likely to occur. Although some of this product innovation
prior to the onset of the global financial crisis was through a loosening of
credit requirements and an increase in the number of low-doc and no-doc loans,
which although far from reaching the level of popularity enjoyed by these
products in the United States, had reached 12% of mortgages in 2006, according
to figures from the Australian Bureau of Statistics, it will surely be a long
time before such a relaxation of lending criteria occurs again. Some of this
competition will come from credit unions, which will be able to offer lower
interest rates since most of their funds come from their members, and this
low-interest strategy is already being pursued actively.
Competition
to the ‘big four’ is also expected to come from foreign banks, which are
expected to make a huge comeback in Australia, attracted by the country’s
relative stability and the positive growth experienced during the global
financial crisis, which suggest a high likelihood of further growth during the
forecast period.
The
dominance of Australia’s ‘big four’ in consumer lending is largely an
aberration, caused by the Australian Government’s deposit guarantee scheme, and
with the economy recovering, the natural balance is also expected to return.
There will still be factors holding smaller players back, most notably limited
access to affordable funds for lending to borrowers, which is largely the
result of the continuing economic woe being experienced in Europe.
Future Impact
After
their aggressive efforts to capture the boom in mortgages created by the first
home owners grant, the Commonwealth Bank and Westpac have each exhausted their
lending funds and are now intent on pulling back their mortgage lending in the
short term. Westpac has even gone as far as to raise its interest rates
significantly higher than the RBA cash rate, rising to 45 basis points compared
to the RBA’s 25, in order to counter the growing demand for its consumer credit
products. The Commonwealth Bank followed a similar, although not as extreme,
strategy, raising its interest rates by 37 basis points. The ‘big four’ have
all been able to achieve this simply due to the lack of competition that they
face, as demonstrated by the remarkable statistic that there was a point in
2009 when over three quarters of mortgages in Australia were being funded
through only two banks. It is this retreat from mortgage lending by the ‘big
four’ banks that is behind the fall in mortgage lending experienced in
Australia during 2010 as much as any decline on the demand side. Requiring
lower loan to value ratios is another means by which the ‘big four’ are
withdrawing slightly from mortgage lending, leaving in their wake a glut of unsatisfied
demand for mortgages which is now open for the smaller players to meet.
Westpac,
for one, plans to replace this aggressive competition for mortgages with a
strategy of cross-selling additional banking products to its existing
consumers, most of whom the bank attracted during 2009. Westpac hopes that this
strategy will enable it to build up its value share in consumer lending
overall. In short, after pushing for growth in its value share in 2009, a
strategy that proved very successful, it is time for both Westpac and the
Commonwealth Bank to haul in the sails and consolidate on the gains made during
the boom times.
Simply
filling the void left by the ‘big four’ will not be sufficient for smaller
players to excel in terms of growth in consumer lending over the forecast
period. Differentiation strategies will also be required, as well as product
development. Such product developments in mortgage lending include capped rate
loans, which is a loan that is variable but has a ceiling above which the interest
rate cannot rise. Capped rate loans are currently being offered by BankWest.
Meanwhile, ING Direct, the fifth largest mortgage provider in Australia, and
the largest outside of the ‘big four’, is developing and pushing its online
channel, and therefore competing on convenience. This is likely to remain a
niche offering in Australia during the forecast period, since it will be a long
time before Australian consumers feel comfortable enough to make a decision as
important and potentially life-changing as taking out a mortgage over the
internet. The offering of smaller loans online will be required initially in
order to wean consumers onto the concept of online mortgage applications.
With
the ‘big four’ banks holding back in terms of competitiveness in mortgage
lending in the wake of their aggressive grab of by far the greater slice of
mortgage lending during 2008/09, mortgage lending is now open for credit
unions, wholesale lenders and mortgage brokers to move in. Mortgage brokers
will become increasingly necessary in an environment in which the ‘big four’
are reducing their presence, at least temporarily, and where new regulations
are likely to make the ‘big four’ less competitive, particularly in terms of
interest rates, in the longer term.
House prices in Australia increase
Over
the past decade, with the exception of a short period in 2008, housing prices
have relentlessly risen across Australia, far faster than have the average
Australian income. Even while the rest of world was witnessing falls in house
prices, average house prices in Sydney rose from A$510,000 at the beginning of
2009 to A$560,000. The figures from Melbourne told a similar story, as average
prices were up from A$420,000 to A$480,000 over the course of 2009. As a
result, any consumer who wishes to engage in the ‘great Australian dream’ of
owning their own home has little choice but to borrow, although even the
deposit is becoming increasingly difficult to afford for the average
Australian.
There
are several reasons for this continued appreciation in house prices, which lie
in direct opposition to the prevailing trends in other developed countries
around the world. The key factor, however, is that the supply of housing in
Australia is simply not keeping up with demand. The Australian population
increased by 225,000 in 2009, which is a rate of increase significantly higher
than the growth in the number of new houses, which was up by only 180,000. To
make matters worse, the growth rate in the number of houses is on a downward
trend, and this was evident even before the Global Financial Crisis led to
tightened credit. Although this was briefly countered by the stimulus packages
introduced by the Australian Government, particularly the First Home Owners
Grant, this underlying downward trend returned as soon as the packages were
phased out.
Even
these figures make the growth in the supply of housing seem brighter than it
really is, as not all ‘new houses’ are actually ‘new’ in the sense that they
are adding to the volume of Australia’s housing stock. Instead, they are
replacing older houses which are being demolished to make way for new housing
stock.
It
is notable that up until 1998, the majority of mortgages in Australia were for
new houses, mostly on the outskirts of Australia’s major cities, but that since
then borrowers are predominately buying existing houses, a fact that has
contributed significantly to the slowing down in the growth of the supply of
new housing. This trend peaked in 2006, when new housing only made up 19% of
the volume of mortgages, a figure which has begun to edge up again, rising to
29% in 2009, according to the Australian Bureau of Statistics.
A
final factor which has contributed to the pushing up of house prices was a
change in the Australian Government’s policy in regards to the relaxation of
foreign ownership laws which occurred in 2009. This led to a rush of foreign
property investors entering Australia, providing stiff competition to existing
domestic property investors. Much of this investment has come from China, where
the Chinese Government has passed legislation to prevent speculative property
investing there, so that such speculative investors have shifted their
attention offshore, including to Australia. As the termination of the enhanced
first home owners grants scheme and the subsequent return of interest rates to
more natural levels led to significantly lower numbers of owner-occupiers in
Australia, these investors have stepped in somewhat to fill the void.
In
addition to demand for housing, the result of solid population growth, far
outstripping supply, there is another more positive reason for Australia’s
steadily growing housing prices. The trend towards improved standards of
living, combined with relatively low interest rates, has led to Australians
buying progressively larger and better quality homes.
Current Impact
One
welcome impact of the first home owners grant was the additional grant on offer
to borrowers intending to use the funds to buy a newly constructed home as
opposed to an existing house, thereby encouraging the additional supply of
housing stock and so reducing the pressure on Australia’s limited housing
stock. This policy appears to have worked, although the impact was minor when
the sheer scale of the overall supply shortage in housing is taken into
account. These rises in house prices have not served to discourage Australians
from obtaining homes of their own, and were instead the main factor fuelling
growth in mortgage lending over the review period, particularly as higher
housing prices have made the category increasingly attractive to lenders.
With
housing affordability falling during the 2000s, Australians have increasingly
demanded higher and higher loan to value ratios (LVR) of 90% and over, which
lenders, pressured by the competitive environment, have offered. Such higher
LVRs were an additional factor generating growth in mortgage lending up until
2008, as a greater proportion of a property’s value was covered by the
mortgage. This all changed in the wake of the global financial crisis, however,
with lower LVRs being the norm in 2009, suppressing the value in mortgage
lending. However, mortgage lending still managed to increase by 17% in gross
lending terms, although lower LVRs were also partially responsible for the 11%
decline registered in mortgage lending in 2010.
Outlook
The
Australian housing market, on which mortgage lending is obviously reliant,
varies according to three factors: consumer confidence, interest rates and
population growth.
The
degree of consumer confidence in Australia is currently reliant upon conditions
in the Australian economy in general as well as the extent to which the global
economy will be affected by severe economic problems within the European Union,
especially Greece, but also in Portugal and Ireland, and if so, whether
Australia’s economy can be protected from the fallout of these sovereign debt
crises by its growing economic ties with China. Any slowdown in the Australian
economy will in fact be of benefit to consumer lending players, as long as
unemployment rates remain low, as it will reduce the extent to which the RBA
perceives the need to raise interest rates, thereby encouraging consumers to
take out mortgage loans or other forms of consumer finance.
Public
debate has been rampant throughout Australia in 2010 as to what extent the
country’s population should be allowed to rise. This debate comes from
predictions of a massive rise in the country’s population to 35 million by
2050, an increase of some 75% on the current population. Unless the housing supply
expands dramatically in the meantime, which given that this is four decades
away, one would hope it would, shall only serve to place further pressure on
housing prices. The result will be further changes to the way in which the
Australian population lives. In terms of number of people per household, for
example, the average household size is rising, partially due to young adults
being unable to afford to make the move to leave home. Previous generations of
Australians from the 1970s onwards left the parental home as soon as they
could, and whilst this is still largely the case, the ability of young people
to move out of home is increasingly being undermined by the lack of affordable
housing. Low interest rates during the global financial crisis did lead to
improvements in housing affordability, and whilst such improvements will
inevitably fade, this is set occur slowly, with many Australians set to take
advantage of the currently more favourable housing affordability over the
forecast period.
With
the first home owners grant now a thing of the past, and owner-occupiers
therefore conspicuous by their absence from mortgage lending, it is hoped that
property investors will step in to fill the void created by the retreat of
owner-occupiers and maintain hosing prices, as they enter the market before
prices rise solidly again.
Future Impact
Rising
housing prices will be the major factor fuelling growth in gross mortgage
lending, thereby guaranteeing strong growth rates over the forecast period as
gross lending is set to increase by 5% in constant value, which is quite high
for such a mature category. There are also concerns in Australia about how high
housing prices, and therefore the amounts loaned out on mortgages, can
reasonably rise. Another major concern is that the growing difficulty faced by
borrowers may force loan to value ratios up again, following the dip
experienced in the aftermath of the global financial crisis, as prospective
mortgage borrowers may otherwise not be able to afford even the deposit. Lenders
will therefore need to engage some discipline in not raising their LVRs to
unsustainable levels. However, the National Consumer Credit Protection Act
2009, which puts the onus on lenders to determine the creditworthiness of
prospective borrowers, is likely to limit the damage that could potentially be
created by this trend. As LVRs rise, mortgages will also rise to represent
close to the entire value of the housing industry in Australia.
Taking
the abovementioned factors into account as well as the resilience of the
Australian economy and the fact that mortgage lending remained dominated in
2010 by the ‘big four’ banks, or more precisely, Westpac and the Commonwealth
Bank, mortgage lending in Australia has now become attractive to lenders. An
influx of competition is therefore anticipated over the forecast period.
Government regulates lending players
One
reason that Australia did not experience a full-blown credit crunch during the
global economic recession was that, as housing affordability was low, less
affluent consumers could not afford to enter the housing market. Instead, the
main participants in the housing market were investors and middle-aged home
owners who wanted to upgrade their homes, and as such their ability to pay back
the mortgage was relatively assured.
The
other was that Australia’s lenders were mostly remarkably prudent in relation
to their lending practices, and although there was a gradual relaxing of credit
requirements in Australia during the economic recession, the practices of Australian
lenders were still several years behind the ‘sub-prime’ tactics which were
being employed in the US and elsewhere. As a result, both the ‘big four’ banks,
and the Australian Government are questioning the need for Australia to
introduce legislation similar to that which has been enacted in other G20
nations in order to prevent the global financial crisis from reoccurring.
Although
not part of these global efforts to regulate the consumer lending market, 2009
saw the Australian Government introduce the National Consumer Credit Protection
Act 2009, which covers not only mortgages but credit cards and consumer credit
more generally. This legislation places the onus squarely upon mortgage brokers
and lenders, including banks, credit unions and wholesale lenders, in order to
ensure that they are selling their consumer credit products only to those who
have capacity to repay, and thus avoid a sub-prime lending crisis such as the
one in the US that triggered the global financial crisis. The 2009 Act also requires
the issuing of licences through the Australian Securities and Investment
Commission (ASIC), which is also responsible for enforcing the 2009 Act.
Current brokers and lenders were issued with licences between April and June
2010, with the necessity to more closely assess borrowers starting from 1 Jul
2010. Although there has been some concern that this legislation will require
infringements of privacy in order to operate effectively, lenders are now
required to take such measures as examining credit card records in order to
uncover risky behaviour such as gambling on credit.
Current Impact
The
prudent behaviour of Australian banks is believed to be the result of the ‘four
pillars’ policy which has been followed by successive Australian Governments
since the 1980s. The ‘four pillars’ policy dictates that none of the ‘big four’
banks are allowed to acquire shares in each other. This policy serves to ease
the level of competition felt, not only by the ‘big four’, but also by other,
smaller players as well, preventing any of them from engaging in risky lending
behaviour.
Another
reason for the prudence exhibited by Australia’s banks is Australia’s
superannuation system, which leads to many Australians putting their savings
into their superannuation fund instead of depositing surplus funds into a
savings account. This means that Australian banks have traditionally needed to
look overseas for funds.
The
gradual loosening of credit requirements prior to the global financial crisis
was prompted by so-called ‘fringe lenders’, which provided loans to consumers
with doubtful ability to pay back the loan. It is these lenders that the
National Consumer Credit Protection Act 2009 is aimed at. Following some
concern at the effect of the 2009 Act on retailing by major retailers of
consumer durables such as Harvey Norman and Good Guys, which were providing
loans on such favourable terms such as ‘four years interest free’ for products
sold in their own outlets, these retailers were made exempt for the first year
of the legislation.
Outlook
In
the aftermath of the global financial crisis, there has been strong momentum
toward regulating consumer lending around the world. Much of this comes from a
desire within the US and Europe to prevent a repeat of the global financial
crisis, and perhaps also as a way of penalising the perceived perpetrators of
the irresponsible behaviour which led to the crisis. This is despite the fact
that such regulations may not be necessary in countries in which banks are
already more thoroughly regulated or simply behave in a far more prudent
manner, which applies to Australia. As a result, although there was initial
support for such regulation during the darkest depths of the global financial
crisis, resistance to such regulation is beginning to build. Much of this resistance
is coming from Australia, where both the ‘big four’ banks and the Australian
Government argue that, given that they were not responsible for the global
financial crisis, there is no reason for them to change any aspect of the
current policy. Furthermore, prior to the global financial crisis, ‘low-doc’
and ‘no-doc’ loans were rare in Australia and the consumer lending industry as
a whole behaved very much in a prudent manner. Although the Australian mortgage
lending industry was, admittedly, heading slowly in the same direction as the
US, with a gradual loosening of credit requirements, it was still some ten
years off the advent of its own sub-prime lending crisis. As a result,
Australia is arguing in such forums as the G20 that it is unnecessary for it to
replicate the same regulations that are being introduced elsewhere in the
world. In propounding this argument, Australia is supported by Canada.
Future Impact
If
it came to pass that Australia did introduce the regulations which are being
advocated by other, more powerful members of the G20, then there are concerns
about the potential impact of these regulations. For example, there is concern
that the introduction of restrictive regulation would increase the price of
funds in money markets, therefore increasing the costs of lending for banks,
leading to changes in interest rates, which would be necessary in order to
maintain profit margins. Banks will therefore focus more on attracting deposits
through higher interest rates on these accounts to a greater extent than they
are presently. This would benefit those players which already use their
customers’ savings deposits as their key source of funds, such as credit
unions.
With
the availability of funds around the globe yet to return to any kind of stability,
banks are endeavouring to attract deposits themselves, regardless of the
impending regulations, simply in order to maintain their own sources of
available and liquid funds. Australian banks also improved their financial
positions through raising large amounts of equity on the stock exchange during
the height of the global financial crisis. With Australian consumers more
likely to place excess funds in their superannuation accounts rather than in
savings accounts, the competitiveness required to attract deposits will
therefore continue to be a tough challenge that Australian banks will be
required to face.
Demand for credit greater than supply
With
the Australian economy continuing to grow at a respectable rate, and as one of
a few developed economies not to enter recession as a result of the global
financial crisis, demand for credit was not hugely affected during 2008/09, and
in fact remained high. The dip experienced in consumer confidence, although
sharp and sudden in 2008, was only short term, and had almost entirely receded
by the middle of 2009. Such optimism in Australia was more or less unique among
developed economies, and this fuelled growth in demand for credit. Incredibly,
mortgage lending actually experienced a boom in Australia during 2009, largely
due to the impact of the first home owner’s grant. Any decline in consumer
lending therefore, occurred on the supply side, with Australian banks finding
it difficult to source funds, despite their AA credit ratings being among the
best and most solid in the world.
Current Impact
Realising
that access to credit would be difficult to come by during the recession, and
perhaps also feeling confident that the Australian economy would be able to
weather the storm of economic recession as demand for credit remained solid,
Australia’s ‘big four’ banks raised large amounts of equity in the last few
months of 2008, which allowed them to compete in mortgage lending. Another
strategy was to secure funds of their own, through competing for customer
deposits. Competing for deposits naturally requires banks to offer high
interest rates, which in turn puts upward pressure on lending interest rates.
But this policy at least assures that access to funding is relatively reliable.
Outlook
There
is currently much debate in Australia over whether the borrowers who took
advantage of the first home owners grant represent frustrated demand from
previous years, when interest rates were excessively high, and housing
affordability too low for many to be able to enter the housing market, or
whether it represents future demand that has now been brought forward. This is
important, because if the first home owners grant has in fact soaked up demand
that would have progressed over the forecast period, then mortgage lending is
likely to be suppressed over the forecast period, particularly as interest
rates begin to rise in order to combat inflationary pressures that are set to
result from the economic recovery.
Future Impact
The
shortage of credit offered by Australian banks is likely to only be a short
term problem. The main problem for Australia’s mortgage market over the
forecast period will be the lack of demand for credit as the economy gradually
drags itself out of its current slowdown. Along with the absence of the first
home owners grant, the still uncertain nature of the global economy and doubts
over whether a double-dip recession will be experienced, as well as rising
interest rates, will require Australian mortgage lenders to face the fact that
a large proportion of their target audience who were at the vanguard of the
previous housing boom are likely to decide to withdraw from the housing market
altogether. This includes Chinese investors, particularly those who buy
properties for their student children, the number of which is declining as the
rising Australian dollar makes living in Australia increasingly expensive. In
the meantime, Australian investors shall also continue to withdraw from the
housing market, simply because real estate prices are becoming excessively
high.
