This decline in the banks’ market share came about after regulators reviewed commercial property lending and decided lending standards were too lax. This led banks to tighten their policies in areas such as the pre-sales a developer must make or loan-to-valuation ratios.
This pullback from property developer lending has been a double-edged sword, which highlights the trade-offs that banks and regulators face.
On one hand, the big four banks have benefited from writing fewer bad loans. Triggs pointed out in a recent research note that the non-performing loans in the banks’ commercial real estate books were “very low,” despite the sharp rise in interest rates. But it’s also likely that the cautious attitude of banks is making it much harder to provide a much-needed boost to housing supply.
Small business lending is another area where some have argued it’s too hard for borrowers to get credit, leading to economic costs.
Barrenjoey analyst Jon Mott argued in a report earlier this year that banks had “de-risked too far” – pointing to small business lending as an example. For years, smaller firms have complained about how hard it is to get credit from a bank without putting a property up as security.
Mott reported that secured lending to small and medium-sized enterprises (SMEs) had grown by about 6 per cent a year over the past five years – far quicker than the 1.7 per cent annual growth in partially or unsecured loans. He argued the regulatory regime, which encourages banks to target secured loans, risked “strangling innovation and economic prosperity over time.”
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The Reserve Bank has also long aired concerns about smaller firms’ access to bank loans. The RBA’s assistant governor for the financial system, Brad Jones, said in April that even though smaller firms have a key role in driving innovation, many SMEs feel like they are “kicking into the wind when it comes to access to financing.” The issue wasn’t unique to Australia, Jones said, and is one reason for the growth in tech-focused venture capital funds.
However, in the mortgage market, it’s difficult to argue that we have a problem with overly cautious banks.
Australian households are among the most indebted in the world, and their debt is mostly mortgage debt. Housing credit is growing at a healthy rate of 4.5 per cent a year.
As Australian Prudential Regulation Authority chairman John Lonsdale recently explained, the main reasons it’s getting harder to buy a home are the surging cost of houses, weak income growth, and the rise in interest rates.
Higher rates have reduced homebuyers’ borrowing power because lenders must assess new customers’ ability to repay their mortgage at 3 percentage points higher interest rates than the official rate. Prospective borrowers today would need to be able to cope if their interest rate hit 9 per cent. That’s pretty cautious, but Lonsdale says it’s there to protect people and the stability of banks.
What’s more, relaxing these curbs on mortgage lending could make our housing affordability problem worse. Why? Because the problem in housing is not the supply of credit, it’s the short supply of homes. Loosening lending rules would risk giving households greater access to credit, boosting demand at a time when we are struggling to supply enough homes – adding more pressure on prices.
When this was put to Elliott, he agreed that too much of the discussion in housing focuses on ideas that boost demand (helping more people buy in), rather than boosting housing supply.
It’s fair enough to question if banks should be taking more risks in their business lending. But in mortgages, any move to loosen standards looks unlikely.