Speaking on a Facebook Live event for consumers, hosted by the organisers of National Finance Brokers Day last week (16 August), Yellow Brick Road executive chairman Mark Bouris was asked why there had been so many changes in the lending market.
In response, Mr Bouris said that it was a “complex” answer, but summarised that it came down to the fact that the regulators have “determined that there are some segments [of the market] that are probably a bit overdone and perhaps create greater risk whether it's concentration in that segment. . . . In other words, too much lending into a segment of the asset class called mortgages”.
Touching on the crackdown in investment lending, the YBR executive chairman explained that ASIC wants to “limit or manage the amount of investor loans relative to the amount of owner-occupier loans”.
“So, that is one area where lending has changed and the way you change that is you change the credit criteria. You don’t say: ‘I’m not going to lend to investors anymore’. You just say: ‘If I’m going to do that and comply with the regulator, I’ll change my credit requirements in order to adhere to what the regulator wants’.
“It’s a bit harder to borrow the same amount of money now, as the requirements are more stringent, the checking process is harder, and in turn that means there is less money for investors which means the investors get less supply.”
Mr Bouris also emphasised that the crackdown in interest-only lending did not mean that it was a “bad asset class” but instead that the regulator “doesn’t want too much of it”.
He said: “You don’t want too much of it because people aren’t actually paying down their principal. And where that can become a problem is if asset class prices change.”
Elaborating, Mr Bouris gave the example that if property prices changed and the borrower hadn’t paid any principal down on their mortgage, they “end up owing more based on what [they] borrowed, relative to what the property is worth if [they] paid nothing back. [They’re] not building any equity”.
‘Good economic outcome if people are forced to pay more principal’
Further, the Australian businessman said that while the regulators are not “necessarily mandated to look after the economy”, he believed that “it’s a good economic outcome if people are forced to pay more principal, or pay the principal and take out principal and interest loans”.
He explained: “As they pay their principal down, the equity builds up, people start to feel more wealthy. They think: ‘I bought the place for $500,000, I borrowed $400,000 and I now only own $370,000. I feel wealthy,’ [so they] tend to spend more. Which actually helps GDP, which is good for the economy.”
Looking forward, Mr Bouris said: “There will continue to be lots of changes at the edges around lending rules, lending requirements, bank’s and product provider’s abilities to provide loans, and that will continue to happen in the future because the regulator wants to do its job. They are insisting on financial stability and that’s fair enough.”
Despite these comments, the governor of the Reserve Bank of Australia (RBA), Philip Lowe, said earlier this month that he was happy with the way the current lending curbs have played out in the market and that he believed enough had been done on mortgage curbs.
Addressing questions at the House of Representatives Standing Committee on Economics in Melbourne on 11 August, the RBA governor stressed that he had “long thought that it was problematic in Australia that, at times, more than 40 per cent of mortgages did not require the repayment of one dollar of principal on a regular basis” [i.e., interest-only loans], but that he did not believe more measures were needed.
“Are more measures likely? I would hope not,” Mr Lowe said. “Housing credit growth is running at 6 or 7 per cent. It doesn’t look like it is picking up. Banks are paying more attention to credit assessment and the lending standards have improved. We have done enough for the time being.”
[Related: Analysis: Lending curbs could be permanent]
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.