On Thursday (9 September), the CEOs of both National Australia Bank (NAB) and Westpac were called to appear before the House of Representatives standing committee on economics to discuss the impacts of lockdowns on bank customers experiencing associated economic hardship, and how their institutions are responding to this.
The hearing, part of the committee’s ongoing scrutiny of the work of the four major banks, asked NAB CEO Ross McEwan and Westpac CEO Peter King about the impact of the lockdowns on mortgage and business loan deferrals and how the banks were responding to support their customers – particularly given escalating house prices.
After confirming that NAB is predicting house prices to rise by a total of 20 per cent this year alone, Mr McEwan acknowledged that the bank would have “major concerns if that continued on”.
“Our view is (and we don’t believe it will continue on at that rate), it becomes an affordability issue for customers,” he added.
The NAB CEO said that prices were largely escalating at the moment due to a lack of stock on market, which was pushing up prices from buyers engaging in bidding wars.
However, he added that the bank had not changed its policies to make accessing finance any easier to customers, and that therefore, “over time, customers do run up against their ability to borrow money to buy, which will cap prices out”.
When asked how the bank would wish to mitigate any “overinflation” of house prices, the bank CEO said that any wholesale changes should be delayed until after lockdowns lift.
Mr McEwan said that as the spring season has only just started (and which traditionally is a busy period for the property market) – and noting that restrictions may ease in Sydney and Melbourne from next month – he said that he would “wait until we open up again as a country and see what more stock comes onto the marketplace”.
He continued: “And hopefully with opening up from COVID, I would give it another two to three months before we started making changes.”
The NAB CEO told the committee that the bank had already been in conversation with the prudential regulator around what could be done to manage any potential rise in arrears and ensuring borrowers can manage their mortgage repayments.
He explained: “We haven’t given advice yet because we’re comfortable with how we assess a customer’s capability to pay. The things that we’ve been thinking about, and that I’ve discussed with APRA, is just what moves would you make if you actually wanted to take some moves? What would you do? And at this stage, as I said, my recommendation is we should leave in another three months. Let the spring sales start. Let the spring stock come on to the marketplace to see what that does.
“It’s very difficult to get a house on the market when an entire industry in Victoria is pretty well closed down. You can’t get your house on the market, you can’t even go and see a rental property. So those things actually constrain a market quite badly.
“So let’s open the market up. The spring sales get going and people put stock over the market, let’s see what happens with time. Let’s be quite careful about how we try and slow it down.”
Similarly, the CEO of Westpac, Mr King, suggested that any macro-prudential changes – or wholesale changes in the way the bank assesses mortgages (for example, changing buffers) – should wait until after lockdown.
Mr King said: “I think the main point there is about housing affordability. When we look at housing affordability at the moment, it’s pretty stretched... if you look at the time it takes to build a deposit, it takes some time. And if we look at a long term trend of 30 years it’s pretty much at the top of what we’ve seen… And we’ve got the lockdown impact as well so we’re in a bit of an uncertain situation.
“So, the question in my mind is: ‘Will the market slow down itself or not?’”
The Westpac CEO said that he would “want to wait, at least through the lockdown, to really get a sense of what the market is doing”.
“I think we’re just going to get through the next quarter and then, and then see how the market reacts,” he told the committee.
However, he conceded that housing affordability is “stretched” and that the response to that should be focused on both supply, (“looking at the different regulatory speeds of getting new places built”) as well as looking at whether “debt is playing a role” in inflated prices, which might require macro-prudential [changes].
“But it’s not just debt that is playing a role. It might be part of the solution, but I don’t think it’d be the whole solution,” he added.
The CEOs of ANZ and CBA will front the committee on the same topic on 23 September.
The committee’s focus on affordability comes amid record levels of mortgage activity and strong price growth.
Earlier this week, APRA published its quarterly data on authorised deposit-taking institutions (ADIs), revealing that a bullish housing market and a strong economic recovery in the quarter had pushed gross loans and advances across the ADIs up by 1.9 per cent over the June quarter, to $3.5 trillion.
Total outstanding credit for residential mortgages hit $1.9 trillion in June, 4.7 per cent more than a year prior. Owner-occupied loans were the bulk, taking up 65.2 per cent of the combined books and equating to $1.2 trillion, up by 8.7 per cent than the year before.
APRA noted that the housing market boom and economic rebound grew loan books in the three months to June, but warned the ongoing lockdowns have made the outlook “uncertain”.
It also recently eased red tape for banks offering loan deferrals to their customers, stretching out the applicable period after receiving industry feedback.
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.