Senate Recommends Lending Reforms to Turbocharge First Home Ownership

Today, the Senate Economics Committee handed down its report on the financial regulatory framework and home ownership.

Australian financial regulation delivers an unquestionably strong system - but it has been unresponsive to the aspirations of prospective first home buyers.

Our Inquiry examined the barriers which push that elusive first mortgage out of reach for a growing number of Australians.

We probed the prudential regulator, banks, lenders and industry participants to examine regulations that can tilt the scales back in favour of first home owners.

Today, we are handing down seven recommendations where financial regulation can promote home ownership which include:

• Adding the promotion of first home ownership as an explicit objective within APRA’s mandate and Statement of Expectations;
• Having APRA prepare prudential guidelines for allowing, at appropriate stages through the economic cycle, a reduced serviceability buffer tailored to first home buyers;
• Having APRA prepare prudential guidelines allowing for a lower mortgage risk weighting for first home buyers, without altering overall system stability; and
• Amending the APRA Act to require regular parliamentary scrutiny, equivalent to ASIC’s oversight framework.

The combination of these changes will improve access to finance and reduce cost. First home loans will be more achievable for first home buyers.

APRA’s existing mandate restricts its capacity to consider the benefits of widespread home ownership when setting lending regulations.

Macroprudential tools have been used in a blunt fashion which has constrained first home ownership for too many Australians.

The Committee concluded that APRA’s rigid application of the 3 per cent serviceability buffer disproportionately impacts prospective first home buyers.

According to the Mortgage and Finance Association of Australia, 37.5 per cent of prospective first home buyers could not obtain housing finance because of the serviceability buffer.

The 3 per cent buffer was implemented when the official cash rate was 0.1 per cent. Evidence provided to the Committee suggested this may be excessive as we reach the likely top of the tightening cycle.

As Bendigo and Adelaide Bank told the Committee, there is a “proportion of prospective first home buyers failing serviceability tests and not being able to enter the housing market despite being able to meet repayment obligations at current rates.”

Equally, the capital risk weighting system makes many first home mortgages more expensive than they ought to be. A parental guarantee is provided with a large discount which is not available to a mortgage protected by lenders mortgage insurance.

These capital risk weights unfairly preference Australians with access to the Bank of Mum and Dad.

As the Australian Housing and Urban Research Institute points out, Australia is without a policy where financial regulation helps drive home ownership.

It is time Australia had a lending policy to get the Australian Dream back on track.

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