- Other issues
Committee members raised a number of other issues in their questioning of the banks, as discussed in this chapter. The Committee was particularly interested in housing affordability, the impact of prudential standards (such as the loan serviceability buffer) on credit availability, and the banks’ climate change and human rights policies.
Housing affordability
6.2Throughout the public hearings, the Committee questioned the banks on the crucial issue of housing affordability, and the growing challenges Australians face in pursuing home ownership. Access to good quality, affordable housing is fundamental to wellbeing and is important for both prospective homebuyers and renters. Various factors influence the supply, demand and cost of housing, including Australia's growing and ageing population, and government policies. Unfortunately, over a long period of time, Australia’s housing system has been unable to provide enough new housing stock to meet much of the population’s needs at a price point they can afford.
6.3The banks identified affordable housing as a growing and critical generational challenge for Australia that needs to be addressed at all levels of government. The banks expressed concern over the national shortage of non-standard, affordable and social housing, acknowledging their obligation to participate in addressing this issue. The banks have publicly committed to and have made investments in affordable, accessible and sustainable homes, including build-to-rent projects.
6.4While there are many facets to housing affordability, the banks suggested that addressing housing supply constraints would be crucial, rather than pursuing demand-side measures. The Committee heard that increasing the supply and availability of housing can directly reduce prices and alleviate market pressures. In contrast, the banks suggested that demand-side measures, such as financial incentives for first home buyers, may not address the underlying issues.
6.5For example, NAB emphasised that the housing affordability situation in Australia was ‘far and away a supply problem’. It said supply needed to be a stronger focus of housing policy conversations, warning that the Australian Government’s usual demand-side levers, in isolation, have the perverse side-effect of increasing house prices:
The primary lever that federal government and politicians have is demand-side levers. I do worry that, if all we pull, as a country, is demand side levers and continue to make weak progress on supply-side levers, all we will do is make housing more expensive. So the more money banks put in, the more enablement we give to first-time home buyers to potentially pull money from superannuation—whatever it is—if that's all we do, we just increase the price of housing stock. It's simple supply and demand economics.
6.6The Committee heard evidence on the potential value of format innovation in construction, such as modular building, which can reduce construction costs and shorten build times. Additionally, the Committee heard that increasing the availability of medium-density housing can provide more affordable options in well-serviced areas with more consumer demand. For example, NAB observed that:
If we want to have more social and affordable housing, I think we need more modularisation, changes to how dwellings are put together. We need more focus on medium-density building. Too much is still in light density housing and detached or semi-detached dwellings.
6.7CBA also called for more medium density housing and the infrastructure to support it, and acknowledged this would take a ‘whole-of-economy’ approach, including supportive efforts by the major banks:
We need housing of various levels of affordability, but, certainly, more affordable housing that's close to transport and close to where people can work. That is going to take a whole-of-economy, multiple sectors approach. As we touched on before, fundamentally, the finance industry probably has more of an impact on the demand side. But we're certainly looking at all of our settings in terms of property developers and builders to see whether there's more risk that we could, reasonably and sensibly, be taking in that area. I suspect that at the centre of your question is a degree of concern, which we absolutely share as we look at the pipeline. We're well below where we would need to be, and that's a real issue, both economically and socially.
6.8The Committee also sought the banks’ perspectives on whether access to finance for developers was a barrier to scaling up production to meet the demand for homes, and whether the banks could be more involved in funding affordable housing. Overall, the banks did not consider access to finance a major issue for developers, but said that the high costs and long timelines of current construction projects were barriers.
6.9For example, Westpac said it did not think developer access to finance was a major constraint, and instead pointed to construction sector challenges ‘getting stock into the market’. In discussions with the Committee, Westpac elaborated on its increased appetite in the construction sector, but observed that most developers preferred infrastructure projects with ‘cost plus’ contracts, whereas residential building projects were only stacking up at the luxury end of the market:
The construction side is the one area where we've increased appetite, knowing that we need to build more buildings. We've relaxed. We used to have a rule for big developments that 100 per cent needed to be presold. We've relaxed that. We don't require that anymore. We've taken steps, but I don't get a sense that residential property is the first thing that builders want to build at the moment. They tend to want to go to infrastructure because the contracts are cost plus, so they can get a return without having risk. In the residential market, the ability to get labour and materials at the price they need is only working for premium housing.
6.10NAB agreed that developer access to finance was not the main barrier to supplying affordable housing; rather, it highlighted planning, zoning and taxation issues that added complexity, time and costs for developers. NAB expanded on how these challenges differed by jurisdiction, using Victoria as an example:
In Victoria, the big issue is taxation, and the amount of taxation in the cost of constructing a new dwelling is somewhere between 40 and 45 per cent of the dwelling's costs. So it's such an impediment to actually starting construction. Iwas at a luncheon with about 10 or 12 of our property clients a couple of weeks ago in Melbourne and, amongst those clients, I would say there was a few thousand dwellings that have been approved and are ready to go. And not one of them is being started because the maths don't work. And we know there are costs with input costs in construction. Although materials have started to come down, wages are still very high.
Committee comment
6.11The Committee agrees with the banks that housing affordability is a critical issue influenced by various factors, including supply constraints and government policies at both the state and federal level. It notes evidence from the banks that the national shortage of affordable and social housing is a significant economic problem, and that the banks have publicly committed to investing in more affordable, accessible and sustainable housing projects. The Committee believes the banks should continue to pursue an active role in addressing housing affordability by participating in social housing and affordable housing initiatives, and continuing to explore ways to better support the construction industry.
Serviceability buffer
6.12APRA mandates that banks apply a serviceability buffer when assessing applications for home loans. This requires banks to assess new borrowers’ ability to repay loans at an interest rate three per cent higher than the current rate. This buffer is essential for ensuring that borrowers can manage their repayments even if interest rates rise or their circumstances change. In aggregate, this is vital for the stability of Australian financial markets.
6.13While acknowledging that prudential safeguards like the serviceability buffer are an important element of a stable banking sector, the Committee asked the banks if they thought adding three per cent to affordability assessments was excessive, at a time when most banks believe interest rates have peaked, or will shortly. Some Committee members expressed concern that the buffer may be limiting households’ ability to borrow, including to refinance in order to avail themselves of better rates.
6.14At the time of the public hearings in 2023, the banks expressed their broad support for the serviceability buffer at its current level of three per cent, as well as the role of the buffer in prudential regulation.
6.15ANZ, for example, told the Committee that ‘absolutely we should have a buffer’. While it acknowledged that the specific buffer figure was open to debate, it said uncertainty regarding the future of interest rates highlighted the importance of ensuring customers were well positioned, and it noted the poor track record of recent interest rate forecasts. ANZ told the Committee that:
It makes perfect sense. We can debate whether it's three per cent or four per cent or two per cent, but I think three per cent feels about right. I know that when APRA did decide on three per cent that was based on some historical norms and understanding the cycle. I think the difficulty here is we don't know what the future holds. If we were sitting here 18 months to two years ago, I don't think any of us would have predicted that we were going to have rates at four per cent. Who's to say what the future holds? Right now, economists think there might be another 50 basis points, perhaps more. As I said, it's completely unknown. It's in our interests to make sure that our customers are well secured and can essentially work through whatever may come.
6.16The banks also noted guidance from APRA to authorised deposit-taking institutions, particularly around customers who were seeking to refinance from one lender to another but would not pass the serviceability buffer test due to recent interest rate rises. Under APRA’s prudential framework, banks can make exceptions to prudential policies—such as the application of the serviceability buffer—to approve loans that do not meet the standard criteria. Banks can use such exceptions if they are managed prudently and in limited numbers, with APRA estimating that serviceability policy exceptions have accounted for a small share of banks’ total housing lending, between two and three per cent.
6.17CBA, for example, told the Committee that the serviceability buffer was a ‘very important macroprudential tool’, and that it was supportive of the settings APRA had adopted. In relation to reducing the buffer for some cohorts, CBA elaborated on its current approach:
As I touched on, I think it's entirely reasonable given the levels of uncertainty to maintain that buffer across the industry at this point in time. As you mentioned, some of the options available to individual lenders are to look at that servicing buffer, particularly as you said in our case in a very limited set of circumstances where we'd be prepared to apply a lower buffer for a small proportion of loans; where we would apply one per cent. We've recently adopted that, and we're comfortable with that. I would again highlight it's to be applied for in a small and exceptional set of circumstances.
6.18NAB similarly shared its perspective on reducing buffer requirements for customers seeking to refinance:
To give clarity to customers and to our lenders and brokers that we do business with, we've communicated to them that, in circumstances where a customer is looking for a like-for-like refinance, that customer is in good standing and they have a loan-to-value ratio of less than 80 per cent, if at first pass that customer doesn't pass serviceability at a three per cent buffer, we'll refer that file on to one of our credit assessors to take another look and make a decision. We think it's important to assess each customer on a case-by-case basis.
6.19The Committee also explored the banks’ treatment of outstanding student Higher Education Loan Program (HELP, formerly HECS) debts when assessing loan serviceability. With approximately 3 million Australians owing an average loan debt of $24,800, mandatory HELP/HECS debt repayments have a significant impact on the serviceability of loans for first home buyers. They increase loan applicants’ overall debt obligations, which are considered as part of serviceability tests.
6.20CBA told the Committee that HELP/HECS was ‘something that we’re looking at’, explaining that many loan applicants with high HELP/HECS debts were reasonably likely to increase their incomes over the course of their career:
Our ordinary treatment around HECS serviceability would be based on the criteria as to when you have to start repaying it. It's included in the serviceability calculator, so it has an impact. It may be said that, where you know and have a relationship with a customer who banks with you, you might be prepared to discount that more heavily. In most cases, people in their 20s and 30s have not peaked in terms of their income generation—clearly that's a factor later in life—so we could be prepared to take a more tailored approach there. They're some of the settings that we're certainly looking at. I saw some work on that very recently, and we're trying to do that in a very targeted way where we believe we've got the capabilities to measure and understand the risk and in settings that are entirely and appropriately inside our control and risk appetite.
Committee comment
6.21The Committee considers the serviceability buffer an important prudential standard and consumer safeguard, helping to protect households from severe hardship if interest rates rise above expectations. The Committee notes evidence in Chapter 2 suggesting the serviceability buffer was crucial to the extremely low rates of loan arrears still seen in Australia despite many successive unexpected rate rises.
6.22The Committee notes APRA’s advice that it is appropriate for banks to apply limited exemptions to prudential regulations when lending, if the risks are not excessive and are carefully managed. The Committee expects the banks to continue lending responsibly and in line with Australia’s world-class prudential framework, but also emphasises the importance of flexibility.
6.23The Committee notes the banks’ evidence on their decisions to reduce serviceability criteria for customers who would be eligible for refinancing but for recent interest rate increases, and for some younger customers with solid future earning potential but current high student debt. The Committee looks forward to updates on how these adjustments play out.
Environmental, social and governance policies
Climate policies
6.24The major banks have a key role supporting Australia’s transition to a low-emissions future through their lending and other banking activities. As signatories to the Net Zero Banking Alliance, the major banks have all committed to transitioning their lending and investment portfolios to align with pathways to Net Zero. This commitment will significantly influence the sectors that the banks support, both currently and in the future.
6.25Recent climate reports published by the banks outline several key strategies to support emissions reductions in critical sectors such as electricity, buildings, transport, heavy industry and agriculture. The banks have also emphasised their support for customers to reduce their carbon footprints through product offerings such as ‘green loans’, and their contributions to government and industry initiatives.
6.26The Committee explored how the banks are responding to the risks and opportunities of climate change, and how the banking sector could support Australia’s progress towards climate and other sustainability-related goals.
6.27The Committee also explored the banks’ social and governance policies, including efforts by the banks to prevent funding reaching human rights abusers.
Support for customers to reduce emissions
6.28Banks can play a crucial role supporting customers’ emissions reductions by offering financial solutions that help offset the costs of adopting low-emissions technologies. The Committee discussed the significance of these initiatives, which have recently included lower interest rates on loans for electric or hybrid cars, and other green or sustainable loans for customers to purchase and install energy-efficient products.
6.29For example, CBA told the Committee that green loans are a crucial component of its broader environmental and sustainability framework. CBA offers a variety of loans designed to help customers reduce their emissions, including lower rates for loans for solar panels, electric vehicles and to upgrade the electrical systems on their properties. CBA stated that it was ‘determined’ to keep offering these products, but felt that awareness-raising and education of customers about the benefits of making these changes needed to increase.
6.30The Committee raised concerns regarding discounted loans for electric and hybrid vehicles, noting that these vehicles are generally more expensive than combustion vehicles. As a result, the lower rates offered by the banks are only accessible to those who can afford to purchase these vehicles.
6.31While acknowledging this concern, Westpac countered that from a cost-of-living perspective, mortgages were two-thirds of its loan book and were the primary way to keep costs down for households. Westpac also conceded that its electric and hybrid loan product had a slower uptake than it had been expecting, but still viewed the green transition as important ‘for the country and the economy’ over time.
Current and future lending to the gas industry
6.32Australia is committed to supporting global emissions reductions to reduce the impact of climate change in order to reach net zero emissions by 2050. While the largest source of emissions in Australia is energy produced from coal (followed by oil), natural gas accounted for 21.1 per cent of CO2 emissions in 2022.
6.33Gas has a smaller carbon footprint than other fossil fuel energy sources and is considered a transition fuel. This perspective is reflected in Australia’s Future Gas Strategy, which outlines the Government’s plan for how gas will support the economy’s transition to Net Zero. The Strategy emphasises that gas production and usage must be optimised throughout the energy transition and remain affordable for Australians, and that new sources of gas supply will be necessary to meet demand during the economy-wide transition.
6.34The major banks face significant pressure to reduce their lending to fossil fuel industries, including gas. In August 2024, CBA became the first bank to announce that it was no longer going to provide finance to oil and gas producing companies that did not have a transition plan that aligns with the Paris Agreement.
6.35During the public hearings in 2024, the Committee inquired about the banks’ current and future investments in the gas sector. Some Committee members raised concerns that reducing lending to gas projects on climate grounds could increase costs for new or planned projects, potentially making them unviable or making gas more expensive. The banks were asked whether they had considered the impact of reducing lending to the gas sector on the price of gas for Australians.
6.36The banks generally responded that as the largest lenders in Australia, they have an obligation to align with Australia’s international climate-related commitments, alongside the commitments they have made independently as part of the Net Zero Banking Alliance. They also stressed their investors’ concerns about the credibility of their climate change policies. However, the banks also stressed the need to support Australia’s economic development as part of a proactive, orderly transition. CBA noted that:
We, and I believe all of our stakeholders, have made commitments around net zero by 2050. We think, alongside that—perhaps with primacy to that—we are committed to Australia's economic development, growth and performance. We have to hold both of those commitments at the same time. They cannot be mutually exclusive. We also believe, as part of the commitments, that any large listed company needs to be prepared to make around Paris—things like the net zero banking alliance—we can't leave things until the 2040s.
6.37Similarly, NAB stated that there needed to be an ‘orderly transition’ to Net Zero that balanced the social, economic and environmental requirements. The banks told the Committee they understood the importance of a reliable gas supply during the energy transition, but were guided by the expectations of stakeholders and the broader community. For example, CBA said gas was going to play a ‘very important role for a long period of time’ and recognised the potential risk of gas shortfalls. Westpac likewise told the Committee that it considers both emissions reduction and energy security important:
We have an investor base that is 25 per cent international and 75 per cent domestic, and they've been demanding our policies on climate change and transition. We took those plans to last year's AGM for them to give us feedback. We want to be transparent with all our stakeholders. We need to, we think, get emissions down because of the long-term impact of climate change. We also pointed out that energy security is important, but we would look for the government to define what that means.
Human rights policies
6.38From a broader environmental, social and governance perspective, the Committee also explored how the banks were upholding their obligations with respect to human rights, including labour practices, procurement, supply chains and accessibility of financial services.
6.39The banking sector’s funding of projects that impact negatively on human rights—where the banks can be considered complicit in human rights abuses—has been a source of growing concern.
6.40As outlined in their human rights policies, the banks have expressed support for and commitment to internationally recognised human rights and principles. Their human rights policies detail commitments across their roles as financial service providers, lenders, employers, purchasers of goods and services, and supporters of community organisations.
6.41The Committee asked the banks about processes for preventing future harm in instances where a bank is made aware that human rights have been violated in relation to their financing. While the banks have established grievance procedures to facilitate this, it was also noted by CBA and ANZ that they had an obligation at the beginning of a lending relationship to ensure human rights were assessed as part of the due diligence process.
6.42For example, CBA told the Committee:
Depending on the particular project, it might manifest in specific conditions in the loan documentation around meeting certain requirements and standards. If those are breached, it becomes a serious issue between the borrower and the bank. The reason for mentioning that is that it's a case of doing the upfront assessment in the first place, but also where appropriate embedding the terms and conditions in the finance documents and then monitoring those through the life of that loan to ensure that they are complied with.
6.43The Committee asked whether the type of loan being financed was a factor in triggering these policies. The banks generally advised that the type of loan being financed was irrelevant, and that policies applied across institutional, corporate and business banking operations.
6.44In further discussion with the Committee, ANZ elaborated on the complexities of human rights issues in banking depending on its relationship with the loan recipient:
…the nature of lending that we have is that some is working capital and very short term with relatively simple terms and conditions, and some is very complicated, like a project to build a dam, a big plant or something. That'll have a lot more documentation and, as a lender, we'll have many more rights. But, in general, if we find somebody is abusing any form of human rights or any sorts of ethical standards, that's exactly the sort of thing that would then go to our ethics committee, and we would make a decision. And that decision could mean to cease the relationship—to stop banking that customer. Our ability to do so will depend on the nature of the relationship and our legal rights, but that's precisely the sort of thing that either go to my committee or, from time to time, might go to the board committee for a decision. For example, this wasn't about a project, but our decision to exit Myanmar was as a result of precisely that kind of process.
Committee comment
6.45The Committee acknowledges the proactive steps taken by the banks in responding to the risks and opportunities presented by climate change. By committing to the Net Zero Banking Alliance, the banks have demonstrated a clear intention to align their lending and investment portfolios with pathways to Net Zero. This commitment is crucial for supporting Australia’s progress towards climate and other sustainability-related goals—and to avoid risks to the economy from a later, more disorderly energy transition. Strategies such as reducing lending to fossil fuel companies that lack credible transition plans, and offering financial products to facilitate the adoption of low-emissions technologies, are efforts in this direction.
6.46The Committee also recognises the banks’ efforts to balance the interests of a diverse set of stakeholders, including borrowers, depositors, shareholders and the wider community. The Committee notes the challenges faced by the banks in balancing these interests in the context of financing the transition to a low-emissions economy. The concerns raised about the accessibility of discounted loans for electric and hybrid vehicles highlight the need for inclusive financial solutions.
6.47The banks’ cautious approach to reducing lending to the gas sector further underscores the complexity of balancing multiple interests—in this case, maintaining energy security while transitioning to sustainable energy sources. The Committee encourages the banks to continue refining their strategies to support a just and equitable transition for all Australians, and for banks to weigh both Net Zero commitments and energy security requirements when making funding decisions.
6.48The Committee recognises the banks’ efforts to uphold human rights through their policies and practices. Given the vast and extensive lending portfolios of the banks, ensuring thorough due diligence is a continual and challenging process. While the banks have made progress in integrating human rights considerations into their operations, the Committee emphasises the importance of ongoing vigilance and improvement. The banks must maintain rigorous standards and proactive engagement with stakeholders to ensure their activities do not inadvertently contribute to human rights abuses.
Dr Daniel Mulino MP
Chair
19 February 2025