Chapter 3Solutions
3.1While the submissions to the inquiry provided a number of proposed solutions to the challenges of obtaining home ownership in Australia, including solutions that might be broadly described as ‘supply side’ or ‘demand side’ approaches, this chapter will focus on proposed solutions discussed during the public hearings to the inquiry.
3.2This chapter will discuss:
the need for prudential reform, the limitations that taxation reform would have on the current market, and the particular disadvantage faced by first home buyers in the current market;
the case for changes to APRA’s mandate;
the appropriateness and the case for reform of the three per cent serviceability buffer required by APRA, particularly in relation to first home owners; and
the credit risk weighting of mortgages and changes to that system.
3.3In turn, this chapter will summarise evidence received on the impact of student loan debt on people applying for their first home loan, responsible lending laws, and supply side solutions to declining home ownership rates.
Need for prudential reform
3.4A range of inquiry participants made the case for prudential reform. One theme in evidence to the committee was that prudential regulations should seek to maintain financial system integrity, rather than prevent individuals from making poor decisions.
3.5Mr Tim Reardon, the Chief Economist of the Housing Industry Association (HIA), noted that mortgage delinquency in Australia was currently close to zero. Mr Reardon explained that macroprudential restrictions were important and emphasised he was not calling for them to be overly relaxed. Nonetheless, Mr Reardon suggested that there was a need these restrictions should properly balance protecting financial stability and encouraging first home buyers into new homes.
3.6Mr Reardon commented that the goal of financial regulators was to identify and mitigate risk, and argued that this should be balanced with the public good of improving home ownership. Mr Reardon also noted the HIA’s concern with the lack of oversight over financial regulatory agencies and recommended that these agencies be oversighted by a ‘Reserve Bank style board’ with targets for the board to achieve around home ownership.
3.7Mr Reardon told the committee:
The role of the Australian government is to put in place regulations that ensure that the financial risk of systemic failure within Australia is mitigated, not necessarily zero, which has been the target inherent within what we have seen over the past decade. I would distinguish that there are two different things there. What we should be looking at is the risk of financial contagion, not individual households and their decisions.
3.8Professor Andy Schmulow disagreed with this assessment, suggesting that the current macroprudential regulator, APRA, does have a mandate beyond financial stability, in that it must balance regulatory enforcement with the need for competition in the market. He commented that the 2018-19 Capability Review of APRA had recommended that APRA do more to foster competition in the banking market, but that this had not been acted upon by APRA.
3.9Prof Schmulow did agree, however, that the financial regulator was ‘laser focused on financial stability at the cost of everything else,’ and it was important to introduce more competition into the Australian banking market. He suggested that proportionality of regulations should be examined, noting that current regulations could be scaled to make those imposed on smaller banks no more onerous than those imposed on large banks.
3.10Dr Sarah Hunter of the Reserve Bank of Australia stated that the aim of macroprudential policies is not to eliminate all risk:
The regulations as they currently are don't completely eliminate risk, and we wouldn't necessarily want to achieve that. Again, APRA with their regulator hat on, are not necessarily trying to achieve that. What we're concerned with is stability of the financial system. All banks have to provision for some of their loans failing—people having to default on their mortgage, business loan or other types of loan; people not being able to continue to make repayments. What we're concerned with is making sure that the banks are able to absorb that loss, continue to operate, be stable and provide that stability to the economy. It's not a question of trying to eliminate all risk; it's balancing risk against other outcomes.
Current taxation arrangements
3.11The question of whether current tax arrangements that incentivise the purchase of real estate for investment purposes were impacting home ownership was discussed in evidence before the committee.
3.12A range of submissions to the inquiry called for changes to the federal and state tax treatment of residential property, arguing this would help increase home ownership.
3.13Other submitters challenged this view. Mrs Alexandra Waldren, Policy Director at Master Builders Australia (MBA), argued that changes to tax arrangements at the federal level, such as negative gearing and capital gains tax concessions, would add to the tax burden of an already heavily taxed sector of the economy. She made the point that taxes on property at the state, territory and local government level make up 50 per cent of the revenue of these governments.
3.14This point was reiterated by Mr Mike Zorbas, CEO of the Property Council of Australia (PCA), who highlighted that there was no evidence or modelling that suggested changes to these taxation arrangements would increase housing supply.
3.15Mrs Waldren stated that Master Builders’ modelling on the removal of negative gearing had found these changes could lead to a significant drop in houses being constructed, negatively impacting job creation, dwelling construction and renovation activity.
3.16Master Builders Australia’s submission provided more specific data on the effect of changes to capital gains tax and negative gearing. Under a scenario where negative gearing was limited to new housing and the capital gains tax discount was halved, the following would occur:
New housing construction would fall by between 10000 and 42000 dwellings.
There would be between 7500 and 32000 fewer jobs.
Value dwelling activity would fall by between $2.8 and $11 billion.
Renovation activity would reduce by between $50 and $210 million.
3.17The Australia Institute was in favour of abolishing tax incentives which promoted investment in housing.
3.18Other witnesses argued that changes to negative gearing and capital gains tax would initially see a slowdown in market activity and lowering of house prices, but in the long term would lead to a slowdown in housing supply and associated price rises.
3.19Mr Tim Reardon of the HIA noted that if there is a goal of lessening the impact of investors in the housing market, then increasing housing supply to the point that house price growth is limited would be a better solution.
Impacts on first home buyers
3.20The impact of increasing house prices on first home buyers was also discussed throughout the inquiry. Mr Ranin Mendis Abeysekera, Managing Director of Ello Lending Co stated simply:
…while government schemes aimed at helping first home buyers are well intended, they are not keeping pace with rising prices and wages. There also needs to be a significant investment made to create awareness of the available schemes, such as the first home super saver scheme. Furthermore, upfront costs such as stamp duty and the chronic shortage of affordable housing supply continue to be significantly big hurdles for our first home buyers.
3.21Mr Reardon of the HIA explained that, as banks are required to hold more collateral for money lent to first home buyers, that cost is passed on to the buyer. He stated that ‘banks aren’t competing with each other to pursue first home buyers. They are coming for investors’ and are more likely to provide them with more competitive interest rates. He remarked that ‘[w]e are increasingly lending to those who already own a home and punishing those who do not’.
3.22Mr Mott of Barrenjoey underlined this point in his evidence:
The Commonwealth Bank lent almost two and a half times as many mortgages in Australia to owner occupied households earning more than $200,000 than they did to households earning less than $100,000. The median income in Australia for a household is about $115,000. If we take this to the extreme, Commonwealth Bank is now lending almost as many owner-occupied mortgages to households that are earning more than half a million dollars than they are to households earning less than $75,000. They are quite extreme numbers. Effectively, mortgages have now become a luxury good.
3.23The RBA made a similar point in its evidence:
Median incomes of first home buyers have long been lower than those of other home buyers. However, the median nominal income has increased more rapidly for new borrowers than other borrowers over the recent interest rate tightening period, and has risen faster than in previous years. Higher interest rates have been binding for lower income borrowers, particularly for first home buyers, and resulted in the median loan-to-income ratio of new loans declining substantially since early 2022.
3.24The RBA also provided a graph illustrating this (see figure 3.1 below)
Figure 3.1Median income of new borrowers
Source: Reserve Bank of Australia, answer to question on notice, 16 October 2024 (received 31 October 2024) p. 3
3.25When questioned about whether increasing first homeowners’ access to finance would lead to a further increase in prices, Mr Reardon of HIA thought this was unlikely to occur. He explained that people moving from renting to owning does not increase overall housing demand. Although an easing of lending rules giving more potential home buyers access to finance could lead to short term upwards pressure on property prices, in the longer term the effect on prices would be negligible:
Over the course of the past decade, we have forced first home buyers out of the market. That hasn't reduced demand for housing. Demand for housing has remained constant. Likewise over the next decade, if we reduce those restrictions and we see home ownership rates increase, that is not an increase in demand for housing because it did not affect our population or the average number of people per home.
3.26Professor Andy Schmulow pointed to the high profitability of the Australian banking system, and noted that mortgages make up 70 per cent of banks’ asset base. He advocated for rebalancing competition in the banking industry to provide first home buyers more choices for mortgages which would lower barriers to entry and enable them to enter the market.
3.27Ms Kylie Davis, President of the Proptech Association of Australia, related the higher risk associated with lending to first homeowners with a trend of de-risking through ‘pushing systemised risk onto individuals.’ She questioned the rationale of why first home owners are considered higher risk than other kinds of mortgage customers.
3.28Mr Mott of Barrenjoey also remarked that ongoing house price inflation in Australia had had a disproportionate impact on the ability of first home buyers to enter the market. He pointed out that people upgrading to their second or third home would have benefitted from that house price inflation, as well as increases in income, and as such would not need to borrow as much to purchase a property. He pointed out recent figures released by CBA showing that in the period from 2016-17, the borrowing capacity of younger people has declined by 40 per cent.
3.29Mr Mott, while being clear that he was not calling for reducing the overall stability of the financial system, advocated for a ‘rebalancing’ of current prudential standards to help younger people enter the housing market. He told the committee ‘that the pendulum has swung a long way. At least for certain first home buyers, it probably needs to swing back a bit to help them.’
3.30The committee also received evidence about the distribution of government assistance to first home buyers across analogous international jurisdictions (see figure 3.2 below).
Figure 3.2Government assistance for first home buyers across jurisdictions
Source: Australian Housing and Urban Research Institute (AHURI), Assisting first homeowners: an international policy review, July 2022, p. 6, (available at: https://www.ahuri.edu.au/sites/default/files/documents/2022-07/AHURI-Final-Report-381-Assisting-first-homebuyers-an-international-policy-review.pdf) (accessed 19November 2024).
3.31Figure 3.2 above shows Australia’s high level of assistance to first home buyers in the form of grants and concessions, but a limited amount of assistance in other areas, such as in savings schemes and loans.
Changes to APRA’s Mandate
3.32As discussed in Chapter 1 of this report, APRA currently has a mandate contained in section 8 of the APRA Act which requires it to, among other things, promote financial system stability in Australia. The committee heard evidence from witnesses about whether there should be a change to this mandate to include a requirement for APRA to consider an increase in first home ownership when performing its functions and powers.
3.33Mrs Therese McCarthy Hockey, Executive Board Member of APRA, explained APRA’s mandate as follows:
Our mandate is about the overall system stability. It doesn't distinguish between any one category of borrower and another, but we are charged with ensuring that we understand what's happening within the credit, within the system. In our financial stability mandate, we balance that, of course, with competition, efficiency and contestability, amongst others.
3.34Mrs McCarthy Hockey went on to say that APRA is not mandated to look at one borrower class over any other. She explained that APRA’s role is to ‘set a framework which enables a neutral understanding of the risk in the system, and that's what, in particular, our credit rate system provides—an ability to understand the risk in the system’.
3.35Other witnesses were in favour of making changes to APRA’s mandate. MsAnjaPannek, CEO of the Mortgage and Finance Association of Australia (MFAA), thought this was an idea which should be considered. Ms Pannek noted that within APRA and the broader Council of Financial Regulators (made up of APRA, ASIC, the RBA and the Treasury), none of these organisations had a mandate to promote and encourage home ownership.
3.36Mr Peter Tulip, Chief Economist at the Centre for Independent Studies, took a different view, saying he did not think APRA should preference one group of borrowers over another. Mr Tulip noted that first homeowners presented a higher risk than established borrowers and it was appropriate to place restrictions on higher risk lending.
3.37Professor Andy Schmulow took the view that, rather than adding to APRA’s mandate, there would be benefit in APRA better enforcing their existing mandate, particularly in relation to competition. This could lead to smaller banks being better able to compete with larger institutions and to more first home buyers being able to receive finance through increased competition.
3.38The Housing Industry Association was in favour of ‘a target band of residential mortgage arrears rate of two and three per cent.’
3.39In its report, Assisting first homeowners: an international policy review, the Australian Housing and Urban Research Institute (AHURI) made the point that APRA had intervened in the housing market in the past, in both 2014 and 2017, in order to restrict lending to investors and thus cool the market. AHURI also observed that regulatory settings which had favoured first home buyers had had a significant role in expanding home ownership in the post-war period and that such powers were still available to APRA today. The report said:
Through their potential influence on the availability and cost of mortgage debt, financial regulatory policies and controls can have significant housing market impacts. In the contemporary context, the key institution here is the Australian Prudential Regulation Authority (APRA)…Fostering preferential treatment for FHBs via regulation in this way complemented other forms of pro-FHB housing finance assistance important in the early postwar era.
Mortgage serviceability buffer
3.40A repeated issue in evidence before the committee was the appropriateness of the mortgage serviceability buffer required by APRA for home buyers when seeking a mortgage. As explained in Chapter 1, this buffer exists to ensure that a borrower can service a loan in the event of increases in mortgage interest rates.
3.41Currently, the mortgage serviceability buffer is set at three per cent. Some comparable overseas jurisdictions have similar buffers, although this of course varies from jurisdiction to jurisdiction. Canada, for example, has a similar buffer set at two per cent, while banks in New Zealand typically add a buffer of between two and three per cent.
3.42On 25 November 2024, APRA provided an update on its prudential settings and made the following statement about the serviceability buffer:
As is the case with all of APRA’s macroprudential tools, the serviceability buffer is calibrated at the system-wide level and will therefore not be appropriate for every lending decision. APRA therefore allows ADIs discretion to make exceptions on a case-by-case basis where it is prudent to do so. Banks used exceptions to serviceability policies for around 5 per cent of new housing loans over the past year, which has increased from 2-3 per cent in the years prior.
3.43APRA’s update confirms that the buffer is a blunt instrument calibrated at a system-wide level. It also indicates that the level of exception utilised by ADI’s is miniscule, representing around five per cent of new mortgages over the last year.
3.44Mr Chris Taylor, Chief of Policy with the Australian Banking Association, was in favour of the three per cent buffer being more flexible for first home buyers, with possible adjustments for an individual’s circumstances and changes in market conditions. This could, he suggested, allow more first home buyers an opportunity to enter the market. Mr Taylor further noted that house prices have increased by 40 per cent since the COVID-19 pandemic and there could be some merit in APRA, as part of the normal review of its regulatory guidance, considering an increased degree of flexibility to be applied to borrowers.
3.45Mr Ranin Mendis Abeysekera, Managing Director of Ello Lending Co, made the point that the serviceability buffer disproportionately affects the ability of first home buyers to get a mortgage. He also advocated for a ‘more nuanced approach to regulatory policies’ in order to give first home buyers greater access to finance.
3.46Ms Anja Pannek of the MFAA explained that, from her members’ perspective, the three per cent buffer had proved to be challenging not just for first home buyers but also for people attempting to refinance their home loans. She reported that since the start of the year some financiers had started to use a oneper cent exception buffer for ‘like-for-like dollar refinancing’ and that this new policy had made refinancing significantly easier. Similar changes for first home buyers would probably see similar improvements in finance rates. This view was echoed in the MFAA’s submission to the inquiry.
3.47In answer to questions on notice, the MFAA conducted a ‘sentiment survey’ of its members to obtain their insights into the impacts of the serviceability buffer on first home buyers attempting to get a loan. Respondents to the survey had a median of 50 clients, of which 16 were first home buyers. Of this 16 first home buyers, ‘approximately 6 were unable to secure finance due to the current buffer settings.’
3.48This indicates, of borrowers attempting to get a mortgage through MFAA members, 37.5 per cent of first home buyers were unable to obtain a mortgage due to the serviceability buffer.
3.49Other witnesses commented that the lack of lack of lending to first home buyers due to the serviceability buffer was having flow-on effects. Mr Anthony Waldron, CEO of the REA Group, noted that building of new housing usually only commences after a certain amount of pre-sales has been achieved so the lack of credit was starting to affect housing supply. He further noted this was particularly affecting the housing development market.
3.50This view was reinforced my Mr Cameron Kusher, Executive Manager of Economic Research for the REA Group, who added that this was particularly damaging for developers of inner-city apartment buildings and greenfield estates, both development-types that are attractive to first home buyers.
3.51Mirvac also took the view that the current serviceability buffer had become a barrier to first home buyers trying to achieve home ownership. It urged the committee to recommend that the buffer be ‘recalibrated to better reflect current economic conditions’.
3.52Ms Pannek of the MFAA acknowledged that there were broader factors outside of the serviceability buffer that were effecting homeownership, and emphasised that the MFAA was not advocating for a wholesale loosening of credit. Ms Pannek suggested there would be a large benefit to specifically targeting a buffer for first home buyers with a shift from three to one per cent. She also made the point that, as per RBA and other statistics, first home borrowers have some of the lowest arrears of any borrower cohorts.
3.53Mr David Carson, Regulatory Compliance Adviser of the Finance Brokers Association of Australasia, advised that the three per cent buffer has an extra impact on first homeowners. He explained that because first home buyers typically have lower incomes and smaller deposits, so the buffer has a larger impact overall.
3.54Mr Carson was of the view that buffers were a sensible measure to contribute to the stability of the financial system, but could be slow to respond to changes in the market. He pointed out that at the top, or close to the top, of the interest rate cycle, the current three per cent buffer was a heavy burden and could impact certain classes of borrower more than others. Mr Carson was in favour of the serviceability buffer being reviewed more frequently.
3.55Mr Carson was not in favour however of a lowering of the serviceability buffer for all consumers, stating that this would stimulate demand and increase housing prices. His view was that there should be a lower buffer which could be applied to first home buyers to allow them to be more competitive in the market. He went on to say:
That is why the focus really needs to be, for me, on giving benefits to those entering the market for the first time without giving them actually more money to compete against.
3.56Other inquiry participants noted the impact of the buffer on fixed rate verses variable home loans. Mr Peter Tulip, Centre for Independent Studies, stated that he understood why the buffer was applied to variable loans where the impact of a change in interest rates would be felt sooner, but felt it was inappropriate for fixed rate loans. He also remarked that the buffer should be a function of the yield curve, with the buffer being higher when the curve was moving upwards and lower when it was moving downwards.
3.57A similar point was made by Ms Pauline Blight-Johnston, CEO of Helia, who felt the serviceability buffer should be countercyclical.
3.58Mr Tulip was also of the view that the current buffer was set too high, pointing out the current low rate of mortgage arrears and the lack of threat to prudential system stability.
3.59The Australian Finance Industry Association (AFIA) also expressed concerns with the serviceability buffer, particularly in the effect it could have smaller and non-bank ADIs:
Regulatory interventions may also have adverse and unintended consequences for lending markets, such as smaller ADls and non-ADI lenders ability to manage their portfolios and/or adhere to specific controls not easily absorbed into lenders reliant on securitisation markets for their funding. A lack of funding optionality for non-ADI lenders would have a material impact on competition and innovation and limit access to finance for customers who choose not to use the products, services, and technologies of an ADI or customers that sit outside the risk appetite of an ADI or outside the offerings provided by an ADI.
3.60In answers to questions on notice, ANZ stated:
If the buffer adjusted automatically based on the cash rate target (or another variable), it would change the maximum amount that could be borrowed by first homeowners and the amount of financial risk that they assume as the cash rate target moved (relative to a static buffer). To the extent the buffer fell, this would increase the maximum amount that first homeowners could borrow and the amount of financial risk. Conversely, as the buffer rose, it would decrease these amounts.
3.61This view was echoed by Mr Any Kerr, Executive of Home Ownership at the National Australia Bank, who said there was an opportunity for banks to work with the regulator and government to target modest changes to the serviceability buffer for first home buyers and increase the borrowing power of this cohort. At the same time, Mr Kerr cautioned that any implementation of this change would have to include consideration of other credit risk elements in order to limit the risks to those borrowers. He emphasized that any change to the buffer should be modest to prevent unintended consequences.
3.62In answers to questions on notice, Bendigo and Adelaide Bank advised that the buffer:
…results in first home buyers having serviceability assessed at an interest rate above 9 per cent, with the current mortgage rates available to most of this cohort being above 6 per cent. Accordingly, we are seeing 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.
A readjustment of how APRA sets the buffer could be considered to take into account the current interest rate cycle, having the impact of raising the buffer during the bottom of the cycle and lowering when at, or near, the top.
3.63In its submission to the inquiry, the Customer Owned Banking Association was also in favour of considering the size of the serviceability buffer, and noted that the buffer was impacting the borrowing power of first home buyers in particular.
‘Mortgage prisons’
3.64In addition to evidence on the impact of the serviceability buffer on first home borrowers, the committee received evidence regarding the inability of some borrowers to refinance their home loans due to the increase in interest rates and the application of the buffer—and outcome described as a borrower becoming trapped in a ‘mortgage prison.’
3.65Mr Carson of the FBAA described this phenomenon, stating that borrowers who had entered the market when interest rates were at three per cent were assessed under the serviceability buffer at six per cent. As rates have increased to six per cent, borrowers who wish to refinance are now assessed with a buffer of nine per cent which can often lock them into less favourable mortgage conditions. He was in favour of these borrowers being assessed at their current mortgage rate if they were demonstrating an existing ability to service their loans. This view was echoed by Mr Mott of Barrenjoey.
3.66FinTech Australia also made the following points:
When existing homeowners are unable to access better loan offers, it reduces their financial flexibility and limits housing stock availability, making it harder for first-time buyers to enter the market. Not only this, but it can diminish competition among lenders, resulting in higher interest rates and less favourable terms, which can deter potential first home buyers.
Concerns raised regarding any changes to the serviceability buffer
3.67The committee also received evidence from a range of inquiry participants opposing any lowering of the three per cent serviceability buffer.
3.68Mr Paul Holmes, Director of Disaster Relief at Legal Aid Queensland, told the committee:
'Freedom to fail' is something you say when you don't see the consequences of it, and, at Legal Aid, we see the consequences of the 'freedom to fail' regularly. I'm not saying don't ever lend to somebody; what I'm saying is that we currently have a really good system that, if you look at the evidence of the amount of people in default in similar economic circumstances before we had this system as opposed to now, has actually prevented people from failing to have a mortgage, and the problem with failing to pay their mortgage is there's currently nowhere to rent.
3.69Mr Holmes argued that the focus of government should be on improving the supply of housing before making changes to regulatory requirements like the serviceability buffer. He also made the point that issues of housing affordability had been exacerbated by current tax arrangements, such as negative gearing and the capital gains tax discount, and was in favour of removing those tax arrangements to ‘get rid of those distortions rather than bringing in another distortion to try and counter that distortion.’
3.70Similarly, Mr Greg Jericho, Australia Institute, countered suggestions the three per cent buffer was too high by pointing out that interest rates had increased by the buffer amount in the last three years. He noted that the fact there had not been an increase in mortgage defaults or other collapse of the housing market was proof the buffer was working. He urged caution in making changes to the buffer and, like Mr Holmes, placed more weight on current tax arrangements for the problems of housing affordability faced by first home buyers.
3.71Westpac was also of the view that the serviceability buffer should not be changed. Mr Martin Green, National General Manager of Property Finance at Westpac, told the committee ‘we don’t think the right answer is to put customers into more debt’ and ‘we do not believe that banks or the community should have an increasing willingness to accept higher levels of home loan defaults’.
3.72Mr Paul Deall, Head of Risk, Mortgages and Consumer Credit at Westpac added that Westpac was satisfied with the three per cent buffer, and that any further loosening of prudential standards would only place an increased burden and stress on borrowers.
3.73The Commonwealth Bank of Australia (CBA) was also opposed to lowering the serviceability buffer, with Mr Angus Sullivan, Group Executive of Retail Banking Services at CBA, describing the buffer as a ‘prudent and appropriate measure’ as well as a matter for APRA to consider. While he was empathetic to the needs of first homeowners, he also pointed out that first homeowners as group experienced higher levels of mortgage stress and it was important they not be overextended by borrowing too much money.
3.74Other witnesses also focused on the human cost of mortgage default, with MsNadia Harrison of Mortgage Stress Victoria urging government and regulators to take extreme caution in making any changes to the buffer.
3.75Mrs Julia Davis, Senior Policy and Communications Officer at the Financial Rights Legal Centre, characterised changing the serviceability buffer as an ‘easy fix that puts all the risk on individual homeowners’. She added:
Fixing the housing crisis is really difficult. A great way to keep the economy rolling, keep construction going and to keep bank profits flowing in is to allow borrowers to borrow more. We know that borrowers are willing to stretch and stretch and stretch because they are desperate to get into a house. To be honest, it is just a lazy policy idea that puts all the risk on the people who can least afford to manage it.
3.76Dr Dominique Meyrick, Co-CEO of Financial Counselling Australia, made the point that since July the National Debt Hotline had received over 42000 points of contact with roughly a third of those being related to mortgage stress. She went on to outline that since the COVID-19 pandemic, borrowers had frequently already had hardship arrangements in place which were now expiring, leading to people not paying other expenses or skipping meals in order to make mortgage payments.
3.77Mr David Locke, Chief Ombudsman and CEO of the Australian Financial Complaints Authority (AFCA) took the view that if current prudential standards were significantly changed, it was highly likely there would be an increase in cases coming through to AFCA. He noted that currently AFCA has roughly 60000 banking and finance complaints a year and those numbers have been largely static, with some small increases in recent years. He told the committee that this demonstrated that current regulatory settings were working as intended.
3.78Mrs Therese McCarthy Hockey, Executive Board Member of APRA, made the point that the serviceability buffer was a tool and there were a variety of factors which were considered by APRA when it was setting this buffer. She observed that the rate of non-performing loans had increased to a rate of roughly one per cent, an amount nearly double that of 2016. While APRA was not overly concerned about these figures from a prudential perspective, Ms McCarthy Hockey remarked that while employment in Australia was currently very strong, if that were to change this would create a very different set of outcomes for borrowers.
3.79Dr Marion Dorothea Kohler, General Manager of System Risk at APRA, also made the point that the serviceability buffer was reviewed several times a year to determine if it was working as intended within the broader prudential system. Such reviews considered a broad range of data, asset prices, lending conditions and financial resilience, and included consultations with the Council of Financial Regulators. Dr Kohler reiterated points previously made that there had been an uptick in loan arrears and non-performing loans recently, adding that there is an existing baseline of vulnerability in the Australian system that APRA was mindful of due to high household debt to income levels.
3.80Mrs McCarthy Hockey also advised APRA’s tools are focused on access to finance, as opposed to solving the challenges of housing affordability.
Mortgage credit risk weighting
3.81The committee also heard evidence around the question of whether a change to the credit risk weighting held by banks would impact on the ability of first home buyers to secure a loan. Mortgage credit risk weighting and its role in the mortgage system is discussed in more detail in Chapter 1 of this report.
3.82In answer to questions on notice, APRA provided the current risk weights for residential property loans (see figure 3.3 below).
Figure 3.3Credit risk weights for standard loans
Source: APRA, answer to written question on notice APRA-002, 24 October 2024 (received 1 November 2024), p.1.
Note: LMI refers to lenders mortgage insurance and LVR refers to loan to value ratio
3.83Mr Johnathan Mott of Barrenjoey was strongly in favour of the idea of rebalancing banks’ existing risk weightings to favour first home buyers:
We think they should consider putting around a 70 per cent risk weighted asset multiplier on owner occupied first home buyers who purchase a new home or build a new home. Again, it is a greater weighting if you build or if you buy off the plan. It would be around an 85 per cent multiplier on first home buyers who buy an existing property and a slight increase in the risk weights to around 105 per cent to 110 per cent for upgraders and investors. This would leave the total risk weighted assets of the banks broadly unchanged. It is consistent with APRA's targets and the recommendation of the Murray financial system inquiry from 2014. We are not suggesting any weakness in financial stability resilience.
3.84Mr Mott went on to say that his suggestion was a modest rebalancing in favour of first home buyers, with an increase of risk being absorbed by other owner-occupier customers. This would lead to banks not needing to hold as much capital against first home buyer mortgages with a flow on effect of lower interest rates.
3.85Mr Mott further explained that the opposite effect had occurred a few years ago when APRA had increased the risk weighting for investor mortgages, which led to the banks increasing interest rates for investors. He contended that a similar effect could be replicated in favour of first home buyers. He went on to say:
On our modelling, you will see a reduction of about 0.29 per cent interest rates to first home buyers who buy to build or buy off the plan. That would save over $37,000 over the life of a loan for the first home buyer. It is a large amount of money that can help just by modestly reweighting the risk weighting.
3.86Mr Mott suggested this was a change which, if approved by APRA, could be quickly implemented by banks and would be in their interests, both in their commitments to being good corporate citizens and in allowing them to grow their customer base among young people.
3.87Based on Barrenjoey’s modelling, Mr Mott confirmed this change would lead to an increase in interest rates for investors and other owner-occupier mortgage customers of roughly six to seven basis points. He maintained that this change would not have an impact on financial resiliency, commenting that Australian banks are ‘unquestionably strong’. He was also clear that this could be implemented in such a way so as to reduce the burden on first home buyers without increasing rates for other existing mortgagees.
3.88He conceded that for people who had already bought property, such as those seeking to upgrade, this change would not be of benefit to them. He noted, however, that existing property owners had likely benefitted from increases in property prices.
3.89Mr Paul Deall, Westpac, pointed out that the bank held more capital for first home and younger borrowers as they present as riskier loans. First home buyers tend to have higher default rates and hardship rates which flows through to higher risk weightings. Despite this, Westpac’s proportion of new lending for first home buyers had increased roughly 50 per cent up to the end of the 2024 financial year. He felt that under current policy settings there was not a particular constraint on first home buyers as this cohort was continuing to enter the market.
3.90Mr Andy Kerr, Executive of Home Ownership at NAB, was not enthusiastic about proposed adjustments to credit risk weightings, noting that this had not been one of NAB’s recommendations to the inquiry.
3.91In its submission to the inquiry, the ABA stated that it was not advocating for changes to the capital treatment of residential mortgages and was supportive of APRA’s current framework.
3.92Mr Angus Sullivan, CBA, was asked about the marketplace effects of one bank offering a lower interest rate to first home buyers due to changes in the credit risk weightings and the flow-on effects of that. He stated that the mortgage market is a competitive one and that one banking institution offering lower first home buyer rates due to a reduction in capital could lead to broader reductions of prices for first homeowners across the market.
3.93Ms Kylie Rixon, Chief Risk Officer of Retail Banking Services at CBA, noted that a relatively small change in risk weighting could lead to an increase in borrowing capacity of between $10000 and $15000.
3.94The committee received differing evidence from witnesses that gave evidence about the risk profile of first home buyers. The evidence from lenders mortgage insurance provider Helia was that first home buyers pose a ‘slightly greater risk’ than other kinds of home borrowers.
3.95Mr Angus Sullivan of CBA stated that first home buyers, based on their data, were higher risks and experience higher rates of delinquency. He was of the view that the level of capital underlying first home buyers’ mortgages should reflect this higher risk.
3.96NAB provided a differing view, with Mr Andy Kerr stating that first home buyers are no more or less risky than other customers and do not show up as higher risk than other home borrowers in NAB’s portfolio.
Role of Lenders Mortgage Insurance
3.97The Insurance Council of Australia provided evidence on the role of lenders mortgage insurance (LMI) for first home buyers and the prevailing capital framework:
We are of the view that the capital framework as designed operates to increase the cost of high loan-to-value ratio (LVR) residential mortgages that are protected by lenders’ mortgage insurance (LMI) – lending that commonly comprises first home buyers (FHBs). This is because ADIs are required to hold higher levels of capital for high-LVR loans protected by LMI through higher risk weights attaching to those loans, and ADIs are also required to maintain higher capital ratios against those total higher risk weighted assets. This disproportionately impacts high-LVR borrowers.
3.98The Insurance Council went on to note that, based on advertised rates of some of the largest mortgage lenders, borrowers with an LVR of 90 to 95 per cent had an interest rate 1.09 per cent higher on average than a borrower with an LVR of 80 per cent. This kind of borrower would also be incurring the costs of LMI as well.
3.99Productivity Commission analysis from 2018 indicates that LMI is not correctly priced as a risk mitigation product:
We analysed whether borrowers paying for LMI are also paying higher interest rates. Using data from the Australian Securities and Investments Commission, we found that, after taking into account factors such as the borrower’s age and the loan amount, borrowers with LMI were on average charged a slightly higher interest rate, amounting to 0.00066% of the average interest rate for all borrowers. This means that, if the average interest rate for all borrowers was 5%, the average interest rate for borrowers with LMI would be approximately 5.003%. Albeit small, this difference is statistically significant.
But even a small difference is hard to justify — LMI already protects lenders from the additional risk of loss arising from borrower default where there is a high LVR ratio, and lenders should not need to charge a higher interest rate as well to protect themselves against the higher risk.
3.100The Insurance Council contended that ‘lenders are now seeking a return on the additional capital they are required to hold for high-LVR lending post Basel III by charging a higher interest rate to high-LVR borrowers’.
3.101In its answers to questions on notice, the Insurance Council provided the following graph illustrating this point (figure 3.4 below). This shows the additional costs of a $500000 mortgage with a 95 per cent LVR (and as such protected by LMI) over the life of the loan.
Figure 3.4Cumulative costs of additional interest rate and LMI for a first home borrower
Source: Insurance Council of Australia, answers to written questions on notice, 5 November 2024 (received 15 November 2024), p. 2.
3.102The Insurance Council made the following suggestion:
We suggest that recalibrating the risk weightings for high-LVR residential mortgages (for owner-occupiers repaying principal and interest, not investor and interest-only loans) with LMI would lower the capital costs for ADIs. This in turn should work to reduce the costs of residential mortgage lending to high-LVR borrowers (typically FHBs). This would better align to the original intent of LMI which was to enable home buyers with low deposits to access a home loan at rates equivalent to those with a 20% deposit, as the increased credit risk of these loans has been appropriately mitigated by the use of LMI. LMI providers, as the Committee is aware, are separately regulated by APRA and must hold significant capital to support high-LVR home lending in Australia.
3.103This view was reinforced by answers to questions on notice provided by LMI provider Helia, who noted that unequal capital requirements are applied to high LVR ratio loans based on whether they utilise LMI, parental guarantees or the Home Guarantee Scheme.
3.104Helia provided the following table demonstrating the above point, using the example of a $600000 loan, a 95 per cent LVR and the capital requirements and risk weights required across different low deposit assistance to the borrower:
Figure 3.5Capital treatment of $600000 loan with different low-deposit security options
Source: Helia, answer to questions on notice, 24 October 2024 (received 6 November 2024), p. 1.
3.105The capital benefit provided to parental guarantees demonstrates the inflated capital holding on LMI which could be reduced to improve accessibility to Australians without access to a parental guarantee. This is regulatory arbitrage which is so significant that a lower capital risk weighting for LMI secured mortgages would easily offset the cost of the premium.
Student loan considerations
3.106The committee also received evidence about whether HECS-HELP debt (hereafter ‘HECS’ – a loan from the Australian Government used to pay university fees) should be considered a debt when a borrower applies for a mortgage, a consideration particularly relevant to younger borrowers and first home borrowers.
3.107In its submission, the Macquarie University Economics Society wrote that HECS debt was becoming an increasing barrier to home ownership. They noted that the average 20–29-year-old has a HECS debt of approximately $32000 and that in 2023 when the indexation for HECS debt was at 7.1 per cent, many people found that their repayments did not cover the applied indexation.
3.108Currently, HECS is assessed similarly to any other debt (such as credit card debt or a personal loan) which a person applies for a mortgage. As Barrenjoey explained:
In calculating borrowing capacity the banks are required to look at all debts such as credit cards, personal loans and HECS - HELP. This debt is not deducted from borrowing capacity, but the repayments are factored into the calculations when determining borrowing capacity as this money is not available to meet the mortgage repayment.
3.109Mr Andy Kerr of NAB explained how HECS debt is calculated for the purposes of mortgage serviceability:
HECS debt is paid pretax. However, we look at post-tax income as our starting point for serviceability assessment, and then we are required to consider HECS as a standalone debt on top of that. To some extent, we see that as double counting in its treatment.
3.110Mr Ranin Mendis Abeysekera of Ello Lending Co noted that many younger people applying for a mortgage are not aware of the longer-term impact of the amount of student debt they are carrying has on their borrowing capacity. He relayed the circumstances of one of his clients who, after calculating their borrowing capacity with HECS debt included, saw their borrowing capacity reduced by $100000.
3.111Mr Abeysekera offered several suggestions for how this barrier could be overcome for borrowers with large amounts of HECS debt, such as refinancing the HECS debt into another loan or excluding HECS from serviceability calculations. He went on to state that, with current calculations HECS debt has a greater impact than other kinds of debt, making the point that a $10000 credit card debt would not have as large an impact on a person’s lending capacity as a $10000 HECS debt.
3.112The MFAA made the point that HECS debt was a significant barrier for many first home buyers and advocated for the removal of HECS debt being included in serviceability assessments in certain circumstances.
3.113Barrenjoey was also in favour of having HECS debt excluded from borrowing calculations, but did note that this could put some borrowers in financial stress for the first few years of the life of their mortgage.
3.114In his submission, Dr John Bryon was of the view that ‘an applicant’s obligation to make HECS repayments should only be taken into account in the context of their receipt of the income that triggers that obligation in actuality’.
3.115Mr Holmes of Legal Aid Queensland was more sceptical of the idea, noting that, whether HECS is calculated as part of a loan applicant’s debt or not, it still is a payment that is required to be made and reduces an applicant’s disposable income. The risk of not including HECS in debt calculations is this can make a person’s disposable income look higher and can lead to financial hardship in the future.
3.116Mr Kerr of NAB stated that his bank has a ‘very conservative approach to treating HECS debt’ and that the bank’s recommendation was that it should only be treated as a pre-tax deduction. In its submission, NAB was open to working with APRA on alternative approaches for how to consider HECS debt for first home buyers.
3.117The ABA was unconvinced that any modifications to how HECS debt was treated in mortgage applications would have a significant impact on a customer’s ability to get a loan. The ABA noted that HECS was taken out of a person’s income before they are paid, impacting the income available to service a loan until the HECS debt is paid off.
Changes to responsible lending obligations
3.118Another issue raised the inquiry was whether there was a case for changes to the current responsible lending obligations.
3.119Several submissions were supportive of current responsible lending obligations, commenting that these laws were striking the right balance and operated effectively.
3.120Ms Anja Pannek, CEO of the MFAA, was of the view that current responsible lending obligations were fit for purpose. However, she did state that there were elements of the National Credit Act which could be amended to include new credit products, such as co-ownership and deferred sharing of capital growth, which currently are not envisioned by the Act.
3.121Mr Chris Taylor, Chief of Policy of the ABA stated that banks are supportive of the responsible lending rules but noted that current obligations around assessing a first home buyer’s ability to service a mortgage do not take into account a borrower’s future income growth. He advocated for more flexibility in the regulatory guidance in this regard. He went on to say:
[First home buyers] are also usually at the beginning of their careers and have a higher income trajectory throughout their career. There was some recent research done by the RBA that showed first home buyers on the whole don't tend to present a greater risk of default than a broader set of borrowers.
3.122Witnesses also discussed the 2020 Federal Court case of Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial), colloquially known as the ‘Wagyu and Shiraz Decision.’ As explained by Mr David Carson of the FBAA:
Effectively, what the court said is that customers can and do change their behaviour after they are approved for a loan. It is not a breach of responsible lending for a lender to recognise that in their approach to determining what they are going to lend to a customer.
3.123Mr Carson went on to explain that, although the regulatory guidance had seen some change since the Wagyu and Shiraz Decision, this had been only minimal and had led to the enforcement of responsible lending becoming a ‘retrospective test’. As a consequence:
…from a lender's perspective, if they make an assessment that this person should cut 20 per cent of their expenses and can, and they lend against that but then the customer doesn't make those cuts, the lender is effectively wearing the risk of that subsequent behaviour. To mitigate that risk, they are generally unwilling to be too courageous about making reasonable concessions for consumers to adjust their behaviour. That results in a conservative assessment, where they say, 'We'll assess you as having less income and more expenses to ensure that if something goes wrong with this loan down the track, we're not going to be accused of overcommitting you. It will be for some other change.'
3.124This view was countered by Mrs Julia Davis of the Financial Rights Legal Centre, who claimed that lenders are not verifying a potential mortgage customer’s expenses and are instead relying on standardised measurements. She advocated for a change to responsible lending law to strengthen mortgage assessment processes.
3.125The Consumer Policy Research Centre submitted that current responsible lending rules were working as intended, and cautioned that any changes to these rules could lead to harm to consumers.
3.126Ms Erin Turner, CEO of the Consumer Policy Research Centre, advocated for more specificity in responsible lending rules for purchasers of investment properties:
We don't just want investors; we want good investors that will be good quality landlords for people who rent. And an investor that can't afford to fix an oven when it breaks is a bad landlord.
Supply-side solutions
3.127Although the focus of the inquiry was on the financial settings which can be changed to increase home ownership, particularly for first home buyers, there was evidence presented at the hearing and in submissions about the place of supply side solutions to Australia’s housing market.
3.128Many people wrote to the committee advocating for a focus on increasing housing supply, or other supply-side solutions to the current housing crisis.
3.129Housing construction has collapsed under the Albanese Government to just 160,000 houses this year - the same amount as in 1989 when the population was just 17 million.
3.130The committee was presented a range of perspectives on the supply challenges from building costs, land release, last mile infrastructure and access to finance.
3.131Mr Paul Holmes of Legal Aid Queensland made the point that there was currently housing stock available and competition for those homes, leading to some buyers offering above-market prices for properties and inflating housing prices. This has led to the ‘lower end of the market’ being squeezed out of the housing market.
3.132Mr Mike Zorbas, Property Council, spoke in favour of ‘build-to-rent’ housing investment as one additional housing model to be implemented in Australia, noting it provides a good rental experience for tenants, does not crowd out the private rental market, and puts downward pressure on rents. Mr Zorbas told he committee:
…we really need to pull every possible lever to increase the supply to bring down those prices, or at least to put downward pressure on them over time.
3.133Mr Holmes of Legal Aid Queensland was firmly of the view that housing supply needed to be increased, arguing that ‘giving people more access to money is not going to magically create more houses’.
3.134Dr Greg Jericho, Chief Economist at the Australia Institute, made the point that housing supply had been affected by the drop in supply of public sector housing. He advised that whereas public sector housing had at once time contributed to 10 per cent of new housing, in the last 20 to 25 years this had fallen to less than two per cent. While acknowledging that there were other factors that have led to the current housing crisis, he was firm that the shift away from public housing should be reversed.
3.135Dr Sarah Hunter, Economic Assistant Governor at the Reserve Bank of Australia (RBA), provided the committee with detail of the RBA’s recent discussions with the building sector. She noted that one of the recent pieces of feedback the RBA had received from the residential building sector was a need to ease some planning rules and regulations. She also relayed that the RBA had received feedback that some of the supply-chain constraints which had affected the building sector during the COVID-19 pandemic, particularly those relating to labour, had started to ease and there was an associated modest up-tick in dwelling approvals.
3.136Dr Hunter went on to say that an increase in supply would, generally speaking, put downward pressure on housing prices and rents and that this is ‘a fundamental of the market’.
3.137This view was echoed by Mr Chris Taylor of the ABA, who stated that new housing supply was at a low point and housing prices had increased 40percent since the COVID-19 pandemic. Mr Taylor said:
…[t]o create more opportunities for young Australians, we need to build more homes. The best way to increase affordable housing is by implementing policies that will increase supply.
3.138This view was echoed by Westpac, with Mr Martin Green clearly stating that ‘the primary challenge facing Australia is housing supply’. He was of the view that there were structural obstacles which had made residential construction building an unattractive risk for builders and developers, with many in that sector moving to less risky infrastructure development projects. He went on to say:
Construction costs, labour costs and shortages, and planning and infrastructure costs are large contributors to this issue. These factors mean that the basic economics for building homes in Australia are currently severely challenged, if not broken. While there are other contributing factors, none of which are easily solvable, to effectively support home ownership, we must prioritise addressing these fundamental supply challenges.
3.139Mr Andy Kerr of NAB warned against a focus on demand-side policies without ensuring there was adequate supply of housing for buyers, noting this could exacerbate current issues in the housing market. He advocated for improving planning and approval processes to incentivize housing development, as well as increased collaboration across different levels of government.
Stamp duty and other state-based taxes
3.140The committee also heard evidence about the effects state and territory tax regimes, including stamp duty and land tax, were having on housing supply.
3.141Mr Tim Reardon of the Housing Industry Association suggested that high rates of stamp duty on foreign investors by state governments had constrained investment in apartment construction. He added that this constraint had been further exacerbated by the federal government’s Foreign Investment Review Board.
3.142Mr Reardon went on to say that foreign banks or other financial institutions investing through building apartments did not affect supply, and suggested a Productivity Commission review of the punitive rates of stamp duty on foreign investment would find them to be revenue negative, particularly in New South Wales.
3.143Mr Cameron Kusher, Executive Manager or Economic Research for the REA Group, aruged in favour of replacing stamp duty with a land-tax system. He noted that land tax offered state and territory governments more guaranteed income, and observed that the existence of state-based first home buyer programs that waive stamp duty was a recognition of the large hindrance stamp duty places on someone wanting to enter the property market.
Different titling and ownership models
3.144There was also a discussion at public hearings and in submissions about new titling and ownership models which could be explored to encourage first home buyers into the market.
3.145Ms Lynda Coker, CEO and Co-founder of Co-operty, was strongly in favour of exploring co-ownership models of property ownership:
We believe co-owning with family or friends can help first home buyers onto the property ladder faster and more cost effectively than some other affordability solutions, as it involves less debt, fewer fees and accelerates ownership for more people in unlocking supply, especially in the inner and middle rings of our cities. It also provides a flexible option for existing home owners, particularly retirees, to gradually sell down their property investment, optimising their capital gains while improving their cash position and encouraging wealth transfer across generations.
3.146Ms Coker went on to explain that parents co-owning a property with their child could be preferable to providing a cash gift or loan for home ownership. She noted that co-ownership enables asset protection and better financial security for people nearing retirement.
3.147Co-operty’s submission also made the point that recent research has shown 47per cent of young Australians ‘would consider buying property with a friend due to affordability concerns’. It added:
Co-ownership is a natural circumstance for many life and family situations but now demand is growing due to affordability constraints. However bank lending policies remain restrictive and fail to recognise that the credit risk is lower when people co-buy as a cohort (stamp duty, mortgage and ongoing costs are shared) albeit liquidity risk is higher.
3.148Co-operty’s submission was in favour examining APRA’s current responsible lending obligations and the Banking Code of Conduct to better facilitate co-ownership models of property ownership.
Conclusion
3.149The committee’s views on the issues raised in this chapter, as well as recommendations for this inquiry, will be explored in the next chapter.