Chapter 4Committee view
4.1This chapter consists of the committee’s view of the evidence received though the inquiry, as well as the committee’s recommendations.
Parliamentary Oversight
4.2Within Australia’s financial regulatory framework, APRA forms one of the peaks of the Twin Peaks system, with responsibility for ensuring Australia’s financial safety and stability through prudential regulation.
4.3Despite this, the committee notes the differences between the oversight of the two agencies, ASIC and APRA, that make up the two peaks of Twin Peaks.
4.4Both organisations appear before Senate Estimates and can be called to appear before other Senate committees. They also both receive statements of expectations from the Australian Government and are required to table their annual reports in the Parliament. Yet while the ASIC is expressly subject to the oversight of a statutory parliamentary committee, namely the Parliamentary Joint Committee for Corporations and Financial Services, under the ASIC Act, the APRA Act does not contain an equivalent provision.
4.5The committee considers that within the Twin Peaks system, both ‘peaks’ should receive the same degree of oversight. The gap between ASIC and APRA should be closed in order to ensure that the Australian people can have full confidence in the Twin Peaks financial regulatory system.
4.6APRA is making rules as a delegate of the Parliament, which heavily impacts upon the lives of Australians. Mortgage rules are but one example.
4.7The committee recommends that the Australian Government amend the Australian Prudential Regulation Authority Act 1998 to establish a statutory duty for the Parliamentary Joint Committee on Corporations and Financial Services to undertake regular scrutiny and oversight of the Australian Prudential Regulation Authority, broadly equivalent to the duties set out for that committee in relation to the Australian Securities and Investments Commission set out in section 243 of the Australian Securities and Investments Commission Act 2001.
APRA’s mandate
4.8Under the current financial regulatory system, APRA has an overarching objective of promoting financial system stability. This is one of the cornerstones of Australia’s current financial regulatory system.
4.9The committee commends APRA for its role as a prudential regulator. It is clear from evidence received that APRA takes its role of promoting financial system stability very seriously. This has created a financial system in Australia which is one of the most stable in the world. Evidence received about the very low rate of banking collapses and mortgage default in Australia reflects this. However, the complete elimination of all risk is not an appropriate or desirable goal for the economy.
4.10Evidence received by the committee throughout the inquiry has shown that APRA’s dedication to stability, though commendable, may be inadvertently disadvantaging first home buyers in Australia. The repeated evidence received about the difficulties faced by first home buyers, including that it is easier to buy your 10th home in Australia than it is to buy your first, was particularly compelling.
4.11To be clear, the committee is not recommending that prudential standards be ‘loosened’ or ‘relaxed’. As previously noted, strong prudential oversight is an important part of Australia’s highly stable financial system. However, the importance of home ownership, and the ability of first home buyers to enter the market, is also an important consideration.
4.12The committee is of the view that making the changes to APRA’s mandate as outlined in the recommendations below could have a beneficial impact on first home ownership, without diminishing the stability of Australia’s financial system. Requiring APRA to have consideration for first home ownership, both in its objectives as well as in the Statement of Expectations provided to it by the Government, sets the stage for a prudentially sound financial system which is fair and accessible to all Australians.
4.13The Treasurer, the Hon Dr Jim Chalmers MP, gave an updated statement of expectations to APRA in June 2023. The committee notes that the statement contained no mention of broader economic considerations such as home ownership.
4.14The committee recommends that the Australian Government amend the Australian Prudential Regulation Authority Act 1998 objectives contained in section 8 to include the promotion of first home ownership as a subsidiary objective.
4.15The committee recommends that the Australian Prudential Regulation Authority Act 1998 be amended to include specific obligations that the Australian Prudential Regulation Authority must have regard to the impacts on first home buyers when setting prudential standards.
4.16The committee recommends that the Australian Government provide the Australian Prudential Regulation Authority with a new Statement of Expectations which would include a requirement to consider the long-term benefits of widespread home ownership – for financial, social and fiscal stability - when setting prudential standards.
Changes to current lending rules
4.17The committee heard concerning evidence from several witnesses that banks were increasingly lending only to people with higher incomes and that mortgages were becoming ‘luxury products.’
4.18Evidence received throughout the inquiry has underlined the benefits of home ownership for Australians and the difficulties faced particularly by buyers trying to enter the property market for the first time.
Serviceability buffer
4.19The evidence received during hearings was clear that the current mortgage serviceability buffers place a particular burden on first home buyers - one that, at different stages of the economic cycle, may not appropriately reflect the risks that first home buyers pose as customers.
4.20The committee was highly concerned by the information provided by the Mortgage and Finance Association of Australia that approximately 37.5 per cent of prospective first home buyers were unable to obtain finance due to the three per cent serviceability buffer.
4.21The committee particularly notes the evidence from the Australian Banking Association and several large and small banks, that first home buyers were not significantly more risky than other types of mortgage customer, particularly given that, as a group, their future earnings are more likely than other cohorts of borrowers to increase over time.
4.22The committee is of the view that the three per cent serviceability buffer is not sufficiently dynamic, as it has applied both when the official cash rate was 0.1per cent in 2021, and currently when the official cash rate is at 4.35 per cent, at or near the likely top of a monetary policy tightening cycle.
4.23The committee was concerned by evidence about the impacts on mortgage lending of the three per cent loan serviceability buffer required by APRA. This ‘one size fits all’ approach to mortgage lending has a particularly onerous impact on first home buyers and can also lead to other kinds of borrowers being unable to refinance their loans to more competitive rates, resulting in them being trapped in what has been referred to as ‘mortgage prison’.
4.24The committee also noted the release of APRA’s update on macroprudential standards in November 2024. This update confirms the blunt nature of this instrument, that the buffer is calibrated at a system-wide level, and that the level of exception utilised by ADI’s is miniscule, representing around five per cent of new mortgages over the last year.
4.25The committee recommends that the Australian Government, through its Statement of Expectations, require the Australian Prudential Regulation Authority to prepare prudential guidelines for a lower first home buyer serviceability buffer that can be adjusted responsively to the economic cycle and to support financial stability settings within APRA’s prudential standards.
The prudential guidelines would be a separate and disallowable legislative instrument; and
APRA would monitor and report on the serviceability buffer’s impact on first home ownership and financial stability annually.
Capital risk weightings
4.26The committee is of the view that capital risk weightings applied to first home mortgages are essentially judgements, and there are various risk weight permutations that could be applied.
4.27The committee received evidence from the Insurance Council of Australia noting that capital risk weightings differ between mortgages covered by the government Home Guarantee Scheme (HGS), parental guarantees, and those covered by the private market Lenders Mortgage Insurance (LMI).
4.28The committee notes that there is a body of evidence suggesting that the risk weights applying to first home mortgages with LMI are excessive, when compared to the risk weighting applied to parental guarantees.
4.29The committee is strongly of the view that this is regulatory arbitrage. For many Australians, LMI is the only way they can access a mortgage, particularly in situations where a parental guarantee isn’t available. This is standing in the way of cheaper mortgages.
4.30The ‘Bank of Mum and Dad’ has been described as Australia’s fifth largest lender. The committee finds this trend highly concerning and is of the view that parental wealth should not be determining housing outcomes. In particular, this trend should not be reinforced by the housing regulator.
4.31The committee notes that APRA gave evidence that there are several permutations as to how risk weightings can be applied to mortgages as set out in the prudential standards.
4.32The committee received evidence that certain changes in mortgage risk weightings could lead to increased borrowing capacity for first home buyers and significant savings over the life of their loans, without increasing overall risk in Australia’s financial system. Evidence received by the committee from investment bank Barrenjoey suggests that up to 50000 first home buyers per annum could become able to buy a home under a proposal along these lines.
4.33The committee recommends that the Australian Government, through its Statement of Expectations, require the Australian Prudential Regulation Authority to prepare prudential guidelines allowing Authorised Deposit-taking Institutions to have lower capital risk weightings for first home mortgages where a stronger degree of risk protection exists, within APRA’s prudential standards.
The prudential guidelines would be a separate and disallowable legislative instrument; and
APRA would monitor and report annually on the impact on first homeowners and financial stability of enhanced flexibility around capital risk weightings.
Other recommendations
4.34The committee welcomes the evidence provided about more flexible ownership options for first home buyers, whether through parents being on the title of their child’s property, or other options for non-family co-ownership of property.
4.35There is a strong case that there is room for more innovative thinking in the home lending space along such lines, to provide more opportunities for first home buyers to enter the property market.
4.36The committee recommends that the Australian Government consults with Approved Deposit-taking Institutions about options for modernising the Banking Code of Practice to facilitate lending in co-ownership scenarios.
Senator Andrew Bragg
Chair
Liberal Senator for New South Wales