Responsible Lending Laws Peeled Back

Treasurer Josh Frydenberg has declined to weigh in on the impact lending reforms will have on house prices.

The changes, announced on Friday, usher in the most significant reform to credit laws since the Rudd-Gillard government’s post-GFC credit safeguards were legislated in 2009.

“I actually didn’t say it would have a direct impact on house prices. But for first home borrowers and people seeking a mortgage this will increase their access to credit,” Frydenberg said.

The reforms remove barriers to lending and transfers the onus from “lender beware” back to “buyer beware”—effectively stripping back the obligations that require banks to undertake lengthy credit approvals.

The red-tape verification processes have long been criticised by the property industry for restricting home buyers’ access to credit and placing downward pressure on house prices.

Real Estate Institute president Adrian Kelly said the reforms will positively impact the housing market.

“By improving demand, the government is giving prices less chance to fall.”

After abandoning the irresponsible lending case against Westpac—which prompted the high-profile “wagyu and shiraz” judgment—regulator ASIC reportedly wrote to the treasurer requesting clarity, while RBA governor Philip Lowe said that the “pendulum had probably swung a bit too far”.

The changes come just 18 months after Royal Commissioner Kenneth Hayne, referring to Treasury’s submission, said that there is “little evidence to suggest that the recent tightening in credit standards, [h]as materially affected the overall availability of credit”.

The winding back of the responsible lending laws in the Credit Act means that the government will no longer adopt the full suite of recommendations of the royal commission’s final report.

While the reforms may help more Australians buy property, according to private house and land developer Grant Dennis, “there’s only so much demand you can pull forward”.

Speaking as part of The Urban Developer’s In Conversation series, Dennis said that without any net overseas migration [there’s] a finite number of houses and land that’s required.

“While things are buoyant at the moment, any time you get government intervention—like the first home buyers grant—you get an initial sugar hit, and then you look at the curve and it always drops below the previous level of activity pre-stimulus.

“There’s only so many customers, and I think we’ll start to see challenges in 12 and definitely in 18 months time.”

More than 900,000 deferrals are due to be assessed as the initial wave of the six-month loan payment deferral period come to an end.

“The coronavirus shock has increased loan delinquency, payment deferral and default risks for residential mortgages, although the impact remains muted for now with many loans on continued payment deferrals,” Moody’s analyst Christopher Chambers said.

On Friday, the treasurer said that “credit underpins the Australian dream of home ownership” while promising to do away with the “one-size-fits-all” approach to lending.

“As the economy emerges from the Covid-induced recession, we know credit will be essential to the speed and strength of recovery,” Frydenberg said.

The government will move to implement the reforms from 1 April 2021.