Lending to housing is a productivity killer

Guest observation

Working with the banks on a daily basis, its easy to understand why tech savvy entrepreneurs are competing for their market share.

Innovation, like PayPal's venture into the small business loans sector, will force our banks to become more competitive and accommodating when dealing with small to medium enterprises (SMEs) who continue to be forced to meet ridiculous hurdles when trying to access capital.

Although our banks would argue otherwise, in my opinion, other than continuing to channel huge amounts of dollars into property, our banks have played a very small role in helping SME’s grow during the post GFC years and the economic recovery in general.

If you were to look deeper into lending in Australia, you will see that most of the lending that does occur to businesses is supported by the security of Real Property.

Banks have effectively homogenised lending to the lowest common denominator, with very little room for negotiation when it comes to products, pricing or terms. They also almost always rely on Real Property Security as a substitute to critical credit analysis, where a lender would set pricing according to risk.

This standardised form of lending has ensured that the banks can continue to operate with the lowest cost base generating the highest returns.

Of course, this has been great windfall for shareholders, but at what cost to the real economy? 

Our property market is one of the most expensive in the world, we have one of the highest costs of living and yet our economy lacks efficiency and productivity has deteriorated dramatically during the past decade.

These imbalances are very obvious and have all been compounded by the fact that capital in Australia is not channeled into the most productive areas where it will achieve the maximum return.

Banks play a critical role in our economy. We need them to be profitable and well capitalised, but while they continue to remain protected from competition, remain “to big to fail” and continue to rely on government guarantees underwritten by our tax dollars, they should be forced to make a greater contribution to the growth and success of our economy.

Or, to put it another way, they should not be allowed to conduct their business in a way the that kills productivity and put into jeopardy the hopes and dreams of future generations.

Con Katsiouras is the Director of Folio Finance.