Finance providers maintaining high lending standards: ABA
Policies seeking to increase home buyers’ purchasing power when supply is insufficient will serve only to drive up prices and reduce housing affordability, according to the Australian Bankers Association Inc (ABA).
"The buying power of most home purchasers is determined ultimately by the amount of money they can borrow.
"The average loan size is now $357,500 or 8.7%higher over the past year, and not surprisingly the highest on record."
Finance providers are maintaining high lending standards, claimed ABA in the submission to the House of Representatives Standing Committee on Economics.
"The proportion of new loan approvals to high LVR borrowers, i.e. LVRs more than 90% has fallen since 2009 for all borrowers and remains below 10% for investor loans.
"Low doc loans have fallen to very low levels for both owner-occupiers and investors. The proportion of interest only loans has been gradually rising since 2009, with investors showing a greater propensity to use this form of financing compared with owner-occupiers. The share of housing loans which are impaired has been falling since 2011."
Australia needs to progressively increase its housing stock to shelter its growing population.
"Over the year ending September 2014 Australia’s population is estimated to have increased by 354,600.Of this, 150,700 was natural increase and 203,900 was net overseas migration.
"There is a danger that policy prescriptions that seek to address issues in particular markets – such as excess demand in Sydney and Melbourne – but which are applied across the nation may have unintended consequences in other areas of Australia where such issues are less pressing or absent."
ABA believes that there is significant opportunity for reform in policies to increase land release for housing construction.
"The supply side of the housing industry is now beginning to lift. Approvals to build new dwellings have been trending up since mid-2012 and over the year to April 2015, 214,000 approvals were issued for the construction of dwellings.
Building approvals
"The close relationship between interest rates and housing construction approvals does not mean that interest rates can be used as a policy tool to address issues of housing shortages.
"Interest rates influence the short term cycles in construction, but do nothing to address the longer term structural imbalance between demand and supply."
In terms of structural issues a persistent complaint is that development is hindered by a shortage of green field sites, reflecting insufficient land release by state governments, and by excessively restrictive council regulations and developer levies.
"Demographia supports the assertion that higher land prices are a major factor and that a key reason for expensive land is inadequate release of new land for development."
Around two thirds of households own or are purchasing their home and about one third are renting. Australia’s home ownership rate is around the middle of many of its peers in the Organisation for Economic Co-operation and Development (OECD).
"More recent data on housing finance commitments suggests that investors are increasing their share of the housing stock. This is not a uniform trend across Australia but is particularly marked in Sydney and to a lesser extent in Melbourne."
Banks are the predominant suppliers of finance for housing in Australia and housing loans comprise the major part of most banks’ assets.
"Loans outstanding for the purchase and construction of houses total $1.46 trillion. Of this, banks lend $1.35 trillion, with the remainder spread among building societies, credit unions and finance companies.
"Housing loans comprise 62 per cent of the total lending assets of banks and about two- thirds are loans to owner-occupiers and the remaining third to investors.
"Over the past two years or so the growth rate [of borrowing for housing] has gradually accelerated and has now reached 7.2 per cent over the year ending April 2015.
"The growth rate over recent months has been the highest since late 2010, but it is well below the average rate of growth in the pre GFC era. The last historical high point was in March 2004 at almost 22 per cent."
Interest rates on home loans are at multi-generational lows. The average advertised standard variable mortgage rate was 5.45 per cent in May 2015, the lowest since 1968.
"Today’s discounted rate is even lower at less than 5 per cent. These low rates compare to the 17 per cent peak recorded between June 1989 and March 1990.
"These low rates charged to home borrowers are in part a reflection of the intense competitive environment faced by bank and non-bank lenders. Mostly however, they are a product of the globally low interest rate environment. The RBA’s cash rate was reduced to 2.00 per cent in May 2015 - the lowest in a generation.
"Interest rates on fixed rate loans are also very low at below 5 per cent. The proportion of loans which are fixed rate is now falling. Around 10 per cent of new loans are fixed rate, which is about half the proportion in 2013.
"Household finances are in good shape. Dwellings are the single largest component of household wealth at $5.1 trillion, with superannuation at $1.9 trillion.
"The ratio of housing debt-to-housing assets is around 28 per cent, with every $1 of debt being matched by over $3 in house value."
Although households are increasing their borrowings for housing, they are also prepaying their loans to a greater degree. As a result of this, households are now on average the equivalent of 28 months, or more than two years, ahead on their mortgage repayments
A change in the mix of property taxes away from stamp duty, and with greater emphasis on land tax would likely improve turnover in the housing market, improving the efficiency of the use of the existing stock of housing
The ABA supports the recommendation of the Committee (recommendation 9.70) that Treasury should prepare and publish a study on the influence of negative gearing on the housing market.
ABA also believes there is not enough evidence to support that current CGT arrangements combined with negative gearing encourage speculative investment as deductions are made at the taxpayers’ marginal tax rate, but gains are taxed at half of that rate.
"Removal of stamp duty on housing transactions would simplify taxation arrangements. It would improve efficiency by increasing the level of beneficial transactions and by improving the allocation of resources.
"Abolishing stamp duty would result in a more efficient allocation of housing, as it would no longer act as a barrier to downsizing or moving to a more suitable property. It would also cease to act as a barrier to workers seeking to move for better employment opportunities.
"An abolition of stamp duty would be expected to result in an increase in property values, particularly in an environment of constrained supply.
"For banks this would improve (reduce) the LVRs of existing borrowers, with a concomitant reduction in the riskiness of the existing housing book. It would lift the effective available deposits for new borrowers although the effect of this on improved housing affordability may be offset by higher purchase prices.
"Land tax is a more efficient form of property tax than stamp duties, particularly when it is broad-based.
"Broadening the scope of land taxes provides an opportunity to lower the rate of tax.
The revenue implications of changing the rate of land tax vary markedly depending on its scope.
"The only argument in favour of higher rates of land tax is to increase government revenue. Due to the low excess burden of land tax, changing the rate of land tax to increase government revenue would be one of the least distortional methods to boost receipts.
"However, a change in rate by itself does not address the issues of complexity or fairness."