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Australia Fears of a debt disaster as property market runs hot and changes to safe lending laws loom

22:32  12 march  2021
22:32  12 march  2021 Source:   abc.net.au

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a man wearing glasses and smiling at the camera: Before the global financial crisis, Jacob wanted to develop his then property in the Tweed Valley into a tourist lodge but the bank repossessed it. (Supplied.) © Provided by ABC Health Before the global financial crisis, Jacob wanted to develop his then property in the Tweed Valley into a tourist lodge but the bank repossessed it. (Supplied.)

Jacob had big dreams before the global financial crisis.

He wanted to develop his then property in the Tweed Valley into a tourist lodge.

But in November 2009, he had a serious accident on the farm tractor and could not work.

He asked his lender at the time — who he had taken a high-risk low-doc loan from — to let him defer mortgage repayments until he could resume work.

But the lender would not give him leeway and started charging higher interest and default fees.

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"All they said is, 'When are you going to pay?'" Jacob tells ABC News.

He was forced to put the property up for sale in 2010, but because of the GFC, potential buyers were also in strife.

Jacob couldn't sell in time to keep the bank at bay and eventually they repossessed his property.

"We lost all the hard work of 12 years — doing up the property into a real magic place — that's what we lost," he says.

"And we ended up in a caravan."

'Debt disaster' looms

Jacob's story is one that consumer advocates fear could repeat itself.

The federal government is looking to wind back safe lending laws, saying there are other adequate protections for consumers.

Reserve Bank Governor Philip Lowe this week said the central bank would be keeping an eye on lending practices by the banks.

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But Katherine Temple from the Consumer Action Law Centre is part of a coalition of consumer groups that have written to financial regulators, including the Reserve Bank, detailing their strong opposition to the proposed law.

Ms Temple said axing safe lending laws during a pandemic was risky and would fuel an already overheating housing market.

She said more than 33,000 Australians and 125 community groups had signed the open letter against the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020.

"We are very concerned that we are destined to repeat the mistakes that were made in the lead-up to the global financial crisis if these changes go ahead," Ms Temple said.

"We can see a debt disaster on the horizon for many people who could take out unaffordable loans as a result of these changes."

The bill has been scheduled for a parliamentary debate on Monday after a government-led Senate inquiry report on Friday recommended that the changes to the law be passed.

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However, the bill could still be rejected by the Senate crossbench, with both Labor and Greens senators that took part in the inquiry expressing their opposition.

Labor senators said in the report they were "concerned that the passage of this bill will serve to transfer risk from lenders to consumers" and give "a significant financial benefit to the banking sector".

The Greens said the bill was "designed to let the banks get on with writing loans as big as they possibly can, whether it's good for people or not".

"In a country that already has one of the highest levels of consumer debt per capita in the world, this bill would give the banks a licence to entice people into even more debt," Greens senator Nick McKim said.

Treasurer says other protections still apply

Federal Treasurer Josh Frydenberg has previously argued that responsible lending obligations would still apply to small amount credit contracts (SACCs) below $2,000 and consumer leases.

He also noted the government had introduced several reforms that have strengthened consumer protection.

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These, he said, included handing more power to corporate watchdog the Australian Securities and Investment Commission (ASIC), a best interest duty for mortgage brokers, increased financial sector civil and criminal penalties, enhanced protections for credit card customers and establishing the Australian Financial Complaints Authority (AFCA).

Despite that, Ms Temple said that, under the government's plans, banks and other lenders would not need to do the same degree of verification and checks to make sure that loans are affordable and suitable for people.

"We are hopeful that the crossbench will vote against this legislation because of the immense risk that it poses not only to individual borrowers and their families but to the community and the economy more broadly," Ms Temple said.

"We know that two in five Australians are already struggling to pay their bills during the COVID crisis.

"We don't want to see easy credit tide people over in a way that's just going to lead them further and further into financial hardship."

Financial Rights Legal Centre chief executive Karen Cox said the banking royal commission reinforced the need for safe lending laws only two years ago.

"This bill will take consumer protection backwards by a decade, let the banks off the hook again and expose ordinary Australians to more crippling debt," she said.

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Is the housing market overvalued?

The laws are being wound back at a time when Australia's housing market is running hot.

Property analyst CoreLogic says the market is in one of its strongest growth phases on record.

Capital city home prices rose 2 per cent in February.

Since October last year, Sydney home values have risen 5.7 per cent to reach a new record high — surpassing their previous peak in 2017.

The recovery trend in Sydney following a 15.3 per cent decline from July 2017 to May 2019 was interrupted by COVID-19, with housing values falling by 3 per cent through the worst of the pandemic.

According to CoreLogic's daily hedonic home value index, Melbourne dwelling values remain 1.3 per cent below their pre-COVID high.

Perth values are still 16.9 per cent lower relative to their 2014 peak.

People want to borrow more

For mortgage brokers, that has meant a boom in business.

"General inquiry in the last six months has been busier than I've had in the past 16 years of being a mortgage broker," Sydney based mortgage broker Terri Unwin said.

She said low rates allowed people to borrow big, but banks were still verifying people can afford to repay.

"The banks have reduced what they were assessing loans at — in 2018 it was closer to 8 per cent, but now it's closer to 5 per cent," Ms Unwin said.

Brokers say the maximum amount people can borrow has increased due to the lower interest rates used to assess loans and a take-home income boost from recent tax cuts.

But the increase has been limited by a rise in the living expenses benchmark most banks use to assess loan applications.

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"Overall borrowing capacity has remained pretty level because of the increases in living expenses that the banks are benchmarking." Ms Unwin said.

Other sources within the broking sector report that borrowing capacity has increased by around 7.5 per cent since July 2019 for a typical family on a $150,000 household income with two kids.

The amount people can borrow has increased even more than that since the peak of lending restrictions and the bank regulator's 7 per cent interest rate floor on testing customers' ability to service a loan was in place during 2018.

Ms Unwin said, so far, access to funding has not been made easier, but there was less paperwork being required when banks sign customers up.

"Some lenders are making it easier in terms of paperwork required for a new loan application," Ms Unwin said.

"Previously we would have to provide three months' bank statements, three months' credit card statements, details of liabilities."

Perth-based mortgage broker Helia Singh said her customers were trying to push her to get bigger loans from the bank so they can afford more expensive housing.

"In cities such as Melbourne and Sydney, the prices have gone up so much," Ms Singh says.

"[There are] people who say, 'I can afford it, I know I can do it, so how am I going to get my hands on more money'."

She said lending criteria has not changed much but warns her customers not to get in over their heads.

"Especially now that responsible lending is ending, people need to be aware of responsible borrowing," Ms Singh said.

"If the banks are going to give them money because of their borrowing capacity that doesn't mean that they should go and get that much money."

The risk of higher rates

AMP Capital chief economist Shane Oliver worries that at some point down the track, interest rates will rise and people will be unable to pay their mortgages.

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"With the removal of responsible lending obligations and the property boom underway, the risk is that those lending standards will be eased and people who maybe shouldn't have got a loan will end up getting one," Dr Oliver said.

But he said higher rates would not be on the cards for another few years.

"The greater likelihood is the Reserve Bank will, with other bank regulators — particularly APRA, put pressure on the banks to slow down the pace of lending and tighten up their lending standards," Dr Oliver said.

Property data analyst Martin North, from Digital Finance Analytics, said if the federal government changes are passed as suggested, it would place most obligations on borrowers.

"It tilts the playing field in favour of the banks — especially now, with the prospect of rates rising and higher unemployment ahead," Mr North said.

"They [borrowers] can say whatever they like about their finances, the banks do not have to validate it — but it also means banks can then sue borrowers if later it transpires their information was not correct."

The federal government argues that the wind back is to ensure easy credit supply, but Mr North said that was not an issue in Australia.

"Indeed, recent RBA data reveals strong lending for housing, even now with the current responsible lending mechanism in place," he said.

"Housing credit is rising at an annualised rate of 3.54 per cent, with owner-occupied loans at 5.58 per cent and rising."

Mr North said too much of the Australian economy was leveraged to housing loans, which has led to home prices rising to "unacceptably high levels".

"The lack of consumer protection which would result from the removal of responsible lending is likely to lead to larger loans, quicker loans, and consequently more households getting into financial difficulty," he said.

"It will simply create yet more systemic structural risks."

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