Opinion
Mortgage wars enter next phase as property remains a rich playground
Elizabeth Knight
Business columnistAnother month and another notable rise in property prices. That’s good news for those with a foothold in the market but lower borrowing capacity and rising affordability challenges are making property a playground for the rich.
Interestingly, after 15 monthly rises and a 12.2 per cent gain in home prices over that period, few if any economists are prepared to make a call that we have reached peak property. And that means borrowing capacity will continue to weaken, forcing a growing band of Australians to be locked out of home ownership.
A growing band of Australians is being locked out of homeownership.Credit: Peter Rae
Meanwhile, the prospect of interest rates coming down has been pushed out from September to potentially as late as next year. And there is an outside chance that rates could actually go up, not down.
For the big four banks, getting ready to report their latest numbers this week, a key feature of the results will be a dip in their interim earnings decline as the mortgage wars rage on.
The theory is that when interest rates are rising, banks make better profits. However, most of the earnings gains have been tempered by the intense competition between the banks on mortgages.
This competitive pressure has meant the more aggressive lenders write unprofitable loans to gain market share, while others like the Commonwealth Bank (CBA) have ceded market share to bolster margins. Forget booming profits, the banks have been too busy eating into each other’s turf.
The Commonwealth Bank’s move to dump the bonus caps has attracted the ire of the corporate regulator.Credit: Oscar Colman
Now there are signs that they are readying themselves for the next phase of the war, as the prospects of a rate cut soften, with the banks rethinking how much risk they can take when it comes to lending.
One theme that has emerged over recent months is that some of the big banks questioning whether the heightened regulation, which emerged following the banking royal commission and in response the global financial crisis, has moved the risk pendulum too far down the conservative road.
Certainly, one way to kick up lending would be to soften regulation in the banking sector, including responsible lending laws and the need for banks to hold large stores of capital against their loans.
The CBA’s approach to testing the limits of the current regulatory straitjacket has been to increase the volume-based bonus it pays to its in-house bankers from 50 per cent of base pay to 80 per cent.
Unsurprisingly, CBA’s move to dump the bonus caps recommended by the Kenneth Hayne-led financial services royal commission has already attracted the ire of the corporate regulator (the Australian Securities and Investments Commission), which is threatening to increase its scrutiny of the bank.
The Hayne royal commission had recommended that enforcing a cap was a critical to preventing a return to the days of outsized bonuses that fed high-pressure sales tactics and undermined the need for the banks to do what was in the best interest of the borrower.
ANZ boss Shayne Elliott says the bank only knows if its pricing is competitive when customers choose its loans.Credit: Arsineh Houspian
For its part, CBA argues that the move to increase bonuses is an attempt to stop mortgage sales staff from moving into mortgage broking – where remuneration is largely commission-based.
But logic suggests that as CBA sweetens bonuses for its home loan sales people, other banks will be forced to follow suit or risk losing their own sales people.
Meanwhile, ANZ boss Shayne Elliott and National Australia Bank’s outgoing chief, Ross McEwan, have been arguing a different route to greater profits.
They suggest that banks in the post-royal commission landscape have been forced to become too risk-averse, with only the wealthy borrowers able to meet the strict parameters for borrowing, while other borrowers miss out on the credit needed to get into the housing market or establish small businesses.
Elliott says this regulatory conservatism breeds exclusion and that this comes with a social and an economic cost. And the lenders further point out that if borrowers can’t access the big four banks, they run the risk of signing up with the less-regulated non-bank lenders.
The banks, with their vested interest in selling more mortgages, clearly think there are customers out there who could fund their loans, but are excluded thanks to the responsible lending requirements.
The flip side of this coin is that our banks enjoyed extremely low rates of loan delinquencies during the pandemic and in the surging interest rate period that followed.
That has kept their coffers humming nicely, although the fierce competition in the sector has perhaps prevented them from fully capitalising on the rising interest rates.
With signs of a looming earnings squeeze, the banks want to kick-start another round of lending. However, they walk a tightrope on not only testing the limits of current regulation, but also just how much extra risk they can safely digest.
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