Lending changes force more debt on graduates, economists warn

Lenders have gotten behind proposed changes to the treatment of student debt for home loans, but economists argue it will see borrowers take on more debt.

Regulators will consult on allowing banks to ignore HELP debt for certain homebuyers. Picture: Andrew Henshaw

Banks have welcomed proposed changes to lending rules which allow them to ignore student debt for certain borrowers, but economists warned the measures would add to the demand pressures in the market and push house prices higher, while forcing younger Australians to take on more debt.

Treasurer Jim Chalmers this week told the major banks he had asked ­financial regulators to update their guidance to help soften home-lending rules for Australians with university debts and developers who can’t guarantee “100 per cent pre-sold apartments”.

Under the overhaul, the Australian Prudential Regulation Authority will tell banks they can exclude Higher Education Loan Program (HELP) repayments from serviceability assessments where they expect a borrower to pay off their debt in the near-term.

APRA will also change debt-to-income reporting definitions so student debt is not treated as debt for reporting purposes, recognising ‘the income-contingent nature of HELP debts’.

Independent economist Chris Richardson said the relaxed rules would top up bank profits by allowing them to lend more, and the measures would not cost the federal budget, but warned borrowers would end up paying a hefty price.

“This will add to demand. It doesn’t add to supply, it’s more money chasing the same amount of stuff. So some people will be able to borrow more and that will drive prices up, not just for these people but for everyone,” Mr Richardson told The Australian.

“It doesn’t help with affordability. First home owner grants are wrong for the same reasons, but at least with those you could say some of that is taxpayer money. This just allows young graduates to borrow more than they otherwise would have,” he said.

Economist Saul Eslake said the changes on HELP debt would drive up prices at the margins, and the regulator should instead look at changes to the serviceability buffer which requires banks to stress test prospective borrowers to ensure they could still make repayments if interest rates rose 3 per cent.

“APRA should apply that buffer countercyclically. When interest rates go up, the buffer that banks are required to stress test their customers by should go down. And conversely, when interest rates are low, the buffer should go up,” Mr Eslake said.

“Interest rates today are at the highest they have been in a long time, so the probability that they’re going to go up again is pretty small. Why should you have the same buffer as you had when interest rates were at zero?”

The warnings came as CBA chief executive Matt Comyn said the planned HELP debt changes could boost the borrowing capacity of certain borrowers by 5 to 10 per cent.

“It is helpful to have some targeted support for specifically first home buyers. We do, in particular circumstances, look at the treatment of HELP or HECS debt — that’s the serviceability exemption — and I think this clarification that will come from APRA and ASIC … will help,” he said.

CBA CEO Matt Comyn. Picture: Supplied

“It will provide an increase to borrowing capacity for first home buyers and obviously that depends on their circumstances and income levels but it’s not unreasonable to imagine that could be in the range of 5 to 10 per cent for certain borrowers. So I think, near-term, that will provide some targeted and helpful support,” he said.

“Clearly this is a long-term challenge and a very important one for both politicians and banks, and everyone else to try and support greater supply of housing into the market.”

Adding more supply into the housing market should be the “highest priority”, Mr Comyn added.

NAB’s executive for home ownership Andy Kerr said the bank welcomed the government’s steps to revise the treatment of HELP as he also pointed to the supply challenges in the market.

“Last year, we recognised the need to rethink how student loans impact first-home buyers. We’re pleased to support this initiative as it will help boost their borrowing capacity,” Mr Kerr said.

“However, housing supply remains a significant challenge. It is critical to address both demand and supply-side measures together to help more Australians buy a home.”

ANZ boss Shayne Elliott said the bank would work closely with regulators on the rules around HELP debt and home loans to get more people into their own home.

ANZ CEO Shayne Elliott speaks at the bank’s AGM. Picture: Arsineh Houspian

Along with the change in treatment for student debt, regulators are also expected to update their guidance on finance for construction of new unit blocks.

Following a brief consultation the regulator is expected to communicate to banks, while it expects them to “consider the extent of presales as part of prudent credit risk management”, it does not expect 100 per cent pre-sales.

Westpac CEO Anthony Miller said the targeted intervention on pre-sale requirements would help supply.

“Long-term and chronic structural obstacles have made the cost and risk of building new homes unattractive for many builders and developers,” Mr Miller said.

“The clarification on pre-sale requirements will offer greater certainty to move quickly on developments and construction.”

Originally published as Lending changes force more debt on graduates, economists warn