Housing industry body tells Senate mortgage arrears must double to improve home ownership

A leading housing body has claimed Australia’s heavily regulated banking system needs to allow more homeowners to fall behind on their mortgage repayments if first-home buyers numbers are to rise.

The Housing Industry Association is calling for greater oversight of Australia’s banking regulator. Picture: NewsWire / Max Mason-Hubers

A leading housing body has argued Australia’s rigid banking system needs to allow mortgage arrears to double if homeownership level are to lift.

In a submission to the Senate inquiry into the financial regulatory framework and home ownership, the Housing Industry Association has argued the near-zero levels of homeowners falling behind on their mortgage repayments is unhealthy for the market. It has recommended banking regulator the Australian Prudential Regulation Authority should have a “Reserve Bank-style” oversight board to keep arrears levels between 2 and 3 per cent.

HIA chief economist chief economist Tim Reardon said more than a decade of additional restrictions on lending had reduced competition among banks issuing loans. He believes the market needs more power and flexibility.

HIA chief economist Tim Reardon. Picture: Tertius Pickard

“Just as zero inflation is not the RBA’s goal, zero mortgage delinquencies is an unattainable and undesirable goal for APRA,” Mr Reardon said.

“Mortgage arrears in Australia remained exceptionally close to zero through the GFC and the pandemic, but regulators continue to impose additional constraints on lending, competition among banks and restricting housing supply.

“Requiring regulators to target a rate of mortgage arrears of between 2 and 3 per cent, or double the current rate, will prioritise home ownership as well as financial system stability.”

Australia has one of the most strongly regulated banking systems in the world. Less than 1 per cent of all housing loans are 90 days or more in arrears despite rates holding at 12-year highs of 4.35 per cent. Of highly leveraged borrowers, only 2 per cent are falling behind on repayments.

To get a loan today, a new borrower must be able to prove they can service a loan at the mortgage rate plus a “buffer” of 3 per cent, which would be around 10 per cent based on current averages.

“The problem is that ongoing regulations have forced banks to eliminate much of the flexibility and competition in the mortgage market that made home ownership accessible for households of variable credit quality, such as first-home buyers,” Mr Reardon said.

“This ‘belt and braces’ approach to macro-prudential restrictions is needlessly restrictive and increasingly limits lending only to those that already own at least one home, pursuing financial system stability at the expense of first-home buyers.”

The Reserve Bank board convened its third-last meeting of the year on Monday and will hand down its decision about interest rates around lunchtime on Tuesday. It is widely expected that rates will be kept on hold.

Analysis by Canstar shows Australians are collectively making $14.5bn in mortgage repayments every month, an increase of an estimated $5.5bn compared to March 2022. One rate cut alone would offer a borrower with a loan of $600,000 relief of $92 each month. Cumulatively, five cuts would save the same homeowner $441 monthly.