‘Ease home-loan rules and watch prices leap’, economists warn

A loosening of lending rules to make it easier for Australians with student debts to get a mortgage risk driving housing prices even higher and could force young people to take on more debt, economists warn.

Economist Saul Eslake said the changes on HELP debt would drive up prices at the margins.

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A loosening of lending rules to make it easier for Australians with student debts to get a mortgage risk driving housing prices even higher and could force young people to take on more debt, economists warn.

Jim Chalmers on Wednesday announced he had instructed ­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 repayments from serviceability assessments of whether a borrower can pay off debts.

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”. But the change was met with scepticism from economists, with Chris Richardson arguing the relaxed rules would increase bank profits by allowing them to lend more, and 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.”

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 can still make repayments if interest rates rise 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?”

Brendan Coates of the Grattan Institute, an independent think tank, said the changes to the serviceability buffer would “modestly boost supply”, but agreed it would also give support to housing prices.

“You could bring forward some additional off-the-plan purchases of homes and apartments, but it will probably also push up prices at the margin,” he said.

With soaring house prices putting home ownership out of reach for many Australians and a chronic shortage of rental properties pushing rents to near-records, the fight over housing policy has become a key battleground between the major parties in the lead up to the federal election.

While the Coalition welcomed the change, opposition home ownership spokesman Andrew Bragg regarded the measure as “small”, having previously flagged plans to water down the mortgage serviceability test. “I think there’s a strong case for a more structural change here,“ Senator Bragg told Sky News. “Some people may be able to borrow a bit more, and that’s good … I don’t think it’s going to transform the universe, but it is a sensible idea.”

Australia’s four major lenders were more supportive of the planned HELP debt changes, which CBA chief executive Matt Comyn said could boost the borrowing capacity of certain borrowers by as much as 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.

“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.

“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 as he also pointed to 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 loans to get more people into their own home.

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.