Opinion
Is it too hard for middle Australia to get loans from risk-averse banks?
Clancy Yeates
Deputy business editorHas it become too hard for middle-income households to get a loan? That’s the view of some bankers, including ANZ Bank’s boss Shayne Elliott, who’s been particularly vocal on this point.
Elliott recently told analysts that well-intentioned banking rules are having some unfortunate side effects when it comes to who can obtain credit.
“We want the banks to be safe, we want people to be safe, we want nobody to lose their home, nobody to end up in [financial] difficulty, nobody to lose their business. Those are all laudable objectives, but they come at a cost, and the cost is exactly what we’re talking about now, which means that middle Australia gets locked out,” Elliott said at a market briefing last month.
Banks’ home loan portfolios get the most attention, but business lending is of vital importance, too.Credit:
He is hardly the first banker to make this point, and he won’t be the last. Some might see these complaints as entirely predictable as banks look for loan growth in a soft market. But even so, might the bankers still have a point?
There’s no question the maximum amounts banks are prepared to lend to most people are lower than they were a few years ago – that is inevitable when interest rates surge. However, bankers such as Elliott argue the problem is deeper than that. They claim the cumulative effect of policy settings and regulation – however well-intentioned – has made lenders too conservative in granting loans, and it’s doing economic damage.
What does the evidence show?
While banks’ vast mortgage businesses get most of the attention, they also have a crucial economic role to play in helping to fund business investment by lending money to firms. On this front, some experts say that banks may have become too conservative in certain areas. One example is property developers – historically a trouble spot for banks and an area where the big four have cut back their lending in the past decade.
JP Morgan analyst Andrew Triggs points out that the major banks’ share of the commercial real estate loan market shrunk from about 85 per cent in 2015 to 70 per cent at the end of 2022. As the big local banks retreated, international lenders and private credit funds sought to fill this gap, but Triggs says they can be less reliable or more expensive.
This decline in the banks’ market share came about after regulators reviewed commercial property lending and decided lending standards were too lax. This led banks to tighten their policies in areas such as the pre-sales a developer must make or loan-to-valuation ratios.
This pullback from property developer lending has been a double-edged sword, which highlights the trade-offs that banks and regulators face.
On one hand, the big four banks have benefited from writing fewer bad loans. Triggs pointed out in a recent research note that the non-performing loans in the banks’ commercial real estate books were “very low,” despite the sharp rise in interest rates. But it’s also likely that the cautious attitude of banks is making it much harder to provide a much-needed boost to housing supply.
Small business lending is another area where some have argued it’s too hard for borrowers to get credit, leading to economic costs.
Barrenjoey analyst Jon Mott argued in a report earlier this year that banks had “de-risked too far” – pointing to small business lending as an example. For years, smaller firms have complained about how hard it is to get credit from a bank without putting a property up as security.
Mott reported that secured lending to small and medium-sized enterprises (SMEs) had grown by about 6 per cent a year over the past five years – far quicker than the 1.7 per cent annual growth in partially or unsecured loans. He argued the regulatory regime, which encourages banks to target secured loans, risked “strangling innovation and economic prosperity over time.”
The Reserve Bank has also long aired concerns about smaller firms’ access to bank loans. The RBA’s assistant governor for the financial system, Brad Jones, said in April that even though smaller firms have a key role in driving innovation, many SMEs feel like they are “kicking into the wind when it comes to access to financing.” The issue wasn’t unique to Australia, Jones said, and is one reason for the growth in tech-focused venture capital funds.
However, in the mortgage market, it’s difficult to argue that we have a problem with overly cautious banks.
Australian households are among the most indebted in the world, and their debt is mostly mortgage debt. Housing credit is growing at a healthy rate of 4.5 per cent a year.
As Australian Prudential Regulation Authority chairman John Lonsdale recently explained, the main reasons it’s getting harder to buy a home are the surging cost of houses, weak income growth, and the rise in interest rates.
Higher rates have reduced homebuyers’ borrowing power because lenders must assess new customers’ ability to repay their mortgage at 3 percentage points higher interest rates than the official rate. Prospective borrowers today would need to be able to cope if their interest rate hit 9 per cent. That’s pretty cautious, but Lonsdale says it’s there to protect people and the stability of banks.
What’s more, relaxing these curbs on mortgage lending could make our housing affordability problem worse. Why? Because the problem in housing is not the supply of credit, it’s the short supply of homes. Loosening lending rules would risk giving households greater access to credit, boosting demand at a time when we are struggling to supply enough homes – adding more pressure on prices.
When this was put to Elliott, he agreed that too much of the discussion in housing focuses on ideas that boost demand (helping more people buy in), rather than boosting housing supply.
It’s fair enough to question if banks should be taking more risks in their business lending. But in mortgages, any move to loosen standards looks unlikely.
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