Scrapping lending rules would inflame housing boom, consumer groups warn

Consumer advocacy groups and some economists are sounding the alarm about a government plan to scrap responsible lending rules, saying it could throw gasoline on an already booming housing market by easing credit while prices are already skyrocketing thanks to low interest rates.

The government is planning to remove rules that make banks subject to responsible lending obligations, in a move supported by the banks but decried by consumer advocates, according to a report by The Sydney Morning Herald. The government maintains that the change, announced last year amidst fears of a COVID-induced credit squeeze, will make it easier for consumers to borrow money while still protecting vulnerable customers. Banks say that the change will allow for simpler loan applications.

But with house prices growing at a breakneck clip and mortgage lending skyrocketing in recent months, consumer advocate and many economists worry that scrapping responsible lending rules will fan the flames of the housing boom.

Consumer groups opposing the change on Monday wrote to Reserve Bank Governor Philip Lowe, who also serves as chair of the Council of Financial Regulators, urging the council to reconsider its public comments on the change in light of “significant changes in the risk environment.” The council said last year that rolling back the rules “would support the supply of credit” and that banks would still be required to lend prudently.

But Alan Kirkland, chief executive of Choice, said customers were at greater risk from irresponsible lending during a housing boom because skyrocketing prices pressured people to buy quickly.

“When you’ve got a hot market that buyers are desperate to get into, that places borrowers – particularly first-home buyers – at risk of predatory lending,” Kirkland told the Herald.

Read more: APRA may have to step in to cool housing

Kirkland said the consumer groups, which also included the Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre, believed that scrapping responsible lending laws would drive home prices up even further by releasing more credit into the system.

“It’s simple economics,” he said.

Treasurer Josh Frydenberg, arguing for the rollback, has pointed to Lowe’s concerns about banks becoming too risk-averse in their lending, the Herald reported. Frydenberg said the proposed changes would simplify the credit framework and cut red tape.

“The government’s reforms will remove the ‘one size fits all’ approach, enabling the more efficient flow of credit to consumers and small businesses, while also strengthening protections for higher-risk products and vulnerable consumers using small-amount credit contracts and consumer leases,” he said.

However, economist Saul Eslake said he was sceptical about the necessity of rolling back the rules.

“It’s not at all obvious to me that there’s a need for regulators to do anything to make credit more available,” Eslake told the Herald. “We’ve got 50 years of evidence that anything that allows Australians to pay more for housing results in more expensive housing.”