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12/12/2020

Responsible Lending Laws Will Push Up Property Prices

New rules in the banking sector have been proposed. The proposal for new rules has been critically examined by many experts in the real estate sector. The new rules would make it far easier for consumers to get a home loan approved.

The findings were that the economy is in need of stimulation. Making it easier for consumers to get a home loan approved will potentially push up housing prices. The results of this are far reaching and could lead to an overly competitive housing market.

Federal Treasurer, Josh Frydenberg, has said that lending obligations have become a burden on banks and mortgage brokers. Lenders have not been able to push the volume of loans the economy needs to withdraw from recession. Consumers too, have had to lie on their mortgage applications in order to get them approved in the current market.

The irony is that the banking sector underwent extensive investigation two years ago due to questionable conduct in the industry. The banking Royal Commission exposed instances where expensive loans were awarded to consumers who had no means to pay them back. 

Investigations also revealed that consumers were overloaded with unnecessary fees in order to keep their accounts open. They also detailed instances where banks were making false reports about customer living expenses on home loan applications. This was done in order to get approval in a tightly regulated market.

Despite this, the climate in Australia’s financial markets has changed significantly, especially since the beginning of the COVID-19 pandemic. With Australia now in recession, experts are saying the move to make home loans easier to get is a welcome one. 

Buyer demand will increase alongside the higher availability of loans. This means property prices have less chance to fall like they did during the pandemic. The change will help more Australians invest in property. This will add to the availability of housing over the long term and should make houses more affordable.

Proposals have been criticised too, however. Slashing red tape is likely to saddle more Australians with debt they cannot afford. This is perceived as encouraging unethical lending practice. Less responsible lending obligations have been criticised too for encouraging risky borrowing behaviour. 

The effects spread further to include the price of property, which may increase to higher levels alongside higher availability of loans. More buyers on properties results in quicker sales which often quickly pushes up the price of other properties for sale.

When a home loan is purchased by a consumer, responsible practice involves curtailing spending on household items and other expenses. Consumers in most cases must cut back their spending to ensure they are able to make mortgage repayments on time. Some responsibility must be taken by consumers to ensure loans aren’t awarded without the ability to pay them back.

One critique of the proposal said that responsible lending reform has gone too far. Responsible lending reform has put too much onus on the lenders, rather than the borrowers, to handle home loans responsibly. 

At the moment, borrowers are being forced to explain their Netflix subscription and Uber purchases before getting home loan finance approved. The demeanour of the financial services market is therefore far too cautious as a whole. Allowing for more loans to be taken out pushes the balance of power back in the right direction in financial markets. This should lead to a quick economic recovery.

Contact Pillar Financial for all financial advice in Melbourne. We are open for business from 9:00 to 5:00pm Monday to Friday. Call us today on 1300 730 309 to schedule a confidential discussion about your finances and your situation.