Senate inquiry recommends reducing 3% serviceability buffer

After hearing evidence from APRA, banks, lenders and other stakeholders, including members of the broking industry, the committee concluded that existing prudential standards, such as the buffer, either lock potential first home buyers out of the housing market or make them overly reliant on the ‘Bank of Mum and Dad’.

As such, the committee has outlined seven recommendations for areas where financial regulations can be adjusted to promote home ownership. These recommendations include a lower serviceability buffer for first home buyers, “that can be adjusted responsively to the economic cycle and to support financial stability settings within APRA’s prudential standards”.

The committee’s recommendations are as follows:

• Recommendation 1: Establish a statutory duty for the Parliamentary Joint Committee on Corporations and Financial Services to “undertake regular scrutiny and oversight” of APRA.
• Recommendations 2 and 3: Amend objectives detailed in the Australian Prudential Regulation Authority Act 1998 to include the promotion of first home ownership as a statutory objective and “specific obligations” APRA considers the impact on first home buyers when setting prudential standards.
• Recommendation 4: Introduce a new statement of expectation for APRA that “considers the long-term benefits of widespread home ownership”.
• Recommendation 5: Require APRA to prepare prudential guidelines for a lower serviceability buffer for first home buyers and monitor and report on the serviceability buffer's impact on first home ownership and financial stability annually.
• Recommendation 6: Require APRA to prepare prudential guidelines that allow authorised deposit-taking institutions (ADIs) to have “lower capital risk weightings for first home mortgages where a stronger degree of risk protection exists” within the regulator’s prudential standards.
• Recommendation 7: Consult approved deposit-taking institutions about options for modernising the Banking Code of Practice to facilitate lending in co-ownership scenarios.

Commenting on the recommendations, the inquiry’s chair, Senator Andrew Bragg, said macroprudential tools like the serviceability buffer had “constrained first home ownership for too many Australians” and that the combination of these recommendations, if enacted, “will improve access to finance and reduce cost”.

“The capital risk weighting system makes many first home mortgages more expensive than they ought to be. A parent guarantee is provided with a large discount which is not available to a mortgage protected by lenders mortgage insurance,” Bragg added.

“These capital risk weights unfairly preference Australians with access to the Bank of Mum and Dad. As the Australian Housing and Urban Research Institute points out, Australia is without a policy where financial regulation helps drive home ownership.”

“It is time Australia had a lending policy to get the Australian dream back on track.”

Serviceability in the spotlight

The report comes during the same week APRA announced its intention to maintain the 3 per cent serviceability buffer, following its regular review of domestic and international economic financial conditions and risks.

The regulator said: “The sources of economic uncertainty have shifted over the past year or so, but the risk of shocks for borrowers remains. The risk of persistently higher inflation and further increases in interest rates in the near-term has reduced. Meanwhile, higher unemployment and some persistence in cost-of-living pressures is expected, which present risks to household incomes including if more adverse scenarios eventuated.

“Risks in the global economic environment which could impact the Australian financial system also remain pronounced, including those from ongoing geopolitical instability.

"The setting also takes into account risks to the financial system associated with Australia’s high overall household indebtedness and housing-related vulnerabilities.”

This decision was criticised by members of the broking industry, including FBAA managing director Peter White AM.

“We have a scenario being played out across Australia where people who have been paying their mortgage without default are being prevented from refinancing to a loan with a lower monthly payment,” White said.

“How crazy is a situation where we are forcing borrowers to pay more during a cost-of-living crisis; not because they can’t afford it, but because of a regulator who refuses to see logic?”

Homeloanexperts.com.au senior broker Jonathan Preston also responded to APRA’s decision, arguing “the regulator is throwing Aussie families under the bus”.

“By keeping the buffer at this level, the APRA keeps first-home buyers crippled and unable to buy across most of the country. The government’s high spending has left the RBA unable to cut rates rapidly. So without APRA assistance, Australians remain locked out of homeownership on a wide scale,” Preston said.

“So now we have the perfect storm of government intervention propping up rates and the APRA maintaining a large buffer, which is hampering the ability of everyday Australians to simply get off the rental hamster wheel and get into the property market.”

First reactions

Greens Senator Barbara Pocock was one of the first to react to the inquiry’s final report, criticising the committee’s recommendation that APRA reduce the serviceability buffer.

The Senator argued such a move “loads up risk for first home buyers”.

“Mortgage stress is already extremely high, yet the Coalition thinks it’s a good idea to load up home buyers with even more debt than they would otherwise be eligible for. It might be good for big banks’ bottom lines but it loads up risk for first home buyers,” Pocock said.

“The inquiry heard evidence from frontline organisations that deal with the human cost of unmanageable debt on a daily basis. They were emphatic that home loans which expose borrowers to debt beyond their means are financially, emotionally and socially crippling.

“The Greens object to this proposal, not only because of the devastating human consequences but also because it won’t fix the housing crisis.”

[Related: APRA slammed for ‘nonsensical’ decision to retain 3% buffer]