The Mortgage and Finance Association of Australia wants the government to step in to encourage banking competition to lower interest rates and boost loan product innovation.
In a submission to the Senate’s inquiry into housing affordability, the MFAA says insufficient access to funding for smaller lenders is causing higher interest rates in the home loan market.
It also provides little incentive for loan product innovation, preventing would-be borrowers entering the mortgage market.
The MFAA says in the submission the “fundamental cause of housing unaffordability in the mainstream residential housing market is the lack of supply”, with knock-on effects to the rental market and social housing.
The association says while greater supply should provide a medium-to-long term solution, shorter term measures must be considered to help first-time buyers to bridge the gap between finance and current housing prices.
One of the main causes of housing finance approvals growth being currently historically low levels is “lack of wide-spread competition across the housing lending sector, inhibiting the development of innovative mortgage products focussing on new buyers”, MFAA said.
The four major banks now hold 79% of the housing loan market, compared with 58% just before the GFC and 66% in 1992.
The previous government’s attempts to stimulate the securitisation market through the Office of Financial Management had minimal impact on increasing the market share of securitised lenders, says MFAA.
“The ill-considered regulatory ban on exit fees in 2010 hurt the innovative smaller lenders even further.
“Although the Big Four argue that they compete aggressively with each other in the market, all their loan products and interest rates are very similar and appreciably higher than those of many smaller lenders.”
MFAA claims small lenders face discriminatory funding treatment under RBA
and APRA regulations, which means average interest rates available to borrowers are higher than they would otherwise be.
CEO Phil Naylor cited Canada as an example where a strong securitisation market has driven competition amongst lenders, in particular smaller lenders.
The submission said all banks in Canada, including their Big Five, hold 75% of the market compared to Australia’s 94%. Credit unions in Canada hold 15%, while in Australia it is just under 5%. And other lenders, such as non-bank lenders, hold 10% of Canada’s market, while in Australia their market share is less than 2%.
“A simple glance at this comparison indicates there is a much more competitive dynamic at work in Canada,” MFAA said.
This is the Canadian Mortgage-Backed Securities programme, guaranteed by the Canadian federal government.
“This programme produces about 30% of all mortgage funding in Canada. So that while Australia relies on the volatile global markets for around 35+% of its mortgage funding, Canada is able to access a much less expensive and certain funding source."
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