The Australian mortgage industry should be remodelling itself on Canada’s to increase competition, Mortgage and Finance Association chief executive Phil Naylor says.
“It’s been demonstrated in the past – pre-GFC – that when Australia had a strong securitisation market we also had strong competition in the lending markets, and the non-bank lenders were very strong,” he told Australian Broker.
“The non-bank lenders were providing price competition on interest rates but also providing innovative products which were beneficial to consumers. Now, because they’ve effectively been squeezed out of the market, that pressure’s not there anymore.”
In 2002 to 2006, the big four had 58% of the market share, non-bank lenders had 27-33% and securitise had more than 20%, Naylor said.
But from 2009 to 2014, the big four had 80% of the market share; non-bank lenders had 1-2% and securitise had less than 5%.
In Canada, there is a strong securitisation market and strong non-bank lender market, and consumers are befitting from the better competition, Naylor said.
Canada has 28.3% of its funding profile in securitisation, while Australia has 5%.
So what can be done to increase competition in Australia?
“You can do what the Canadians do, and that is their government guarantees the markets, and therefore it’s a strong market,” he said.
“But I think there’s a reluctance in Australia by the government, especially the current government, to guarantee anything in the private sector. So we just have to make sure that whatever regulations relate to securitisation – and there are several – help the development of the market rather than hinder it.”
To improve the current mortgage market conditions and entice more first home buyers there also needs to be more innovation within the LMI sphere, Naylor said.
While it is a “great initiative” to allow first home buyers to borrow up to 95%, more needs to be done, he believes.
“I think there’s a strong argument that first home buyers would like to get in the market but are being outbid by investors, or that some first home buyers are giving up, thinking it’s all too hard and they’ll keep on renting.
“One of the problems is we do have an overall housing shortage and that is pushing up prices which makes it difficult, so until that is sorted out we will have this ongoing problem.
“Maybe more competition in the non-bank sector will help to bring rates down and prompt more innovative ideas from LMI providers.”
Naylor hopes superannuation funds will think about investing in the securitisation sector to help build up a “reasonably inexpensive” funding system.
Earlier this year, in its submission to the Financial Services Inquiry, mortgage franchise Yellow Brick Road suggested the government invest the proceeds of a banking levy into a fund that invests in securitisation of home loans through the Australian Office of Financial Management.
This would let smaller and non-bank lenders compete with the four major banks, which currently benefit unfairly from a government guarantee on deposits but also dominate the market for deposits and therefore access to funding, it said.
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