How the Loan in Australian Industry Grew and Developed
The Late 19th Century
Real Property Act
The Australian home loan timeline started with the adoption of the Real Property Act 1862, first by Victoria, followed by other states.
However, the property rights across Australia we know today got introduced a little later in 1886 in South Australia.
The Real Property Act of 1886 aimed to identify and record the ownership details of land or property to reduce the rate of fraudulence occurring at the time.
Through this act, people were able to register their entitlement to property, including mortgages.
Impact of an unregulated banking system
Australian banks operated in a free banking system even after establishing the Federal Bank of Australia earlier in 1881.
The federal bank issued the banknotes but did not regulate the banking system like a central bank.
It was around this time that there was substantial speculative demand in the property market. And the establishment of a large number of building societies and land banks began.
The supply well exceeded the demand for property. A direct result was the collapse of the Premier Permanent Building Association in December 1889, one of Melbourne’s largest building societies.
Following the collapse, more small banks and building societies shut down in 1891.
1961-1970
A Proper Central Banking System
The Federal Bank’s Failure made the need for a separate central bank evident to restore public faith in the banking system. Thus, the Commonwealth Bank of Australia (CBA), a commercial bank established on 22 December 1911, got the central bank authority in 1920.
As the central bank, it took over the responsibility of issuing Australian banknotes from the Department of Treasury.
Heavily-regulated financial system to control recession
In the 1990s, the government revenue saw a severe downturn, with most economic sectors not doing well. As a result, there was a cutback in borrowing as well as government expenditure.
The biggest recession in the history of Australia peaked between 1931 and 1932.
Post-recession, as a tactic to avoid another recession, Australian government authorities put in place the following regulatory measures:
- Took control over setting interest rates.
- Put a limit to the number of loans given by one bank
- Set the minimum amount for banks’ reserve capital
Needless to say, banks were giving out a lesser number of loans, to stay inside the regulation. Establishment of RBA
The Common Wealth Bank (CBA) started facing criticism for operating as a central bank and commercial business at the same time.
So, in 1960, the Australian Government established the Reserve Bank of Australia (RBA), which took over as the central bank.
Today, its main function is to produce banknotes, regulate the banking system, and announce cash rates.
Lenders Mortgage Insurance
Established in 1965, Its insurance policies covered the losses suffered by lenders if a borrower were to default on their mortgage.
The insurance encouraged banks to be less strict with the lending criteria because even if the borrower defaulted, they got a backup.
This insurance today is known as Lenders Mortgage Insurance (LMI).
Rise of the non-banks
Most of the events that unfolded in the 1960s led to a highly regulated banking system.
Banks were doing the bare minimum to provide borrowers with better Loan to Value Ratios (LVR) and competitive interest rates.
Non-bank lenders started to rise in the market to provide borrowers with better deals and packages. Banks lost their market share for mortgages from 90% in the 1950s to 70% in 1970.
It was evident that, with banks being inefficient in satisfying their needs, they started shifting to non-banks.
The 1990s
Rise of wholesale lenders
By 1996, wholesale lenders’ market share increased by 4% compared to 1993.
They were offering more competitive rates than lender banks and even non-banks.
They also introduced competitive home loan products such as:
Establishment of APRA
The Australian Prudential Regulation Authority (APRA) was established on 1 July 1998.
Its principal function is to oversee and report financial institutions’ actions, including banks and the mortgage industry as a whole.
Its job was also to establish and enforce prudential standards and practices to ensure a competitive financial system.
The 2000s
In the early 2000s, banks began increasing the discounts offered on their standard interest rates.
Various lenders offered a new range of products to meet the needs of those who could not meet standard lending criteria.
By 2004, 10% of home loans approved in Australia were low-doc loan products.
Also, In 2001, the government established The Australian Securities and Investment Commission (ASIC). It regulates Australia’s corporate markets and financial services sectors.
The Global Financial Crisis (GFC)
Due to the US housing bubble that peaked in 2004 and the rise of defaults in home loans, the GFC hit Australia around mid-2007.
The wholesale lenders were affected the most by GFC because they would bring in the international market’s funding to provide cheap interest rates.
Their not providing competitive rates due to the global crisis meant borrowers saw no reason to choose them over banks.
As a result, wholesale lenders’ market share fell from 13% in mid-2007 to about 2% by early 2009.
Major banks also bought some wholesale lenders. And thus, the market share for banks rose from 60% to 80% over the two years.
The 2010s
The banks regaining their market share and wholesalers losing theirs led to a drastic fall in low doc and bad credit loans in 2011.
The demand for loans hence decreased, and supply was ever-growing.
To avoid a potential market crash, the RBA was cutting the official cash rate continuously.
The Australian government began offering various grants and schemes to entice first-home buyers to buy a new property.
Specialist lenders also entered the space to fill this market gap.
Stricter lender policies for investment loans
By 2014/15, the RBA began introducing stricter lending policies for investment loans.
It then required every lender to make investor lending to no more than 10% per annum of their total loan book.
Establishment of the Banking Royal Commission
The big four banks were under scrutiny for alleged misconducts like benchmark interest rate meddling and mortgage fraud.
Thus, on 14 December 2017, a Banking Royal Commission was established. Its main function was to check on any fraud in the banking, superannuation, and financial services industry.
It submitted its final report to the governor-general on 1 February 2019.
Toughening of Australia’s lending standards
Following the establishment of the Banking Royal Commission, the limit of interest-only loans, and lenders moving away from high-risk loans, it became harder to get mortgages.
In 2018, lenders, to bring their reputation back in line, were setting lending standards stricter than in several years.
The growth in home loans was evidently on a decline with 5.87% of new loans given out in 2018 versus 6.6% the previous year.
Benchmark for Interest Only Loans Removed
A substantial strengthening of Australian mortgage lending standards led APRA to lift the interest-only benchmark on January 1, 2019.
The Australian Depository Institutions (ADIs) were required to provide substantial assurance of improved lending standards to lift the benchmark.
The 2020s
Covid-19 Pandemic Impacts the Housing Market
The economic crisis brought about by the Covid-19 pandemic started showing its effect on the Australian housing market a little late.
Usually, it takes property prices to be hit by the impact of economic fluctuations, the reason being, houses are harder to buy and sell than stocks and bonds.
However, the Australian government and the mortgage industry were quick to predict such changes and hence they were able to implement defensive measures soon enough.
From a lender’s point of view, for the ones unable to make repayments due to the pandemic, mortgage deferral dates were set.
On 31 December 2020, official data on deferrals was submitted by Australian Deposit-Taking Institutions (ADIs).
It showed a total of $51 billion worth of loans on temporary repayment deferrals, which was around 1.9 percent of total loans outstanding.
Covid-19 Assistance Schemes
To cut down the pandemic’s effects on economically impacted home buyers, the government introduced various schemes.
Of the schemes provided, some of the most sought schemes were:
- HomeBuilder Grant
- Job Keeper
- Extension of the FHLDS Scheme
Rise in Property Prices (2021)
As the economy slowly started to recover in 2021, the property market became a seller’s market.
With the remote working experience and a lack of space, the demand for spacier accommodations created a demand-supply imbalance.
The demand outweighs the supply causing an increase in property prices all over Australia.
The prices are likely to shoot up throughout 2021, setting new records.
Also, the lenders started to bring their guard up regarding high-risk loans.
As they plan on setting higher rates in the coming month, they also started to slow down their lending altogether now.
With many changes underway, it would be interesting to witness what turn of events comes in the Australian home loan timeline in the days to come.