Prime Minister Anthony Albanese’s 5 per cent deposit scheme has been exposed to some risk as prices fall. Picture: Martin Ollman
ANALYSIS
If something was in absolutely no danger, we used to say it was “as safe as a bank”.
See, banks are these rock solid institutions, full of money and setting new profit records year after year … especially in Australia.
The other term we might use was “as safe as houses”. Our home values have also been steady and reliable, with consistent growth over the decades, due largely to our national obsession with owning or investing in property.
Our $13 trillion love affair with property has seen the home loan space become incredibly fertile ground over the years, supporting growing numbers of banks, credit unions, mutuals and other forms of lender.
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The result has been the situation we find ourselves in today, with more than 100 lenders in the Australian market.
Our banking system is the envy of the world.
Cast your mind back to the Global Financial Crisis, where bank collapses and massive taxpayer bailouts were widespread across the USA and Europe.
Canstar’s Sally Tindall said the lending environment was putting pressure on banks.
Down in the little old land of Oz? Not a peep. Our banks were steadfast, due largely to a history of conservative lending practices and robust regulation for our financial institutions.
But suddenly, there’s one less lender in market, after HSBC announced it would be withdrawing from Australia. Its $36 billion book of home and personal loans will be offloaded to private equity firm Blackstone, while the loans will be serviced by non-bank lender Pepper Money.
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The market is looking a little less fertile for lenders all of a sudden.
Recent quarterly lending data from the Australian Bureau of Statistics revealed a 5.4 per cent drop in the total number of new home loans, driven largely by a decline in lending to investors.
The release came on the back of a 28 per cent fall in investor loans announced by Commonwealth Bank and a 26 per cent fall reported by Westpac.
With less interest money to go around between all the lenders we still have, is it time to worry about more banks getting out of the market? And suddenly, with home values now falling, faster than many thought and with no floor in sight just yet, neither houses nor banks seem as safe as they used to be.
The bank of mum and dad is likely helping young buyers avoid negative equity.
Canstar data insights director Sally Tindall said the current environment was “putting pressure on lenders big and small”, but noted that there was currently little cause for concern from regulator APRA. She said that when the lending market gets tough in Australia, buyers are presented with more opportunity to save money.
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“We’ve been seeing competition ramp up,” she said, “over interest rates especially.
“We have 33 lenders who have dropped variable rates since June even though the RBA hasn’t moved a muscle. We now have 52 lenders with a variable rate below 6 per cent.”
But there is one bank potentially at more risk than everyone else. It lends money, but it doesn’t collect interest. And it can often have only one asset in its own portfolio. What’s more, if it fails, the government won’t bail it out. It’s the bank of mum and dad.
So many young buyers have entered the property market, backed by equity from their parents’ houses, that family homes in Australia are exposed to greater risk of default.
The upside, is that their deposits are “usually pretty healthy”, Ms Tindall said.
“If someone is borrowing from the bank of mum and dad, they’re likely to be starting with a healthier deposit and less at risk of negative equity,” she said. “Those buying with the government’s 5 per cent deposit scheme are more at risk, but the government is taking on that risk instead of mum and dad.
Lots of first home buyers have taken action to get into the market this year. Picture: Sarah Ebbett
“The bank of mum and dad is likely helping a lot of young buyers stay out of negative equity.”
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So perhaps it’s the Bank of Albo we need to be more worried about after all.
Over the past 12 months, about 60,000 Aussies have taken out loans with 5 per cent deposits, while the government guarantees the other 15 per cent of the 20 per cent deposit.
Taking a look at the worst case scenario, as highly unlikely as it is:
If all of those borrowers defaulted on their mortgages, with an average mortgage being $646,000, the Bank of Albo could be on the hook for more than $3.5 billion, if prices fell by 10 per cent, and a stunning $5.8 billion if there was a severe market correction of 25 per cent.