Australian consumers are at risk of further interest rate rises as a result of reduced competition in the mortgage market, if steps are not made to secure funding for home-loan providers, according to the Mortgage and Finance Association of Australia (MFAA).
The MFAA has called for action to ensure competition in the home lending market in its submission to the Senate Select Committee into Housing Affordability.
“The issue of housing affordability needs to be tackled on several fronts. While securing a competitive home-loan market is not a silver bullet, it will play an important role in making home financing more affordable for consumers,” said Phil Naylor, CEO of the MFAA.
The current liquidity crunch, while impacting on all providers of credit, has had a greater impact on non bank lenders, which do not have access to deposits and rely on the global markets and securitisation for their loan funding.
“If non bank lenders are squeezed out of the market because of lack of access to funds, we will likely see a ‘back to the future’ scenario with banks dominating housing lending and interest rate margins creeping back to pre-1990 levels,” Naylor said.
“Consumers need competition in the home-loan industry to ensure there are a lot of product options available to them and to put downward pressure on interest rates. Higher interest rates will mean less access to housing finance and home ownership.”
In order to sustain competition in the Australian housing finance market, Naylor said that Australia needs a mechanism to provide access to securitised funds. This structure already operates in Canada and USA, through organisations such as the CMHC (owned by the Canadian Government), Fannie Mae (privatised) and Freddie Mac (sponsored by the US Government.
“History tells us that increased competition in the home loan market leads to a better deal for consumers. Deregulation in 1990 lead to a significant reduction in the margin between mortgage lending rates and the official cash rate,” Naylor said.
After deregulation, non-bank mortgage providers increased their market share by offering lower mortgage rates than the banks. The banks reacted by reducing their lending rates to meet the competition from non-bank providers. The result was a reduction of more than 2% in the margin on mortgage lending over the cash rate, Naylor said, which has continued to this day.