FED:Loan demand could suffer awaiting reforms

AAP General News (Australia)
12-13-2010
FED:Loan demand could suffer awaiting reforms

By Colin Brinsden, AAP Economics Correspondent

CANBERRA, Dec 13 AAP - Economists are concerned that home lending faces a downturn
as buyers wait for the federal government's new banking laws to be enacted, particularly
the abolition of mortgage exit fees.

They already expect lending to soften over the next few months as a result of the round
of interest rate rises in November that saw variable home-loan rates jump by 40 basis
points on average.

Among Treasurer Wayne Swan's suite of measures to help increase banking competition
announced on Sunday was the axing of all exit fees on home loans taken out from July 1,
2011.

"There is simply no justification for any lender to have a mortgage exit fee, say,
of the order of $7000," Mr Swan told ABC radio on Monday.

"Whether you're a smaller lender or a larger lender, that is absolutely unfair and
it can't be tolerated."

But opposition treasury spokesman Joe Hockey said while getting rid of exit fees sounds
great for consumers, he believes they will be hit in other ways.

"What you will see is higher maintenance fees, higher application fees, because unless
the banks are prepared to cut back on their profits they are not going to willingly accept
a fee being abolished and not replacing income with something else," he told Melbourne's
MTR radio.

Legislation for Mr Swan's package - which also aims to prevent price signalling between
banks and opens up new types of funding for lending institutions to enable better access
to money - will be put forward to parliament next year after consultations with the industry.

In the meantime, Nomura Australia chief economist Stephen Roberts believes it could
make existing homeowners and first-time buyers think twice about a new home loan as they
wait for exit fees to be dropped.

"It suddenly makes what should be two identical products somewhat different," Mr Roberts
told AAP.

"That can have the effect of influencing demand for new products relative to sitting
on the existing products."

Macquarie Research senior economist Brian Redican agreed that there will be a considerable
incentive to wait a couple of months, not only because of the end of exit fees but also
because of the promise of better deals.

He said that could also dampen house prices as demand slackens.

"In that kind of environment, you are better off waiting before putting your house
on the market," Mr Redican told AAP.

Government data last week showed first-time buyers remained reluctant to enter the
market even before the November rate rise, making up just over 15 per cent of loans granted
in October, the smallest amount since July 2004.

Still, despite the government's efforts to make the banking industry more competitive,
Reserve Bank governor Glenn Stevens believes there is more competition now than there
was in the mid-1990s.

"The overall availability of finance to purchase housing in particular seems to be
adequate," he told a Senate inquiry into banking competition in Sydney on Monday.

Mr Stevens said he had a brief consultation with the treasurer's department about the
reforms but refused to comment on the measures.

"I don't really want to offer a comprehensive response to it," he told the inquiry.

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KEYWORD: ECONOMY WRAP

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