CCCFA rules are bad, but slowing ‘abnormal’ increase in home loans, economist says

Tough new lending rules are bad law, but they come at a time when the “unsustainable” growth in home loans needs to slow, an economist says.

Changes introduced in early December as part of the Credit Agreements and Consumer Credit Act (CCCFA) impose additional requirements on lenders to verify that borrowers can afford a loan.

This had a negative impact on many borrowers. Horror stories include someone who was told they overspent on their dog, another who declined despite a 57% down payment, and people being reprimanded by their banks for having Netflix subscriptions.

But independent economist Cameron Bagrie said while the CCCFA was a bad law that got out of hand, the huge growth in home loans in recent years was a bigger problem that needed to be addressed.

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Total home loans increased by $33 billion, or $2.5 billion per month, over the past 12 months, he said. This was equivalent to an 11% increase in real estate debt, while revenue growth had been around 6%.

“This level of mortgage growth is abnormal, especially when mortgage rates are rising. It is unsustainable and it must be stopped.

“But there’s nothing like restricting access to credit to buy homes to cause an uproar. Access has tightened as an unintended consequence of the CCCFA, and now all hell has broken loose.

Bagrie said the new rules were on point, but it would still be harder to access credit this year.

Jason and Cindy Guild had their home loan pre-approval canceled in December after new loan rules came into effect.

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Jason and Cindy Guild had their home loan pre-approval canceled in December after new loan rules came into effect.

The housing credit had flashing red lights anyway, he said.

They included the return of loan-to-value ratios, consultation with the Reserve Bank on the introduction of debt-to-income ratios and the withdrawal of banks, some already applying DTIs.

“We need to get the housing market under control and credit crunch measures are being used to do that.

“It’s a fundamentally different environment than it has been in recent years, and it’s unreasonable to expect it to continue as it was.”

Although there have been issues with the CCCFA, Bagrie said businesses have had difficulty accessing credit for at least five years and there has been no outcry over it.

“You don’t have the same champions for business lending as you do for housing, and yet credit access issues are overwhelming businesses.”

Economist Cameron Bagrie says home lending has grown by $33 billion in the past 12 months - and that's unsustainable.

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Economist Cameron Bagrie says home lending has grown by $33 billion in the past 12 months – and that’s unsustainable.

Recent figures from credit reporting agency Centrix showed a sharp drop in the proportion of loan applications approved since early December.

Banking ombudsman Nicola Sladden said home loan complaints had nearly doubled recently and the increase was linked to changes to the CCCFA.

“Complaints mainly relate to delays and banks not acting as expected. A customer may have been refused credit when they would have obtained it before, for example. Some relate to the cancellation of pre -approvals.

While the first step was to work with banks to try to resolve complaints, Sladden said his office wanted to make sure borrowers’ voices and experiences were heard.

Earlier this month, the Minister for Commerce and Consumer Affairs, David Clark, announced an investigation into the legislation. It started last week.

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