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Australia's consumer regulator's interference with mortgages could trigger economic meltdown.

BIScom Subsection: 
Author: 
Nigel Morris-Cotterill

Starting point: banks in Australia have behaved appallingly. The Australian Consumer and Competition Commission, ACCC, has been shown up as .. pick a negative adjective and it's probably been used. The ACCC, along with other regulators who have been shown up as wanting are now doing their best to prove they are "across it," as Australians say. Today, they say that they have produced a "final report" from their residential mortgage price inquiry. But.. has the ACCC now moved from ensuring good behaviour to managing how banks do business? It raises risk management questions, liquidity issues and even the stability of the housing market which has been in an accelerating downturn for a while and is showing all the signs of turning into a bit of a crisis.

The media release announcing the Report smacks of a conclusion looking for a justification. It uses trendy buzzwords like "transparency" and "opaque" and then, inadvertently, explains why this is so: simultaneously justifying and criticising it.

It is ironic that the Commission, charged with ensuring Competition, appears to criticise the banks for exercising discretion when considering home loans.

This is what they say in the press release:

"LACK OF TRANSPARENCY STIFLES MORTGAGE PRICE COMPETITION." Yes, they really do use all caps.

"The opaque, discretionary pricing of residential mortgages by banks makes it difficult and time consuming for borrowers to shop around and stifles price competition, a report by the ACCC has found. The ACCC’s final report found the unnecessarily high search costs or effort required by borrowers to find better prices reduces their willingness to shop around, but that many borrowers who negotiate with their bank can get a much better price. “Pricing for mortgages is opaque and the big four banks have a lot of discretion. The banks profit from this and it is against their interests to make pricing transparent,” ACCC Chairman Rod Sims said."

The objectives are good and it is unarguable that they should be supported. For example, one thing that all borrowers all over the world should heed is this: Sims said "Borrowers may not be aware they can negotiate with their lender on price, both before and, particularly, after they have established their mortgage."

This is where the somewhat poorly presented argument has some logic - but it's a logic that may be flawed. This is how the dots join up: new borrowers may get better rates than existing borrowers. Existing borrowers should, ACCC implies, be able to go to the bank and say "hey, I want that deal." And, according to ACCC, there's a decent saving to be had: "As at 30 June 2018, an existing borrower with an average-sized mortgage could initially save up to AUD850 a year in interest if they negotiated to pay the same interest rate as the average new borrower at the five banks under review. For many borrowers the gain will be much larger."

Gross that up to pre-tax income and it's as good as a pretty solid salary increase for many people. But then Sims goes off the rails: "I encourage more people to ask their lender whether they are getting the lowest possible interest rates for their residential mortgage and, as they do so, be ready to threaten to switch to another lender. I am afraid that the threat of switching banks will often be necessary to achieve a competitive mortgage rate." The making of a threat to gain something to which you are not entitled (and an interest rate reduction is not an entitlement) is blackmail. Well done, Mr Regulator.

What ACCC is saying is that banks don't publicly advertise their best rates; they advertise rates that are competitive but there are deals to be done. Well, in Mr Sims' position as a senior civil servant (or whatever quasi-public sector workers are called these days) he's got a good job with a decent salary and, if he's typical of his ilk, a wife with a decent salary, too. So, for him, getting a mortgage is not a big deal. And, the way the civil service revolving door works, even if he gets booted out because of ACCC's poor report card before the Royal Banking Commission (not its correct name) he's still going to go into a similar level job with another public body or, even, an even better paid job with one of the large consulting firms. He's not only going to find getting a loan easy, he's going to find that he's regarded as a low risk and therefore get favourable terms.

That's not the reality for millions of existing and prospective home-owners across Australia and Sims and the ACCC appear to be living in a vacuum.

 


 

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