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SELECT COMMITTEE ON HOUSING AFFORDABILITY IN AUSTRALIA
Barriers to homeownership in Australia
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SELECT COMMITTEE ON HOUSING AFFORDABILITY IN AUSTRALIA
Barriers to homeownership in Australia
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SELECT COMMITTEE ON HOUSING AFFORDABILITY IN AUSTRALIA
(Senate-Monday, 5 May 2008)
ABERNETHY, Mr Ian
BUSHBY, Mr Peter Maxwell
PHILLIPS, Mr John Brendon
HABIBIS, Dr Daphne
FLANAGAN, Ms Kathleen Mary
- ABERNETHY, Mr Ian
Content WindowSELECT COMMITTEE ON HOUSING AFFORDABILITY IN AUSTRALIA - 05/05/2008 - Barriers to homeownership in Australia
CHAIR —Welcome. Thank you for the document that you have just handed to the committee. We appreciate that. I invite you to make an opening statement and then we will go to questions from members of the committee at the conclusion of that.
Mr Phillips —Perhaps my opening statement can be what I have just heard on a CD that I get every month from Business Essentials. Professor Norman, who is an associate professor of economics at the University of Melbourne, stated in this CD that he believes interest rates will start to decrease at the end of this current year and by the beginning of 2009 they should come down to at least two per cent less than what they are at the present time. That could have a fairly dramatic effect on housing affordability—or unaffordability as it is at the present time. A two per cent drop is quite dramatic. What we are also finding is that there is not so much a housing debt crisis but more of a debt crisis across the board. You will notice in those papers that I have given you that I have attached some loan servicing calculators that calculate repayments based on a rate 1½ per cent above the interest rate that a person is actually borrowing at.
What we have found in recent times is that it is not so much getting a housing loan that puts them out of the marketplace; it is the debts they have, with credit card debts, store debts, housing loans, car loans and so on. That is our biggest concern at present—they just do not have the necessary deposit with these other debts. Again, looking at that service calculator, you can see the difference that makes in their viability to borrow sufficient funds to purchase a home in today’s environment.
The other problem is an impaired credit history, because things have tightened up right across the board. Banks, nonbanks and so on are looking very closely at previous credit history. Even though someone may have paid a debt they are still unable to pick up a loan in many cases because they have an impaired debt at some stage down the track—tracked through Veda Advantage, for example, which is a credit scoring company Australia wide. So lending conditions have certainly tightened over the last probably six or eight months—certainly since the American situation.
The other thing is that at present we are finding that a number of institutions, particularly non-bank institutions, have dropped out of the marketplace. They cannot borrow money through the securitisation program and if they can it is at a much higher rate of interest so it becomes unattractive and certainly non-competitive for them in today’s environment. As I said, quite a number have dropped out. Macquarie Bank, Maxis and Bluestone Mortgages, just to name a few, have all dropped out of that market. We did a lot of business through Maxis, which is Members Equity Bank. They just do not have sufficient funds or are unable to secure funds to lend through Maxis.
Again, with the demise of some of these non-bank and bank institutions, we getting back to a stage where the major four banks are the main supplier of housing finance. To go back to the beginning of the 1990s, John Symond with Aussie Home Loans fought against them and was able to make the housing loan interest rates a lot more competitive around the country. We are getting to the stage where we might have to go back to John Symond beating the drum again, because they are going to have a stranglehold on the industry. Westpac are already starting to drop the commissions payable to brokers from about 2.5 per cent to 1.5 per cent for trailer commissions and from 0.6 per cent to 0.5 per cent up-front. St George are looking at a model that is a little bit different. But that could permeate the whole banking industry. Do you have any questions, or will I keep going?
CHAIR —Keep going, please.
Mr Phillips —Looking at improving housing affordability in Tasmania, the federal government supply funds to the state under the Commonwealth-State Housing Agreement for rental accommodation for low-income earners. I believe they charge interest on that money and I am just wondering whether the federal government would consider for a period of time not charging interest and/or maybe having a moratorium insofar as repaying that debt. That moratorium could go for, say, 10 years, or until such time as they can pick up the slack in providing suitable accommodation for low-income earners, particularly in the rental market through housing department properties.
Senator MOORE —Could you explain that, so I know exactly what you mean?
Mr Phillips —Currently, under the Commonwealth-State Housing Agreement, state governments are required to repay that debt.
Senator MOORE —Which debt?
Mr Phillips —The Commonwealth-State Housing Agreement debt. Paying interest and repaying debt is a fair impost on Housing Tasmania. I am wondering whether there could be a moratorium on paying that back, rather than immediately paying it back. The repayments of that could be extended for 10 years until they can catch up. There certainly is a demand for rental accommodation for low-income earners in Tasmania. You also have the other problem in Tasmania with housing department properties, which need to have a fair amount of maintenance work done on them. They are a fair way behind in maintaining their existing stock.
Tassie Home Loans are the managers of the Home Ownership Assistance Program, HOAP, in Tasmania. It was initially based on the South Australian Home Start program, with slight improvements. The Home Start program in South Australia is managed by the state government, whereas here we manage it on behalf of the state government. The Tasmanian state government, over the last four financial years, has received on average about $116 million from stamp duty on residential properties and mortgage transactions. My thoughts are that maybe the state government should be encouraged to plough back a proportion of that income to assist in providing housing for low-income earners. That could be through building more government housing or it could be done through community based housing projects. There is a need for those.
You will find that with community based housing projects the people involved are a lot closer to the needs of people, whereas the bureaucrats are there just doing a job. There was something in the local newspaper a few days ago about a little old lady who had been living in a housing department flat for many years and next door there was a group of ruffians bombing up and down the street, waking everybody up, playing loud music and so forth. There has to be a better mix when you are looking at accommodating people in some of those residential rental properties run by the government.
Insofar as HOAP is concerned, we have done very little lending on that over the last three or four years, mainly because the product has not been updated to match the current environment. They still have a restriction on the maximum amount that people can borrow. There is also a maximum in relation to their income for them to be eligible to borrow. I suggest that the state government should consider what happened with the South Australian scheme. They have a number of very good products that they are implementing in that state or that have been there for some time. The government here was considering a top-up loan of about $35,000 on top of HOAP. There were going to be no income limits on that and no maximum loan limit. But I believe that that is in abeyance at the present time. If you give people opportunities to purchase a home of their own, then they certainly look after it and maintain it. We do not have any problems with bad arrears cases with those low-income earners at all.
In relation to Housing Tasmania’s principle of allowing people to live in the properties that they rent forever and a day unless they get kicked out because they have damaged the property or it has burnt down—and they burn it down in most cases—I believe that there should be a grandfather clause in there. It should be reviewed every five years, or more often if need be, to make sure that they are still eligible to live in that particular property. You will find that people on quite substantial incomes are still living in housing department homes in Hobart in particular. If they could go through that process, that would assist people who are more in need. If people can afford to go into the public arena to borrow funds for a house or rent, that is what should happen.
I also think that consideration should be given, under the Commonwealth-State Housing Agreement, to trying to provide a better or more appropriate range of housing. A report was done by the upper house in Tasmania into affordability of housing, and there are quite a number of single people who are unable to obtain housing simply because, particularly with government housing, they do not meet the criteria—I think the more kids you have got, the more likely you are to get a home. Maybe there should be some form of community-style accommodation, probably cluster housing to start with, which is a much more efficient use of land and, secondly, motel-hostel style accommodation with shared kitchen and community or dining facilities. To me, there is a need for that and you could probably better utilise money available to accommodate those people in that sort of situation.
Last but not least, I think the management of public rental properties, particularly the collection of rents, could be outsourced to the private sector. In my dealings with the housing department—I probably should not repeat all of it!—they are quite inefficient at times. We have recently taken over three portfolios that they had been managing for many, many years. What we have done in the last six months to make the way the whole thing runs a lot more efficient is incredible. They had been doing it since 1945. They were using an old actuarial loan repayment system which is older than me, but I knew a bit about it anyway. So they really have not got an efficient way of doing business. If it could be outsourced, money generated by the savings could go into the continuing maintenance of some of those rental properties.
I have got some attachments, including the Genworth Financial servicing calculator. That shows that a couple borrowing money on an income of $60,000 with a credit card debt of $5,000 could borrow $236,000. A couple with three children could borrow $121,000. I have got nothing against that vis-a-vis what happened in America—I think they were giving it to everybody at whatever the rate might have been—but, as I said before, the lending institutions are clamping down to make sure people are able to afford to borrow for a home of their own. That is the end.
CHAIR —Thanks very much and, as I said, thank you for this information that you have provided to the committee today.
Senator FIFIELD —Mr Phillips, in your submission you state that we could be heading back to a situation where the banks have a monopoly on the housing loan market because of the demise of a number of non-bank lenders. It might be time for Aussie John Symond to start beating the drum again. The nature of his business has changed over the years. He started off with Aussie Home Loans actually providing loans from funds which his organisation sought.
Mr Phillips —They were sourced through the Macquarie Bank, by the way.
Senator FIFIELD —He has now shifted his business model to being a mortgage broker. One of the reasons, I guess, for the reduction in the number of non-bank lenders is that some of them have actually changed their business model to being mortgage brokers—they are leading that change themselves. Are you suggesting Aussie John should go back to his original business?
Mr Phillips —No. He was the one that really got the banks offside and made it more competitive for the banks, and the banks then came back. A fair bit of our business—as a mortgage broker as well as a mortgage manager—goes through the banking industry. But ING or GE, for argument’s sake, are fairly competitive. Without the competition, the banks, as they have already done, will increase their interest rates higher than the Reserve Bank has done anyway.
Senator FIFIELD —They are indeed naughty! The banks have their own criteria for the percentage of someone’s income that they are prepared to see go in loan repayments and 30 per cent is the figure that has been kicked around a fair bit. When the Deputy Governor of the Reserve Bank was giving evidence to us a week or two back, he said that if that formula was redone today something of the order of 47 per cent might be a more appropriate figure. One of the submissions that we received—I think it was to the Tasmanian upper house inquiry—said that, using the 30 per cent figure, something in the order of 12 per cent of Tasmanian households were in mortgage stress. What do you think would be the appropriate measure? Is it 30 per cent; is it 47 per cent? I personally find it difficult to believe that 12 per cent—
Mr Phillips —Look at those attachments that I have given you at the back of my submission. This is a servicing calculator. It is not based so much—and I put this in my submission—on the percentage of your income, but more on Professor Henderson’s living allowance—the poverty index. Most banks are using that, rather than 30 per cent, 25 per cent, 40 per cent or whatever the case might be. That percentage used to be around 30 per cent but it is no longer being used. It is more or less similar to the calculator I have got there. They take into consideration, for example, a couple with no children. If you take 30 per cent of their income it is okay, but if you take 30 per cent of the income of a couple with three children and do not take into consideration the cost of educating, bringing up, clothing and feeding the children, then that 30 per cent would probably be up to 60 per cent. So it is based on Henderson’s poverty index. Most banks are using that, rather than 20 per cent, 25 per cent or 30 per cent of income.
Senator FIFIELD —So that raw 30 per cent measure is pretty meaningless.
Mr Phillips —It is very much meaningless, yes.
Senator FIFIELD —The Tasmanian upper house inquiry used that 30 per cent measure to determine that 12 per cent of Tasmanian households are stressed—
Mr Phillips —They should have asked me that question, but they did not ask me that question at the time.
Senator FIFIELD —That is right. So that 12 per cent figure asserting that Tasmanian households are experiencing housing stress would be a fairly meaningless figure?
Mr Phillips —I would think so. I do not know how they worked that out.
Senator FIFIELD —I think applying the 30 per cent figure—
Mr Phillips —As you can imagine, a couple can live much more cheaply than a couple with three children.
Senator FIFIELD —Yes, sure.
Mr Phillips —And those things are taken into consideration.
Senator FIFIELD —In terms of your own business, you do not apply your own criteria; you just go with the bank’s criteria. If the bank is happy, then you are happy?
Mr Phillips —They approve the loan anyway so we have to comply. They are the ones who make the final decision of yes or no. But we have got all of these calculators on our computers for each of the banks and lending institutions. It is only a matter of us applying those to a particular loan for wherever people are going. The only one we do not do it for is the government Home Ownership Assistance Program, HOAP. They have set out, I think, 35 per cent of people’s income, again not taking those other things into consideration.
Senator MOORE —I only have two questions; one is in relation to the media comments this morning about what they claim to be a higher repossession rate happening in Tasmania at the moment. Does your institution have any comment on that?
Mr Phillips —We have not experienced repossessions at all. When we deal with the banks and other lending institutions, if people do not make their repayments or are in arrears with their repayments, we do not get paid. We have trial commissions, and we have not found anything out of the ordinary at the moment. We certainly have not had a glut in the last two or three months of not getting commissions from people who have not paid.
Again, I suppose it gets back to the institution. What we have found with some of the banks—and I am not bank bashing—is that we have had a number of instances where we have put an application up to a particular bank and it has been knocked back, and yet their own staff can get that same loan through for the same people on the same conditions that they knocked ours back on. The banks have probably got a little bit more leeway with what they can do as against than what we can do because we are totally controlled by the banks. But we have not, as an organisation, experienced it, particularly with the government housing program where we are dealing with low-income earners—we have not found a problem.
Senator MOORE —It is always very difficult when you are relying on something you read in the media; you only get a certain amount of the story. The situation, as described in some cases this morning, indicated that people were making a strong effort to repay and in fact were catching up but they were still unsure, through the legal process, whether that was going to be enough to retain them in possession. I am wondering about your experience of that process.
Mr Phillips —For anyone who gets into arrears with us, we have a person dedicated to our arrears, apart from the stuff we broker out—we manage some inside. If a person does get into arrears—and they do from time to time; they all go through little problems—we would manage them. In most cases we can manage them out of it.
We had a fair number of mortgagee sales back in the 1990s—probably 1995 to about 2000 or 2001—with a government housing program where with some properties there was no increased value at all; in most cases they went downwards rather than going up. Most of the causes of the mortgagee sales we had then were breakdowns in relationships—I think 80 to 85 per cent of them were breakdowns in relationships. Others were for other debts that they could not afford to pay—it all fell over. I think it gets back to managing those people out of it and, for most people, if you can take the time you can often manage them out of it. We would do that all the time. But the banks are probably less personal.
Senator MOORE —The other question—I will ask you for an opinion—is about the 30 per cent rate, which is talked about generally now. When you are spending beyond that 30 per cent, you are in housing stress, which is common parlance. When we were talking with the Reserve Bank a couple of weeks ago, their representatives felt that that rate was perhaps not as concrete as other people talk about it in the media. The Hansard reflects a discussion where the person from the Reserve Bank felt that it varied very much and you could not rely on just saying that someone was 30 per cent or more; it was much more personal in terms of individual circumstances.
CHAIR —Senator Moore, while you were out of the room, Senator Fifield did pursue that issue.
Senator MOORE —That was good of him! I will read Hansard later and see your answer.
Mr Phillips —But you are quite right; it is no longer a hard and fast rule. If you look at those attachments, it will explain things to you.
Senator BARNETT —I perused your submission, Mr Phillips, and I thank you very much for it. I think you have made some very good points and I do not have any further questions.
Senator COLBECK —Can you explain to us the fundamentals of the HOAP scheme and how that works? You mentioned that the core criteria for it had not changed, so therefore the use of it had dropped off over the last few years. Is that because of the increase in property prices and putting those properties outside the criteria of the scheme?
Mr Phillips —Yes. In most cases it has been an increase in properties over the last three or four years that has done that. We were lending on housing department properties back in 2002 to 2004, where the properties were selling at about $50,000. Those same properties are now selling for about $130,000 to $150,000. So there has been a big increase in the price of those properties—even government housing. That would be the case generally across the board.
The government has not kept up with the HOAP scheme. There is a limit on earnings whereby, I think, to be eligible you must earn no more than $900 a week. The maximum loan is about $130,000. It is totally out of whack. They are looking at it at the present time. They are also looking at a shared equity scheme, but at the moment I am not too sure what is going to come out of that.
Senator COLBECK —So the HOAP scheme effectively deals with department properties?
Mr Phillips —Not necessarily—
Senator COLBECK —So they can be general market properties?
Mr Phillips —They can be across the board. But, again, because of the increase in properties, the restrictions on the amount they can borrow and the income required to be eligible to borrow, it is out of whack.
Senator COLBECK —Was there any proportion of former housing commission properties released to the general market that made up the overall cohort? Was there a large proportion of former housing commission properties as the government sold—
Mr Phillips —We have not lent on a housing department home for this current financial year and we have only done about six loans to the private sector. Over the last three or four years the majority of loans that we have done—and, again, there have not been very many—have been in outlying and rural areas, because houses are less expensive in those areas.
Senator COLBECK —Is the reduction in the sale of former housing commission properties because there have been fewer of those to sell on behalf of the government?
Mr Phillips —There probably have been, yes. In this current year I think that there are fewer properties for sale. They are looking to sell more of their three-bedroom properties that come on the market from time to time, but the problem is they have got a bad mix. They have got a lot of three-bedroom homes which people do not require these days. They are looking more to one- or two-bedroom properties.
Senator COLBECK —You talked about the management of the housing stock and the loan stock that you are running on behalf of the government. Are they loan books or rental books that you are managing?
Mr Phillips —No, not loan books; they belong to people. I am talking about the rental stocks—
Senator COLBECK —You are actually managing their rental books as well at this point in time? That is the element of the market that you talked about that you had taken over and were finding a lot of efficiencies—
Mr Phillips —Yes. I think that the management of the rental stock could in most cases be run by private enterprise.
Senator COLBECK —We have heard through the inquiry a lot of evidence about housing cooperatives—and I am not sure whether they are necessarily housing cooperatives in the traditional cooperative sense but rather community and church based groups—taking over state government housing stock and managing that stock in respect of rentals and maintenance, and in fact in some circumstances taking over ownership. Do you see that there is scope for an increased capacity for the community or the private sector to move into that market?
Mr Phillips —Yes, I do. The Salvation Army already manage a number of those housing department homes. I think that they have taken a block of them. I am not too sure whether they have purchased them or not from the housing department but they certainly manage them as far as putting people in them and so on. I mentioned earlier the bureaucracy of the housing department. I think that it could go back to the community to manage houses on behalf of whomever, whether private enterprise, government or whatever the case might be. You would probably find a far better and more efficient way of accommodating people in that lower income bracket.
Senator COLBECK —You mentioned in your evidence that you believe there should be some grandfathering of the rentals and an increased scrutiny of the increased capacity of people who are allowed into community based housing or housing commission type housing. We have heard a lot of evidence in other states about the narrowing of that cohort where, going back 15 or 20 years, a much broader range of people had public housing available to them. In New South Wales the evidence was quite overwhelming that the narrowing of that focus and the tenants who were in the community or public housing meant that it was now basically down to a welfare type of person and the reduction in rentals that they were able to charge was actually impacting on the capacity or the sustainability of that overall stock.
You obviously have a thought on this and it is similar to where, I suppose, the policy is heading on this—that a narrow range of people should have them available to them. But, in an overall management sense, surely having a broader cohort in your housing provides for capacity to assist those at the lower end by having a group of people at the top end who can actually afford a higher rental. Is your perspective based on what is actually available in the market rather than what the overall policy should be?
Mr Phillips —Certainly their policy is that once you are in the house you can stay there forever. There is no checking on them to make sure that they are within the current guidelines for rental of housing of public rental stock. I do not have any evidence one way or the other. Narrowing may still be the case. But if there are checks and balances in place and the people do fall outside and are not eligible because of their income and financial position, there should be some review of those things at regular intervals.
Senator COLBECK —To essentially assist with the turnover and the availability of stock.
Mr Phillips —Yes. They are complaining because they do not have enough stock. Here is one way of looking at it a bit more closely.
CHAIR —When we spoke with other lenders, mortgage brokers and so on, we asked about the financial literacy and what steps they take to ensure that those who engage with them have the capacity to understand what they are committing to and the sorts of things that they are going to be signing up to. Do you provide financial literacy education to your potential customers?
Mr Phillips —We do. I should have brought you a copy of a brochure we have. I could give one to Senator Colbeck. It goes through the whole process of borrowing money. Our loan consultants would spend at least an hour at the initial interview explaining things to them fairly carefully. Again, with HOAP that is fairly well explained in a document prepared by the housing department. What they are getting into is fairly well explained. In this state we do not have a large number of people from other countries, so in most cases we do not have a language problem. I do not know of any problems we have experienced with people coming back and saying, ‘You never told us about that.’ The Mortgage and Finance Association of Australia have a code of practice. We also have COSL, which is a dispute resolution organisation. Nobody in Tasmania at this stage has been dobbed in to them because they were outside the MFAA code of practice.
CHAIR —Senator Moore asked you about repossessions and the figures on that. What about arrears rates? Have you noticed any significant change there?
Mr Phillips —Again, from the point of view of our in-house and brokered stuff, we have not found an increase at all because, as I said, we do not get paid trailer commissions on loans that go into arrears. We have not found any problems at all.
CHAIR —That is very interesting.
Mr Phillips —Tasmanians borrow less than those on the mainland with a similar sort of income. House prices are lower here than in Melbourne or Sydney. Our average loan is about $136,000 across the board.
CHAIR —In earlier evidence, we were told that income rates in Tasmania were not keeping up with increases in the mainland level, so, even though the borrowings may be lower, increases in income do not match the mainland increases in income.
Mr Phillips —You are probably right. I have never compared it to the mainland.
CHAIR —Of course not. It is interesting for us to be here today when one of the local newspapers has decided to do quite a big story on housing affordability issues in both Hobart and Launceston. That is why local issues are important to us.
Mr Phillips —I would not think our income was that much less than the mainland. If it is lower, there is the cost of transport on the mainland—going backwards and forwards to work alone. I can go home for lunch, for argument’s sake. Most people in Tasmania could go home lunch, if they wanted to. That is how it is. Whereas on the mainland, it takes six hours to get to work and six hours to get home again with no time for lunch anyway!
CHAIR —I do not want to even think about how that would be possible in New South Wales.
Senator MOORE —Mr Phillips, does your organisation offer any of the home equity products for older people who—
Mr Phillips —Reverse mortgages? Yes, we do.
Senator MOORE —What is the success rate of those?
Mr Phillips —We have not done that many of them. We are an accredited lender for that and our staff went through a whole training program to make them accredited. People have to get advice from their solicitor and so on. We are pretty pedantic in relation to that, and we have had no problems with it. It is a good product if it is used properly. The poor kids might miss out, but so they should!
CHAIR —As there are no further questions, Mr Phillips, we thank you very much again for providing the information you have given to the committee this morning and for your time today.
Mr Phillips —Thank you.