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Tuesday, 23 August 1994
Page: 4

Senator SHORT —My question is directed to the Leader of the Government in the Senate. I refer to the government's decision to alter the prudential arrangements for home borrowing so as effectively to require now a minimum 20 per cent deposit, and hence therefore deny most first home buyers the opportunity to purchase a family home. Why has the government sought to single out first home buyers by this savage move to ration home lending? What will be the interest rate cost of this move for mortgagees with less than 20 per cent equity? How many borrowers will be affected by it? Finally, when the Treasurer said last Sunday that anything less than a 20 per cent deposit was risky, was he referring to the risk being a fall in the home buyers' earnings or a collapse in asset prices, or—perhaps the most likely of all—a further rapid rise in interest rates?

Senator GARETH EVANS —I have to say about this that the change in the prudential ratio that has been adopted by the banks is a perfectly understandable and sensible precaution in a situation where it just is the known case that too many home borrowers, home loan seekers, have been over-extending themselves. The result of the banking experience in recent years has been such that it makes perfect sense from the banks' point of view and from the government's point of view to ensure that that does not occur on the same scale in future.

  It does not mean that we are anticipating any flowthrough of the current interest rate increase to home loan lending. There is absolutely no reason to believe that that should occur in the foreseeable future, given the competitive pressures that are at work in the housing market and given that the margins that presently exist between the borrowing rates and the lending rates are still so comfortable for the banks.

  There is a sense, of course, in which it is important for the larger management of the economy that some moneys in the banking system be directed to productive business investment rather than being concentrated as intensely in the housing market as they have been in the past. I guess to that extent also there is a policy rationale for introducing some element of caution in that prudential ratio issue. But beyond that, the interest rate consequences for first home buyers obviously will not be great so long as the expectations are—and I have indicated that it is proper to expect this will be the case—that home loan interest rates will remain low.

  The steps that the government has taken to increase the official cash rates do, of course, have their own economic rationale: it is good, sensible monetary management to anticipate the 12- to 18-month surge in the business cycle. We have experienced that often enough in the past. We have not acted early enough in the past to anticipate that and to seek to smooth it out.

  The whole point about acting as we have is to create an economic environment in which the present level of inflation will be sustainable at a low level and we will not get interest rates rising across the banking sector generally and the housing market in particular to anything like the same extent that we have experienced in the past. So the prudential thing should be seen just as a small part of a larger interrelated strategy with all those different elements.

Senator SHORT —Mr President, I ask a supplementary question. Is the minister seriously saying—because that is the effect of the policy—that the change in the prudential arrangements to require purchasers of homes to have a minimum 20 per cent deposit will not make it extremely difficult, particularly for young first home buyers, to raise the money necessary to get a housing loan in the first instance? Does the minister accept or not accept that home owners, particularly first home owners, are going to be hurt by this policy decision?

Senator GARETH EVANS —It just is the case that in the past, as all too many of us are unhappily aware from information available or constituency cases we have had to look after, people have overreached themselves by borrowing too much money on much too small an initial deposit. Banks in the past have been all too happy to accommodate what have not been very prudential borrowing expeditions by the home borrowers in question.

  The point remains that, with the present rate of housing loans averaging 8 1/2 per cent or something of that order of magnitude at the moment, with the economy in its present condition with the fundamentals as sound as they are, with steps having been taken, as they have been taken by the government, to anticipate an increase in inflationary and interest rate pressures in the future, to spread it out over time in the way that I have indicated we are doing, there is every reason to expect that those low levels of interest rates will be maintained. And that is the benefit that really matters so far as first home buyers are concerned.

  The initial deposit is one element, obviously, in the buying equation. But a much bigger element is the basic rate of interest and in that respect the opposition ought to be reasonably confident—we are.