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Competition in the home loan market: address to Mortgage House Annual Conference

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Joe Hockey, MP  Shadow Treasurer  Member for North Sydney





I am delighted to be here today to open the National Conference for Mortgage House, and in particular I would like to thank Ken Sayer, my fellow supporter of the Central Coast Bears, for extending the invitation.

The theme of my address today is competition in Australian housing lending markets, an issue on which I have been very vocal over the past year or so.

However, I would like to begin with a few comments on the unprecedented flood crisis in the eastern states, across Queensland, northern New South Wales, Victoria and Tasmania.

In what has been a rolling crisis since November, the devastating impact of the floods across Australia is only just starting to be realised.

The worst affected state has been Queensland. To give you some idea of the scale of the disaster, Queensland has a population of around 4.6 million people, of which 3.1 million have been affected by flooding. It covers an area of 1.8 million square kilometres, of which 500,000 square kilometres has been impacted by flooding.

Early estimates suggest that around 90,000 kilometres of roads will need to be repaired across the State, with uncounted bridges and other utilities requiring repair or replacement.

Around 2,500 businesses in Brisbane have been affected by the flooding.

Across the state some 28,000 homes have been affected, and will need to be repaired or rebuilt, with 11,900 of those homes in Brisbane. This task alone will stretch resources. To illustrate this point, over the 12 months to November 2010, work commenced on 31,230 dwellings in Queensland. This shows that the rebuilding task will be a very large addition to home building activity in Queensland.

Some estimates of the rebuilding task are as high as $20bn.

There will be heavy impacts on economic activity, employment and inflation, although not all of the impacts will be negative.

Reserve Bank board member Warwick McKibbin estimates that the initial economic impact of the Queensland floods on the Australian economy could be to detract around 1 per cent from GDP, or approximately $13 billion. This is the result of lost production from coal mines, agricultural activities, tourism, and other businesses.

This however is not the end of the story. Going forward the reconstruction task will add to economic activity, and it may be that overall the impact on growth will be relatively small.

Employment is likely to be boosted by the floods. How can that be? Relatively few jobs will be permanently lost because of the floods. Most businesses will eventually reopen in some form. On top of that will be many new jobs created for the reconstruction effort, which is likely to last several years. The unemployment rate is already down to 5% which is close to Treasury’s estimate of full employment. I would not be surprised if the unemployment rate is well below this by year end.

There is increasing concern that higher food prices will add to inflation. Headline inflation will certainly be higher over the next year, although the direct impact of the floods on core inflation is likely to be more muted. Further out core inflation will face upward pressure from stronger economic activity and a tighter labour market from the huge reconstruction effort.

And finally, what does this all mean for interest rates, an issue close to the heart of everyone here today. The market view seems to be that in the short term the Reserve Bank will look through the impacts of higher food prices on inflation, and will leave interest rates unchanged. In the second half of the year though it may have to increase interest rates again to tone down the upward pressure on core inflation.

The government could offset this pressure by reducing spending in other areas. This lies behind our call for the government to recommit to returning the budget to surplus as soon as possible, and to offset the necessary spending on reconstruction through savings elsewhere in the budget. The Coalition has shown the way, identifying 10s of billions of dollars of savings.

The danger is that this government will shirk the hard decisions, and will either not cut spending elsewhere or will fund the reconstruction effort through a new tax.

There is a point here about long term prudent budget strategy. One of the reasons the Coalition believes the government should target the running of a budget surplus over the cycle is to allow room for spending on unpredictable events such as drought, fire and flood. These events occur at regular intervals in Australia and a prudent and sensible government needs to provide sufficient capacity to handle spending on these events. The current government has failed miserably in this.

The challenge ahead in not only rebuilding Queensland, but repairing northern New South Wales, Victoria and Tasmania, is certainly one on a scale which is unprecedented in Australian economic history.

There is a role for the mortgage broking and origination industry in helping home owners get the best deal they can for any new financing requirements they may have.

This brings me to the main theme of my talk, competition in the mortgage market, and the role of mortgage brokers and originators such as Mortgage House.

The development and expansion of the broking industry has been a key contributor to competition in the provision of financial services in Australia. The industry has provided consumers with a wider range of financing options and has allowed consumers to shop around for the best deal. It has allowed consumers to break their ties with just a single financial provider. Most importantly this has led to the delivery of more affordable finance to both households and businesses by compressing the margin between the interest rate paid by borrowers, and the lending institutions’ cost of funds.

The emergence of the broking industry was a great example of market innovation following the deregulation of the banking industry from the early 1980s. The industry developed in tandem with the development of innovative forms of financing, in particular the mechanism of securitisation. It shows what can happen when markets are released from the dead hand of government regulation. In this sense the development of these markets was entirely consistent with the Liberal philosophy of the power of free and competitive markets.

Much of the public perception of the broking industry is dominated by the big names such as Aussie Home Loans and RAMS. But the industry is much broader than this, comprising thousands of small and medium businesses, some independent, and some linked to larger organisations.

Although many of these businesses are small, together they have been a force to be reckoned with, placing very significant competitive pressure on the established big four banks. They have also provided employment for thousands of Australians.

In short, the broking industry has been a small and medium business success story. Everyone of you here today should be proud of what the industry has achieved and the better deal it has delivered for Australian home buyers. You have all played your part in this Australian success story.

Over the past few years - since the start of the Global Financial Crisis in 2007 - the broking industry has been under pressure. Some of the sources of funding have dried up, such as offshore funding and the securitisation market. This in turn has led to a rationalisation within the industry. Some players have sought to survive by getting into bed with the major players. There has also been a rationalisation of firms, with mergers or alliances.

These developments have led to a weakening in competition for the provision of financial services, evidenced most clearly by an increase in the major banks’ share of finance for housing.

Recent Reserve Bank data shows that the major banks’ share of owner occupier loan approvals rose from less than 60% in 2006/07 to a peak of 84% in late 2008. Since then the major banks’ share of new lending has eased back to around 78%, still high. Smaller Australian lenders have 9 per cent, and building societies have a 6 per cent share.

Reserve Bank data also shows the dramatic decline in the share of housing credit funded by securitisation. In mid 2007 securitisation accounted for over 20% of new housing loans. In late 2010 it accounted for less than 10%.

I view this lessening in competition as a backward step in the development of the Australian financial markets. Consumers have suffered with less choice and less competitive pricing.

As you know I have been very public about this, and have been urging the government to put in place measures to rekindle competition in the financial sector. This is not something I have come to recently, I have been talking about this for well over a year.

And I have not just been talking. Late last year I initiated real action to deliver a stronger, more robust and more competitive financial system.

In October I released my nine point plan for banking reform. This received wide support within the business community, along with support from the Independents and the Greens.

In November the Coalition introduced a Private Member’s Bill to give the ACCC further powers to crack down on price signalling and collusion by the major banks. Also in November I released Terms of Reference for a new inquiry into Australia’s financial system, a son of Wallis or a granddaughter of Campbell.

I believe my actions were a key catalyst behind the Treasurer’s announcement in mid December of a range of measures for a competitive and sustainable banking system.

The plan released by Wayne Swan in December adopted key features of the Coalition’s 9 point plan, such as legislation on price signalling and the introduction of covered bonds.

However, while there is much in this package we could support, it’s important to acknowledge the government’s plan is a piecemeal approach which hasn’t been fully thought through.

For example, the banning of exit fees is likely to see those charges passed on to customers in other forms or on other products. It’s up to the government to assure account holders this will not happen.

Also, the package is prospective and does nothing for customers with existing loans.

We also need to ask ourselves why it has taken so long for the government to respond. The problems associated with a lessening of competition in the banking system have been apparent from 2007 yet it took the government three years to come up with a plan.

I believe the biggest failing in the government’s recently released plan, despite Wayne Swan’s repeated assurances, is that it doesn’t address the issue of rising interest rates. The best thing the government could do to provide immediate relief for homeowners is to pursue responsible economic management and wind back its heavy debt fuelled spending to ease the upward pressure on interest rates.

As I have already noted, this need has become more acute following the widespread floods in the eastern and southern states, with the government facing a massive bill to rebuild infrastructure and assist households and businesses. It needs to reprioritise spending to make room in the Budget for this essential spending while still returning the Budget to surplus as quickly as possible and repaying the debt.

The mortgage broking and origination industry has gone through tough times in the past two years. It has had to adapt but the continued success of organisations such as Mortgage House gives me confidence that the industry has a bright future.

The maintenance of a healthy broker sector is crucial for the health of the Australian financial system and for the delivery of a better deal for home buyers. It is this sector that has done the most to exert competitive pressure on the banks - it has if you like kept the banks honest.

I repeat my call that it is time for a new root and branch enquiry into the financial sector to take account of changes to the competitive and regulatory environment arising from the GFC. This enquiry must among other things explore measures to ensure the continued viability of a strong and competitive alternative financing sector.