It sounds fantastic in theory – a debt led recovery, with relaxed lending restrictions freeing up huge amounts of credit and supercharging our economy back into growth.
In practice, however, the change from “responsible lending” to “responsible borrowing” won’t encourage banks and other finance providers to throw open their vaults, nor do they give us any incentive to race out and apply for more credit.
People don’t borrow more to get out of trouble, they spend less
Unless there is a bright light at the end of the debt tunnel, people faced with financial hardship tend to tighten their purse strings and spend less, not borrow to spend more. Here’s a graphic example of how this works.
In a recent estimates hearing, the head of the National Bushfire Relief Agency, Andrew Colvin stated that only five (5) applications for concessional loans had been approved to bushfire affected small businesses.
These added up to a loan total of $400,000, just 0.02% of the $2 Billion allocated by the government for bushfire relief.
The government’s notion that people would borrow to get out of trouble was badly misjudged. Many business owners simply decided that increasing their levels of debt would make it harder for them to recover, not easier.
So, the assumption that people will race out and apply for housing finance, personal loans, increase their credit card limits or take out payday loans as a pathway to financial recovery is flawed, as it is the very last thing most people will actually decide to do.
But. even if some of us have such plans, there’s a much bigger obstacle. Even before we apply for a loan, finance providers already know our debt capacity and ability to make repayments.
The finance providers know all about us anyway
Over the past few years, the government has been quietly implementing what they call Comprehensive Credit Reporting (CCR), which requires finance providers to report our credit history and repayment performance back to credit bureaus so that they can share this information with other lenders.
Previously, credit bureaus only listed application busting information such as defaults and bankruptcies on your credit report.
Under CCR your report shows all your past credit applications, amounts applied for, loans declined and approved credit limits.
Plus, CCR exposes your repayment history, which must be provided by lenders to credit bureaus, along with default agreements and any deferrals you have applied for, such as those under current repayment moratoriums.
These new reporting rules mean that finance providers will know much more about you than your credit rating when you apply for your next mortgage, personal loan, credit card or payday loan – your CCR lays bare your current debt position, your repayment history and your capacity to repay any further loans.
So, finance providers don’t have to take your word about how little you spend on Uber Eats, Netflix, or your capacity to repay more debt. No matter what you assure them in your loan applications, they already know everything they need to approve or deny you further finance.
Put simply, finance providers won’t be lending more but they will be lending more carefully. That’s why any suggestions that these new simplified lending rules will lead to a debt driven recovery are more spin than win.
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John Lindeman is widely respected as one of Australia's leading property market analysts, authors and commentators.
Visit Lindeman Reports for more information.
He has well over fifteen years’ experience researching the nature and dynamics of the housing market at major data analysts.
John’s monthly column on housing market research featured in Australian Property Investor Magazine for over five years. He is a regular contributor to Your Investment Property Magazine and other property investment publications and e-newsletters such as Kevin Turners Real Estate Talk, Michael Yardney’s Property Update and Alan Kohler’s Eureka Report.
John also authored the landmark books for property investors, Mastering the Australian Housing Market, and Unlocking the Property Market, both published by Wileys.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
