Industry Super: Banks Lend Too Much For Housing, It's Inefficient And A Handbrake On Growth

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Industry Super Australia has released research in the lead up to next week’s deadline for the second round of submissions to the Murray Inquiry which they say shows that the financial system is “not as efficient as it could be” and asks the question on whether the financial system, which was Australia’s second fastest growing sector in the past 30 years, is “effective at facilitating capital formation”.

Their research finds that:

  • Banks are lending less for commercial endeavours, and more for the purchase or refinancing of existing housing. The volume of commercial lending per dollar of housing-related lending has fallen from $3.84 to $1.62 over the last 25 years.
  • The cost of real capital formation in Australia has risen over the last thirty years. The finance sector cost the economy $214 to create $1000 of capital in 1980, but it is now over $500 per $1000, with no improvement since the turn of the century.
  • The also argue that the government subsidies that the banking system enjoys, and which they estimate was worth between $1.2 and $3,1 billion in 2012, actually contributes to falling efficiency.

    The result is that banks are focused on lending on residential property rather than to business and that there was a particular focus on lending to purchase in the existing stock of housing rather than to create and build new dwellings which made up just 12.2% of new housing finance compared to 22% in the early 1990’s and 30% in the 1970’s.

    Part of the focus on home loan lending is also a return on capital argument and a result of a regulatory free kick that the 5 dominant home loan lenders in Australia recieive as a result of their ability to use APRA’s internal ratings-based approach in order to hold less capital against a home loan than the rest of the Australian banking industry as well as holding substantially less capital than they hold against commercial and other types of loans.

    It’s a question as the Murray Panel noted in their interim report when they asked whether the free kick the Majors and Macquarie recieve over their competitors is either fair – competitively neutral – or works efficiently for the Australian financial system.

    Crucially Industry Super says they have undertaken “regression analysis to estimate what would happen if the financial system was more efficient at capital formation”. This analysis finds that Australia’s capital stock would be 7% or $328 billion higher and crucially labour productivity would be 0.3% higher which by 2049-50 would add $570 billion to the size of the economy.

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