The worldwide credit shortage is reducing competition among lenders. This could mean trouble for home buyers further decreasing the level of housing affordability.
The credit crisis we are experiencing at the moment might eventually be a good thing, as it will help to cancel out some high-risk practices. In the short term, however, it is reducing home buyers choice within the housing market.
There is increasing evidence that borrowers are heading back to major banks and staying away from non-bank lenders as they are not sure how the credit crisis will affect the overall economy.
Many second-tier lenders are pulling in the reins because of a shortage of credit to finance loans. Mortgage brokers, who earn commissions from lenders, could earn less income as a result.
Broker lobby group, the Mortgage and Finance Association of Australia, suggests that the Federal Government should take a bigger role in ensuring that competition within the lending sector is healthy.
MFAA chief executive Phil Naylor has suggested that the government should ensure that more funding is available for home loan lenders. Mr Naylor warns that consumers face further risk of interest rises, as the larger banks continued to put up interest rates separate to official RBA rate rises, in an attempt to show their power and increase profits.
Whilst the credit crisis affects all lenders, it has a significant impact on non-bank lenders that do not have deposits of their own and rely solely on the global credit markets and securitisation for funding."If non-bank lenders are squeezed out of the market because of a lack of access to funds, we will likely see a back-to-the-future scenario with banks dominating housing lending,'' Mr Naylor said.
He went onto say that "consumers need competition in the home-loan industry to ensure there are a lot of product options available to them and to put downward pressure on interest rates. Higher interest rates will mean less access to housing finance and home ownership, history tells us that increased competition in the home loan market leads to a better deal for consumers.''
David Kaplan, Rate Detective's chief analyst, said Australia is risking seeing 15 years of competition in the mortgage sector going by the wayside if the credit crisis continued on its current path. "This would drive consumers back to the big banks", he said. "If the credit crisis continues, we risk returning to the days before Aussie Home Loans and Wizard where the average margin on a home loan was 4 per cent - more than double the margin of the past 10 years,'' Mr Wemyss said.
He went onto suggest that "lenders who cannot fund their home loans from taking deposits are struggling to compete in an environment of spiralling funding costs. Smaller lenders are approving new mortgages at break-even or at a loss.''