Troppo co-host Nicholas Gruen made an impressively well-groomed appearance on Alan Kohler’s Inside Business program on ABC TV this morning.
Nicholas canvassed a really interesting idea I don’t immediately recall his having yet ventilated here at Troppo. It’s the concept of portable mortgage insurance to replace the current government guarantee of the Big 4 Banks. The lenders would pay something for the insurance and it would cover bank and non-bank lenders alike.
Together with banning or capping exit fees at a low rate (although Nicholas suggested that this might be a mixed blessing), this would certainly enhance competition in the home loan market by assisting the redevelopment of viable non-bank lenders in the wake of the Big 4 having taken advantage of the GFC to obliterate or absorb Aussie Home Loans etc.
However, I can’t help wondering whether it would be enough. The banks have achieved a level of maket dominance that may prove difficult to overcome. They seem to be elevating the techniques of the Claytons (unprovable) cartel to an art form.
One of the advantages of being a self-confessed economics nincompoop is that I can unblushingly canvas ideas that may well be extraordinarily stupid, if only so the economic gurus can gently explain to me why they’re silly.
Why should we not also consider creating a publicly owned non-bank lender, taking advantage of the lower interest rate at which governments can borrow to on-lend to home buyers at reasonably affordable rates? Mortgage rates would need to to be high enough so that they keep the banks honest rather than crowding them out of the market, but that shouldn’t be impossible to achieve. Why not legislate to require the new affordable lender (Wayne and Julia’s Awesome Home Loans) to lend at a minimum interest rate of (say) 1.5% above the cash rate for the time being, with some independent review mechanism to ensure that the margin above the cash rate remains at a level that would allow the private banks to maintain a reasonable profit margin in the home loans market?
Wayne and Julia’s Awesome Home Loans would not be a deposit-taking institution (so it wouldn’t compete with the banks in that respect and would miss out on that potentially cheaper source of loan funds) and would not maintain a branch structure (thereby giving it a compensating advantage over the banks). It would utilise existing private sector mortgage brokers (including Nicholas’s Peach Home Loans).
Of course, all this assumes that the banks really are acting as a cartel to a sufficient extent to justify what is a fairly radical intervention in the mortgage marketplace. Perhaps the evidence of market failure and excessive oligopoly profits isn’t yet persistent enough to provide sufficient justification. However, subject to the advice of economically literate Troppists, I think it’s an idea worth keeping in mind.
Update – I must say I find Michael Pascoe’s article in this morning’s SMH a pretty persuasive rebuttal of my proposal, and possibly of Nicholas’s as well.