Determinants Of Demand And Supply For Home Loans In Commonwealth Bank Of Australia, Essay.

What is the likely effect of that event on the market price and quantity? 

Determinants of demand for home loans for Commonwealth Bank of Australia

Commonwealth Bank of Australia offers various loans to businesses and individuals (Gollan, 2015). It is the wish for everyone to own a house rather than keep on paying rent. Money may not be enough for many Australian to put up a house. This necessitates the need for acquiring a loan from Australian banks where the Commonwealth Bank of Australia is among the four major dominant banks of Australia. The demand for home loans is influenced by the following factors:

Mortgages are used by many Australians to acquire their dream homes. A mortgage refers to a situation whereby the borrower offers his or her home a security against a specified loan amount dedicated to constructing the house (Meador, 2016). In the event of default of the borrower, the lender has the right to claim the borrower’s house for compensation of the defaulted loan amount. Various banks in Australia especially the big four banks (Commonwealth Bank of Australia, Westpac, ANZ and the National Bank of Australia) offer home loans at different mortgage rates. It, therefore, calls for a “safe game” among the Australian mortgage lenders to win a larger market share. Customers will always carry out a market research and obtain the safest and lowest mortgage rates possible. Demand for home loans will be higher for lenders who offer reasonable mortgage plans to their customers. This means that the Commonwealth Bank of Australia has to consider the overall prevailing home loan rates offered by its competitors in the market and adjust accordingly in order to maintain or if possible increase the demand for its home loans.

Generally, rent refers to an amount that is actually paid by a tenant for using the property (usually buildings and land) of the landlord. The prevailing rent in the market, especially around the big towns and cities, determines the demand for home loans by residents (Buchanan, 2014). Favorable and lower interest rates decrease the demand for home loans among the Australian lenders. On the other hand, if rents are hiked, the demand for home loans to lenders increases rapidly. This is due to the fact that consumers may opt to pay rent if it was considerable but huge amounts of loans motivates customers to acquire their own homes rather than keeping on paying the huge amounts which at long-last total to the cost of acquiring a decent house. High rents will increase the demand for home loans for the Commonwealth Bank of Australia while on the other hand, lower rents will decrease the demand.

Prevailing mortgage rates in the market

Determinants of supply for home loans for Commonwealth Bank of Australia

Commonwealth Bank of Australia and the entire banking sector of Australia are regulated by the Reserve Bank of Australia. The banks within the Australian financial sector have to pay compliance and regulatory fees according to their size. Commonwealth Bank of Australia, Westpac, ANZ and the National Bank of Australia are the four major big banks within Australia and they pay huge compliance and regulatory costs (Sturm & Williams, 2017). If the Reserve Bank of Australia raises the compliance and regulatory costs, then the bank's operational costs rise. This means that they will have to offer home loans at higher interest rates to recover their production costs and make a profit. The high-interest rates discourage consumers from borrowing home loans. On the other hand, suppliers are unwilling to offer loans which bring little profit to their business. As a result, the high compliance and regulatory costs decrease the supply of home loans. Favorable compliance and regulatory fees make banks to offer home loans at reasonable interest rates. This attracts more customers to acquire the home loans and hence supply increases.

Bank reserves in Australia refer to minimum amounts that should be deposited with the Reserve Bank of Australia in order to ensure that banks will be able to meet their clients’ needs. Lower minimum reserves mean that more money is available to the Commonwealth Bank of Australia and hence this increases the supply of home loans as adequate money is available for lending. An increase in minimum reserves by the Reserve Bank of Australia leaves the Commonwealth Bank of Australia with little cash available for lending. As a result, the home loans supply decreases as only a little cash is left for lending.

The emergence of Fin Techs and new technologies in the Australian Banking Industry

The Australian banking industry has been regulated recently prior to claims that it has been oligopolistic in nature (Otchere & Chan, 2017). The banking industry of Australia is dominated by four major banks namely the Commonwealth Bank of Australia, ANZ, the National Bank of Australia and Westpac. The banks have been collaborating with each other as they make market decisions together to reap high unreasonable profits from Australians. The banks recently have been opened to competition and reasonable regulatory policies to lower the barriers to entry by small firms. This has seen technology improve among the key players in the industry due to the entry of technology-oriented new players such as Fin Techs (Hawes & Chitra, 2017). Various Australian banks have highly invested in emerging technologies to remain competitive by lowering their production costs and maintaining consumer satisfaction. Australian banks have highly embraced emerging technologies such as artificial intelligence, block-chain, and biometrics. Customers are now served efficiently at the comfort of their homes which has enabled many Australian banks to minimize labor costs and eliminate queuing process in their premises. For example, ANZ has been highly using voice biometrics and Westpac has been highly using Chat-bots.

Prevailing level of rents in the market

Effects of the emergence of Fin Techs and new technologies in the Australian Banking Industry market demand and supply

The emergence of Fin Techs and new technologies in the Australian banking industry has heightened competition among Australian banks. As a result, the Australian banks especially the big four ones have highly invested in technology and improved the overall banking market efficiency (Collins, 2018). As a result, Australian consumers have slowly started enjoying reasonable prices of banking products. Consumers can also search all the information needed before making a decision on which products to purchase. As a result, many Australian banks have realized an increase in demand for their products. For example, Commonwealth Bank of Australia has improved efficiency in offering home loans by providing online loan calculations and as a result, its demand for home loans is on the rise despite having been reported for various market misconducts. The supply in the banking industry has increased due to the emergence of new technologies. Banks in Australia have been able to reach out many customers not only in Australia but also from other parts of the world through the internet. They have been able to sell their various products to different parts of the world and this has made the overall banking industry supply in Australia increase.

Possible effects of the emergence of Fin Techs and new technologies in the Australian Banking Industry market price and quantity

The emergence of Fin Techs and new technologies in the Australian banking industry has led to the improvement of market efficiency among the players in the industry. Australian banks have tried their best to minimize their production costs and maximize their profits in the competitive banking climate by investing heavily in the newly emerging technology (Makarchenko, Nerkararian & Shmeleva, 2017). This is likely to make the players in the industry to offer reasonably low market prices to consumers in order to win big market share as their production costs reduce. Australians have started enjoying low-quality banking industry products and much better results are anticipated in the future. Due to minimized costs of production, the Australian banks are likely to increase their market share and expand their operations using capital realized from minimum production costs. As a result, the overall market quantity in the Australian banking industry is likely to increase to cater for the rising demand.

References

Collins, M. (2018). Fintechs could challenge the business model of savings banks. Equity, 32(10), 4.

Buchanan, J. M. (2014). Rent seeking and profit seeking. Toward a theory of the rent-seeking society, 3, 15.

Gollan, R. (2015). The Commonwealth Bank of Australia; origins and early history. Canberra, Australian National University Press.

Hawes, A., & Chitra, T. (2017). Keeping up with the FinTechs: A banker's strategy for digital transformation. Journal of Digital Banking, 1(2), 102-110.

Makarchenko, M., Nerkararian, S., & Shmeleva, I. A. (2017, June). How Traditional Banks Should Work in Smart City. In International Conference on Digital Transformation and Global Society (pp. 123-134). Springer, Cham.

Meador, M. (2016). The effects of mortgage laws on home mortgage rates. Journal of Economics and Business, 34(2), 143-148.

Otchere, I., & Chan, J. (2017). Intra-industry effects of bank privatization: A clinical analysis of the privatization of the Commonwealth Bank of Australia. Journal of Banking & Finance, 27(5), 949-975.

Sturm, J. E., & Williams, B. (2017). Foreign bank entry, deregulation and bank efficiency: Lessons from the Australian experience. Journal of Banking & Finance, 28(7), 1775- 1799.