Finance Market Update 28 September 18
Will the loose lending that lead to this credit crunch lead to a slow Spring property market? In this update we discuss views from investment bank UBS, the Banking Royal Commission, what the banks reaction will be and how that will directly impact this Spring property market.
Investment bank UBS has been critical of the big banks lending policies, or more precisely the lack of responsible lending policies, for quite sometime now. Most recently they have made a number of assertions, which include:
Mortgages taking longer than 4 weeks to be approved rose from 7% to 12%
Borrowing capacity could fall by 20-30%
1 in 5 Interest Only borrowers could default on mortgage repayments
The risks of a credit crunch are rising given the extreme leverage in the Australian household sector
The impending property price decline could be the worst in decades, but it will be a gradual 5-10% drop
They expect the interim report from the Banking Royal Commission to be an ‘inflection point’ for the banking sector and lead to (even more) tightening of lending standards
There will likely be much more work by the banks to comply with the royal commissions interpretation of responsible lending
So what does all this mean?
Firstly, it highlights that loans are taking longer to get approved, a fact Skyward Financial has been noticing for months and helping clients to navigate.
Secondly, it further shows the depression of borrowing capacity could be extreme. If lending cuts back and we see a 20% drop in credit availability to borrowers that will directly put further downward pressure on property prices because people will not be able to offer as much to buy them. Importantly, they are saying here that the price decline will not be a 'crash' but rather a slow and drawn out decline possibly over a number of decades.
Thirdly, if we are not technically in a credit crunch right now, if you speak to borrowers struggling to get a loan they might disagree. Either way the risks of an increased credit crunch are rising.
Forth, if 1 in 5 borrowers with Interest Only loans defaults on a mortgage repayment that has huge consequences for banks, because if their arrears increase they will become even tighter in lending.
Finally, all of the findings so far from Commissioner Hayne and the Banking Royal Commission team have made the banks look really bad, irresponsible, or worse like criminals. As a response the banks need to up their game, and this will come at the cost to borrowers.
The banks will have increased compliance costs and processes, both of these will ultimately be paid for by customers and borrowers who have a mortgage. This is because generally speaking these costs get passed onto customers all the time, and as we have said before banks want to protect their profit margin because ultimately they are acting in the interests of shareholders, not customers.
What does that mean for people who want to borrow?
Generally speaking the banks view of peoples “borrowing capacity” (i.e. the amount they can borrow) is changing a lot, mostly downwards.
This is because of a few factors, one of them is banks are not relying (as much) on the “HEM” (Household Expenditure Measure) which is a baseline across Australia of a “typical” households’ expenses, and they are now trying to get an “accurate” view of living expenses.
For the banks to get an “accurate” view of expenses they are looking at around 3 months’ worth of bank statements and transactions.
This is having 2 repercussions on the experience by borrowers to get a mortgage.
Firstly, it takes a lot of time think about what they have spent money on in the past 3+ months and write it all down.
Secondly, it takes time to get all the bank statements together and complete the verification process. Both of these things add up to create a more time consuming and frustrating experience for borrowers. This is a key reason to use a broker like Skyward Financial, as we can manage the process of applying for a loan for you to make it as efficient as possible.
Will this Spring market be slow?
We have already seen it taking longer to get loans approved, and once they are approved the amounts can be (surprisingly) lower than people expected. We have talked about this phenomenon of credit crunch previously and how credit drives property prices.
Combine this with increased compliance processes such as expense verification and risk assessment the banks are frantically doing because of the bad press and we see how it can be, will be, even harder to get a mortgage. But all of the compliance takes time to implement, and more time for the knock-on effects to reach prices. This is why UBS is saying prices could drop by 5-10% over the next few decades, a long a sustained downward motion in property prices.
We have discussed before about the issues of forced sales and how many properties coming to market at once will drive down prices especially for “mortgage prisoners”. We are continuing to see ‘interest only’ loans reaching their “roll-over” date and switch to ‘principal & interest’ repayments, which can be up to 40% higher, which is causing “mortgage stress” so many investors are now selling. In both these cases it means more properties being sold, which means it is more a buyers’ market than sellers, and the harder it is for people to get a loan, the harder it is for them to buy a property.
Combine that with the slow and low mortgage approvals and we see a 2018 Spring property market that 1) has more stock being sold and 2) where people can’t borrow as much.
Of course it depends on the suburb and property type, but generally speaking this Spring market could be slower - for listings, auction clearance rates and loan approvals - than in recent years.