Banks likely to curtail mortgage lending amounts by up to 35pc: top analyst

AUSTRALIANS wanting to take out a mortgage could soon see the amount available to them dramatically slashed, sending a shockwave through the housing market, analysts say.

AUSTRALIA’S banks are likely to soon dramatically cut the amount they lend to homebuyers, potentially sending a shockwave through the housing market, analysts say.

In new research on the impact of the banking royal commission, investment bank UBS says the sweeping inquiry is “changing the game”.

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In the extreme, the probe could give rise to a “credit crunch” in the housing market as banks are forced to sharply curtail the sums they lend out, UBS analysts say.

They say this could lead to “Australia’s Minsky moment” — a reference to a point in credit cycles where asset values abruptly collapse.

In a report for investors, the UBS banking team led by analyst Jonathan Mott — regarded as one the best industry experts in Australia — said the first round of commission hearings “was more severe than we anticipated”.

Mr Mott said commissioner Kenneth Hayne was likely to recommend banks be far more diligent in their research before approving loans.

Kenneth Hayne overseeing the Royal Commission into the Financial Services Royal commission examines CBA's accreditation of mortgage brokers Industry.

In particular, he said, lenders may be forced to “undertake a detailed assessment of each customer’s living expenses” rather than rely on statistical benchmarks.

Under that scenario, according to the UBS calculations, banks may cut the maximum amount they offer homebuyers by an average of about 35 per cent.

The lenders would only offer loans of three to four times borrowers’ income, on average, compared with a ratio now of five to six times.

“A sharp reduction in housing finance and credit growth looks more likely,” Mr Mott said. If the total number of home loans offered fell 20 per cent, growth in housing credit would flatline, he said.

“However, in a ‘credit crunch’ scenario, where approvals fall by about one third, housing credit outstanding would contract by about 2 to 3 per cent per annum,” he said.

“This could lead to Australia’s ‘Minsky moment’.”

Mr Mott said that the UBS “base case” was for a modest fall in home lending, with house prices stalling or falling 3 per cent this year and next as a result.

“A credit tightening scenario would likely see larger and sustained price falls,” he said.

In a “credit crunch” scenario, the Reserve Bank might even cut the cash rate from its current all-time low of 1.5 per cent, Mr Mott said.

Westpac chief Brian Hartzer said the bank had been sloppy rather than negligent. Picture: AAP

In separate research, a team of analysts led by Daniel Blake at investment bank Morgan Stanley said the risks in the housing market were building.

“Conditions for housing for the remainder of 2018 continue to look challenging with further regulatory tightening of credit, an increasing stock of properties to be settled, and continued uncertainty on government policy for housing as the election cycle looms,” he said.

“This leaves us cautious on the outlook not just for housing, but the broader economy in 2018, given the leveraged exposure of the economy to the property market.”

Speaking at a banking conference yesterday, Westpac chief Brian Hartzer said the bank had been sloppy rather than negligent in checking whether potential customers could repay their loans.

“We have been a little sloppy on some of the record keeping but I think it is drawing a pretty long bow ... to suggest that there is something fundamentally wrong,” he said.

“It is not in our interest to give a loan to someone who can’t pay it back.”

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—with The Australian, AAP