Fears of price falls as new apartments come to market

The most senior financial regulators are growing increasingly concerned about a credit crunch in the business lending sector.

Reserve Bank assistant governor Michelle Bullock has warned that a ‘large influx’ of apartment developments in major cities could spark even deeper falls in property prices. Picture: David Geraghty

The most senior financial regul­ators are growing increasingly concerned about a credit crunch in the business lending sector, which is being intensified by falling house prices and an “elevated” risk of collapsing apartment develop­ments.

Speaking in Perth yesterday, Reserve Bank assistant governor Michelle Bullock warned that a “large influx” of apartment developments in major cities could spark even deeper falls in property prices, which could harm household budgets and developer balance sheets.

It came as the powerful Council of Financial Regulators killed off a royal commission recom­mendation to extend legal protections to larger firms that would prevent lenders tipping businesses into default amid fears it could reduce banks’ appetite to lend.

In the minutes from its latest quarterly meeting, the council, which takes in senior members from Treasury, the Reserve Bank, the Australian Prudential Regulation Authority and the Aust­ralian Securities & Investments Commission, noted that it “supporte­d maintaining the curren­t borrowing threshold” to define small-business borrowers.

It noted concerns that adopt­ing financial services royal commissioner Kenneth Hayne’s recom­mendation could worsen “the tightening in credit conditions that has taken place”.

The royal commission recommended broadening the legal definition of a small business as a company with fewer than 100 employee­s and total credit facilities of $3 million, to one covering any company that takes out a loan of less than $5m.

This would extend protections such as simplified contracts, protectio­n against default, and fewer loan conditions to larger, more risky ventures.

Ms Bullock warned that sliding apartment prices could leave off-the-plan buyers in negative equity, which would result in banks being less willing to lend to borrowers.

It could also spark more settlement failures if buyers couldn’t fund their purchase, meaning that develope­rs could be lumped with empty apartments.

All situations would spiral back and affect the balance sheets of major banks.

Ms Bullock said the risks around household debt and slowing­ credit were “a little more heightened” than six months ago but noted the risks were currently contained.

“My hope, now that the royal commission has finished, and now that APRA has finished and is removing its benchmarks, is that banks will start to lend again,” Ms Bullock said.

“I don’t have any silver bullet, unfortunately. All I can do, all the bank can do, is continue to encourage the banks.

She urged banks to “please think very hard about whether your lending standards are too tight and whether you can loosen up a bit”.

Fresh data from the prudential regulator yesterday showed new housing loans approved in the December quarter slumped 12 per cent compared with a year ago.