The banking royal commission is scaring off home buyers

The royal commission into banking is not just making bank CEOs uncomfortable, it’s scaring off home buyers too.

Duncan Skene, from Maxwell Collins real estate auctioned 105 Maud St, Geelong. Picture: Peter Ristevski

The royal commission into banking is not just making bank chief executives uncomfortable, it’s scaring off home buyers too.

New figures released this week show investors and, less predictably, first home buyers are staying out of the property market, a development which in turn threatens to push prices even lower across the country.

A report from the property research group RiskWise confirms housing finance is now going backwards with a negative reading on finance for dwelling commitments among both investors and home buyers in September against the same period a year earlier.

Separately, new figures from researcher Roy Morgan said the number of first home buyers “intending to take out a home loan” over the next 12 months plunged by 45 per cent in the three months to October.

Roy Morgan research suggests: “The current high level of negative publicity given to borrowing by the Royal Commission is likely to be impacting on both the supply and demand for home loans.”

Catch up on today’s royal commission action over at our live blog

The possibility that banks may have now overdone their lending pullback is already surfacing at the big end of town where developers are being rejected by banks, but the new data suggests the problem is widespread and investors at all levels are being frozen out of the market.

Federal Treasury secretary Phi Gaetjens was the first senior bureaucrat to raise the issue of the bank clampdown going too far, he has now been joined by RBA deputy governor Guy Debelle who has pointed specifically to the apartment market.

“One risk is that tighter lending standards could amplify the current downturn in apartment markets if some buyers of off- the- plan- apartments are unable to obtain finance; this could lead to an increase in settlement failures and even tighter financing conditions for developers’, Debelle said a few days ago.

Doron Peleg, CEO of RiskWise says: “Though there are questions being raised already about the pace of the lending pullback, the regulator is unlikely to offer any relief to credit standards. However, if things were to get much worse regulators may be forced to step in.”

With the RiskWise figures showing total dwelling commitments (seasonally adjusted) down 3.8 per cent year on year, Peleg says the RBA will not cut rates to defend the housing market but “they may decrease interest rates if dwelling prices have a major impact on household spending”.

For now, bargain hunters remain rare. Indeed the pocketful of bargain hunting we are seeing reported appears to be primarily in the Brisbane market which is widely seen as the city most likely to be the first that will recover from a nationwide decline. Recent reports of China-based investors on organised tours of the city’s bargain hot spots can be combined with occasional forays by rich listers into apartment projects to show the demand is there. But these investors may not need conventional bank credit.

The reality for most would-be property buyers is the banks are continuing to tighten credit often through tougher lending criteria. Westpac which previously had six expense categories now has 13 categories for new borrowers. This week ANZ begins its enhanced home loan verification requirements where the bank will want to see absolutely everything from salary statements to specific details of overtime and bonuses — these items will then be discounted when assessing income. Though the changes are perfectly sensible — the issue is that they will definitely reduce the supply of credit further into a market that appears to be grinding to a halt.

It is obvious now regulators let the property investment market run too hard too fast. Today both the Australian Prudential Regulation Authority and The Reserve Bank of Australia are watching as directions given in April slowly get translated into action. Clearly the mechanics of thoroughly substantiating borrower income is a new business for many bank lenders.

Meanwhile, most property investors cannot even enter the arena with banks preoccupied with not upsetting regulators and regulators no doubt stunned at this rare demonstration of obedience from banks.