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The Housing Squeeze is On

Despite protests that Australian house prices are not in ‘bubble territory’ the banks and other lenders have begun the process of tightening borrowing standards across the country amid growing concerns about falling prices. Credit has already been restricted to a number of former mining boom towns where oversupply and falling demand have already caused price tumbles and the cancellation of some planning projects.

 

Loan-to-value ratios (or LVR’s) and hard dollar limits on the amount that will be loaned have also been lowered as the banks continue to respond to the Australian Prudential Regulation Authority’s (APRA) direction to increase the level of capital to be held against these loans from 16% to 25% by July 2016. Whilst some analysts believe this has largely been priced in others are not so sure.

 

When setting these types of technical limits upon the Australian financial industry APRA is obliged to take into consideration the latest thinking of the Switzerland-based Basel Committee on Banking Supervision who are basically the global banking system supervisors. The Basel Committee have done a lot of analysis into the risk models that the banks use to determine how much capital lenders hold against loans as part of its work program (referred to Basel IV). Most bank capital raisings that took place during 2015 and early 2016 have been to shore up the bank’s capital positions in order to comply with Basel III. Basel IV will in all likelihood require even higher level of capital to be held over time.

 

Both owner-occupiers and investor mortgage borrowers have been hit with increases in their borrowing rate due to increasing regulatory demands despite the Reserve Bank of Australia (RBA) cash rate remaining at 2% over the past year. Even if the RBA were to lower the cash rate to below 2% over 2016-17 there is an increasing probability that the banks will use this event to increase their margins by not completely passing this on to borrowers. We have already witnessed this in New Zealand where the Australian banks are the largest lenders. Last week the Reserve Bank of New Zealand (RBNZ) surprised the market by reducing their cash rate from 2.50% to 2.25% and so far none of the banks have passed on this rate cut to Kiwi household borrowers.

 

‘Blacklists’ of suburbs considered to be of a ‘higher risk’ of default are not new. These lists are typically reviewed on an ongoing basis by all lenders to protect their balance sheets against loan defaults if house buyers breach their loans. Late last year the National Australia Bank (NAB) listed a number of NSW postcodes where they believed mortgage stress was likely to increase. More recently the Australia and New Zealand Bank (ANZ) has followed suit in issuing a list of more than 50 postcodes that are (up from 30 in the previous survey conducted during 2013) concentrated around Western Australia, Queensland and NSW mining towns that they have described as “not acceptable” for providing lenders mortgage insurance, which is a one-off insurance payment that protects lenders against default.

 

A number of lenders have also written to mortgage brokers warning about an increase in off-the-plan apartment deals involving special incentives and financing as they are concerned that undisclosed incentives, such as rebates, mean the property’s value has been pumped up in a way that cannot be transferred to successive buyers. Developers are also under pressure to complete deals to ensure lender funding for the total project and many buyers need help to bridge the increase in deposit from 10% to 20% because of tighter bank lending to buyers.