In a report titled, “Financial Stability Review, April 2019”, the Reserve Bank of
Australia stated that recent measures to reduce high-risk lending had curbed the maximum loan
sizes available to most borrowers.
They described housing credit conditions as being, “tighter than they have been for
some time”, which has resulted in housing credit growth nosediving in recent years as
shown in this chart.
Owner-occupier growth, shown in orange, has fallen significantly in the last couple of
years.
But by far the biggest fall in credit growth has been with investors, shown in yellow.
Quite simply, investors are pulling out of the property market and putting their money
elsewhere.
Interest-only loans have collapsed in the last few years.
In early 2015, interest-only loans made up almost 45% of new loan approvals.
Now that’s down to around 16%.
Perth homeowner, Julia, has been hit by the lending crackdown.
She said that she and her husband could not afford the $900 jump in monthly repayments
for their investment property in Perth's south-east.
She said,
“When I came to refinance … I was told in short there was nothing they could do anymore.
My interest-only term had expired and they had to roll me over to principal and interest.
I've always been able to roll over my interest-only term when that expires … and now they've
said, 'You can't do that anymore'.
We've got two young children, a two-year-old and a four-year-old, so the stability is everything
to us, it determines every decision we make as a family.
This is not something I want to sell, I've had this property for 10 years.
I'm selling because I have to.”
Property analyst, Gavin Hegney, spoke of the looming crisis in Sydney.
He stated,
“Values are off 18% in Sydney, which is an important number because that takes away
20% growth on the way up in a market.
So for those buyers, they are now probably in negative equity situations and are probably
feeling a little bit uncomfortable.
We'd have to go back to the mid-1970s before we had the last credit squeeze in Australia.
Although banking has been tight before, it's just been the drastic change — where it's
gone from quite liberal lending to quite tight lending over such a short period of time — that's
caught quite a few people unaware and affected the market quite significantly.”
The RBA estimate that around $120 billion of interest-only loans are scheduled to convert
to principal and interest repayments this year.
Most of these loans were made prior to 2015, when lending standards were a lot weaker,
so ultimately it’s going to prove quite challenging to those borrowers when their
mortgage repayments start increasing.
With regard to the stricter lending standards, Amanda Bearcroft, a property owner in Sydney,
said that she was trying to sell her property on the Hawkesbury River, north-west of Sydney.
But the couple who were keen to purchase it were simply unable to secure financing, despite
raising a 30% deposit.
Ms Bearcroft said,
“At first they were told it would be 30%, then the banks finally came back and said
it was 35% at the very end.
They also went through their statements for the past year, I believe right down to the
smallest expenses, including a $9.70 charge on the statement which turned out to be a
coffee and banana bread.
The banks have just got too difficult to borrow money off.
We're really going to need a cash buyer to come in and people don't have that cash just
lying there.
It's really difficult.
Everybody that's come through and have been interested have been told they are required
to pay 30%.”
Information sourced from the data company, Digital Finance Analytics, shows the riskiest
suburbs for home loans from a banking financial perspective.
With higher-risk suburbs, lenders apply tighter lending criteria and require borrowers to
find larger deposits to avoid paying costly mortgage insurance on top of their loans.
Canberra has a relatively low risk overall.
It’s riskiest postcodes include 2600 at a risk score of 11.5, and 2603 at 11.0.
Melbourne has a number of postcodes that are above a risk score of 20.
These include 3980, 3796, 3782, 3977, 3978, and so on.
Sydney also has a number of suburbs that fall in the 20 range.
These include 2106, 2105, 2101, 2083, 2754, and 2104.
Postcodes 2106 and 2105 are the riskiest at 24.2, and 23 respectively.
Hobart postcodes 7024, 7012, 7025, 7055, 7170, and so on, all have scores above 20.
Brisbane postcodes 4064, 4184, 4129, 4169, 4102, 4156, and 4000 are also considered quite
risky for lenders.
Adelaide is not faring so well.
The following suburbs all have a risk score greater than 25.
These include 5064, 5069, 5081, 5168, 5015, and 5095.
But Perth is by far Australia’s riskiest city with a whole bunch of suburbs having
risk scores above 30.
These include 6069, 6003, 6061, 6056, 6167… the list goes on!
Good luck getting a loan in Perth at the moment without a huge deposit.
Caylum Merrick, team leader of finance at Momentum Wealth stated,
“It's probably been the most difficult time to acquire money in a long time, so a lot
of people are probably being caught off guard.
It's a bit of a perfect storm… with the Banking Royal Commission, that's provided
a whole other raft of challenges for borrowers regarding serviceability.
The big thing is the way the banks are assessing loans at the moment is a lot different to
what it was three to four years ago.
And a lot of clients probably don't understand that's changed and are finding all of a sudden
they can't borrow as much as what they once [could].”
So that’s the current state of the Australian housing credit situation.
People are having a tough time getting the finance they need to purchase the houses they
want.
Consequently, house prices are falling as nobody can afford the higher house prices.
In my opinion, this is good.
Credit shouldn’t be easy to get.
By allowing people to easily borrow large amounts of money, we’re creating a culture
where people don’t want to save anymore.
And unfortunately, this culture is coming back to bite us.
We can see it in the house of cards that is the property market as it crumbles down around
us.