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New bank mortgage loans to fall 8 per cent amid APRA, royal commission crackdown

This article originally appeared on Domain on 20/6/2018.

Australians will be able to borrow $30,000 less to buy a home as banks tighten their lending practices amid new regulations and a bruising royal commission.

The average new loan size is expected to fall about 8 per cent – from $379,000 to $349,000 – as banks specifically target high-risk loans, according to new Morgan Stanley research.

New borrowers with a modest deposit are likely to have a “materially different” conversation with their banker than prior to the regulation changes, according to IFM Investors chief economist Alex Joiner.

Average new loan sizes could fall 8 per cent amid a regulatory crackdown.Average new loan sizes could fall 8 per cent amid a regulatory crackdown. Photo: Glenn Hunt

“The scrutiny that the retail banks have been under from the royal commission, and these regulations from APRA, certainly mean that it’s a different conversation a mortgagee is having now when they step into a bank than they might have been, previously,” Mr Joiner told Domain.

But while the mortgage market experiences regulatory change, Mr Joiner said he doesn’t believe those changes would trigger a significant drop in house prices.

However, others aren’t so convinced with ANZ and Macquarie economists updating their forecasts this week to predict 10 per cent peak-to-trough falls in the Sydney property market.

Property prices in Sydney recorded their first annual fall in the March quarter since 2012, according to ABS figures released on Tuesday, while Melbourne posted its first quarterly price fall in six years, with the ABS outlining stricter credit conditions as a possible cause for the house price weakness.

High risk loans targeted by APRA

An estimated 18 per cent of mortgage customers have a debt-to-income (DTI) ratio that is above six times, an analysis of 1836 mortgagors shows, which is unacceptable when seen through the lens of new lending rules.

A correction of the “very high” debt-to-income segment of the mortgage market could pull average new loan sizes noticeably lower.

In April, the Australian Prudential Regulation Authority (APRA) announced new measures to curb unsustainable lending practices, including internal limits on new loans where debt would be greater than six times a borrower’s income.

With Australia’s household debt among the highest in the world, house prices beginning to fall in Sydney and Melbourne, and two rounds of royal commission public hearings in which widespread breaches to responsible lending were exposed, tighter regulation and stricter enforcement is underway.

Morgan Stanley’s analysis estimates the median loan-to-income ratio is 3½ times, about 40 per cent of mortgage holders have a loan-to-income ratio of over four times, and 18 per cent are in the “very high” category of over six times.

The analysts have halved their housing loan growth forecast to 2 per cent for fiscal 2019 and 2020, and see “risks to the downside”.

Open homes:

International context sees Australian banks remain higher-risk lenders

Despite the crackdown, Australia’s banks will continue to be seen as high-risk lenders, as Morgan Stanley points out international lenders are stricter still.

“The Reserve Bank of New Zealand’s Financial Stability Report released in May defined DTI more than five times as ‘high risk’,” Morgan Stanley equity analysts led by Richard Wiles wrote to clients this week.

“In the UK, the Bank of England introduced measures in 2014 to limit the percentage of new mortgages with a LTI more than 4½ times to 15 per cent.”

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