Talk of a credit crunch is in the air, as the Royal Commission shines a spotlight on the banks and their questionable lending practices.
Lenders have been pretty generous with their criteria for a long time, but this has been changing in recent years. We’ve seen restrictions on loan-to-value ratios (LVRs), restrictions on interest-only borrowing, and now closer scrutiny of borrowers’ income and expenses.
Tightening borrowing rules always makes it harder for those targeted borrowers to take out mortgages – we see that in subsequent data any time one of these restrictions is introduced. Still, it must be said that the borrowers in the crosshairs are the ones who were borrowing at the limits of their financial capacity; in other words, people who were going to struggle to repay the loans.
If stopping lending to borrowers who can’t really afford the loan is enough to cause a crunch, the problem is worse than we thought.
You can no longer fake your way to a home loan
It’s too early to say whether these restrictions will lead to a credit crunch.
One thing we can say, though, is that if you’re stretched already on your finances, you’re going to have a much harder time finding a loan. Indeed, there are many lenders that will have already locked you out.
The latest crackdown has been on what the banks call ‘serviceability’ – how much spare cash you have each month to pay your loan, after normal expenses. If you’re stretched but serious about getting a new loan, you’re going to have to get serious about budgeting and build up several months of proof, via your bank statements, that you can afford the loan.
You won’t be able to fake it, because there is now technology that analyses your bank statements and calculates whether you can afford the loan. It’s no longer up to humans.
But don’t forget that this only applies to borrowers at the limits of their financial capacity. If you can legitimately afford a loan, you have little to worry about.
Less borrowing means lower prices
A full-blown credit crunch, or even a minor downturn in lending, will inevitably impact the property market.
It’s widely acknowledged that when property markets are hot, they are very much driven by how much people can afford to borrow. For proof, we only need to look at the recent booms in Sydney and Melbourne, which were partly driven by easy access to credit.
If there are fewer people who are able to qualify for home loans, there will be fewer people making offers for houses and units throughout Australia. When fewer people compete for a property, the selling price tends to be lower than it would otherwise be.
That said, Australia’s various property markets are complex beasts, so it would take a brave punter to bet on how they will be affected.
We’ll have to wait a little bit longer to see if this is, indeed, a credit crunch, and what it will mean for property prices.
About Nick Bendel
Nick Bendel is RateCity.com.au’s property editor. He is an experienced journalist who has written for a range of real estate and mortgage publications. He covers property prices, rental trends, housing finance stats and home loans news. He loves getting elbow-deep in the latest ABS, APRA and RBA data.