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BFCSA: 7.30 Report’s “House of Cards” (Part 2) does the credit crackdown

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7.30 Report’s “House of Cards” (Part 2) does the credit crackdown

Macro Business11:15 am on December 12, 2018

Leith van Onselen

ABC 7.30 Report last night aired the second of a three part special on Australia’s budding housing bust, which is well worth watching.

The episode focussed on how the credit crackdown is putting heat on buyers and developers.

The episode first features several quotes about systemic mortgage fraud and loose lending:

MS ROWENA ORR, QC, SENIOR COUNSEL ASSISTING: Multiple bank employees across multiple branches in the Greater Western Sydney area were accepting false documents in support of loan applications.

ANTHONY WALDRON, NATIONAL AUSTRALIA BANK LIMITED: People did step outside their responsible lending guidelines.

ROWENA ORR: There were unsuitable loans. There was false documentation.

KAREN COX, FINANCIAL RIGHTS LEGAL CENTRE: Just really inappropriate lending.

We don’t resile from anything that the royal commission has identified…

It then featured a short discussion of the recent credit tightening:

GEORGE THARENOU, CHIEF ECONOMIST, UBS: The banks under the public scrutiny, particularly, are moving ahead of the royal commission’s findings and are starting to tighten lending standards themselves already.

TIM LAWLESS, HEAD OF RESEARCH, CORELOGIC: They started testing serviceability much more closely. They started looking at verifying incomes much more carefully as well.

GEORGE THARENOU: This is having a knock-on impact because the more banks tighten, the more investors and other borrowers become concerned well actually, in six or 12 or 18 months’ time the housing market could be worse than what it is now and I might hold off…

GEOFF THOMPSON: The royal commission came on top of new lending restrictions imposed by APRA, the banking regulator.

First in 2014, APRA asked the banks not to increase their proportion of investor loans by more than 10 per cent.

JO MASTERS, ECONOMIST, ANZ: It’s been a fairly steady progression over the last three years of tightening up credit, improving credit quality and trying to slow down that investor part of the market.

GEOFF THOMPSON: Last year, APRA struck again. This time seeking to slash the number of interest-only loans on the bank’s books.

TIM LAWLESS: We saw interest-only lending fall rapidly, to the current extent where we see interest-only loans comprising only around about 16 to 17 per cent of new loan originations.

GEORGE THARENOU: Previously the banks would assess how much you could borrow, assuming a very low level of living expenses.

But now, under the pressure from the royal commission and responsible lending, banks have been required to verify people’s actual living expenses and are looking more tightly at their income putting haircuts on things like overtime and bonuses.

So the borrowing capacity for the typical borrower trying to get into the market now, is going to decline materially.

Along with the deleterious impact on off-the-plan developers and buyers, where the bubble is starting to burst:

GEOFF THOMPSON: Luke Berry is feeling the pinch of Australia’s credit squeeze.

Potential buyers of his off-the-plan developments, such as this one in Sydney’s Alexandria, find it increasingly difficult to secure the loans they need.

Developers are also under the bank’s microscope.

LUKE BERRY: Banks are scrutinising pre-sales. They want to understand who your builder is, they want to understand your ability as a developer, if you can cover overruns.

It’s definitely a lot harder than it has been in the past…

GEOFF THOMPSON: Mark and Samantha Burgess bought an apartment off-the-plan in one of Luke Berry’s Sydney developments in 2016.

The couple has taken a double hit – bitten by tighter lending, and the fall in property prices.

Initially, they were told they needed a 10 per cent deposit on their $1.65 million purchase.

MARK BURGESS: The bank pulled out at the last minute and we had to find another bank.

GEOFF THOMPSON: When it came time to settle in August this year, they were told they needed a 20 per cent deposit on a property now valued at more than $300,000 less and their ability to repay came under intense scrutiny.

When you committed to this property, the bank was happy to give you the money?

MARK BURGESS: Absolutely. There was no question at that point in time that there was an issue.

GEOFF THOMPSON: And then things changed?

MARK BURGESS: Absolutely and that’s what, that’s what’s has really hurt, is what we’ve had to go through since then.

My whole salary goes to the mortgage and even just getting that 20 per cent together – if it hadn’t been for friends and family coming to our aid, we wouldn’t be, we wouldn’t be here now.

GEOFF THOMPSON: So you almost couldn’t settle?

MARK BURGESS: No, no. We were on the verge of losing the deposit and losing the property.

TIM LAWLESS: We are already seeing a lot of evidence that that off-the-plan market, particularly for investment-grade stock is seeing a fairly large proportion of off-the-plan valuations at the time of settlement are valuing at a value that is lower than the contract price.

GEORGE THARENOU: During the rising boom, it was easy to make money. You bought off-the-plan with a relatively small deposit of around 10 per cent, and when you got to settlement you have made a big gain and you could even flip it quite quickly and make a lot of money.

But I think those people are going to face a material problem in the next six, 12, 18 months, because there is just this record pipeline of dwellings under construction right now.

GEOFF THOMPSON: As of June this year, there were more than 156,000 apartments – a record number – being built around the country, vastly more than the number of new houses.

LUKE BERRY: There’s no doubt that the last 12 months have seen a massive decline in off-the-plan sales…

GEOFF THOMPSON: Are many of these off-the-plan developments going to be in trouble?

LUKE BERRY: There will be a large number that will be under enormous financial pressure in the next 12 to 18 months.

The impact is significant, you know, usually you would have confidence of selling one or two a month, and at the moment it might be one every three months.

So we’re seeing a significant slowdown.

UBS chief economist, George Tharenou, thinks a housing bust and an economic downturn is more likely than not:

GEORGE THARENOU: And that’s the hope, that we can somehow muddle through a decline in house prices that doesn’t impact the real economy.

Generally banking crises, economic recessions, are started by a downturn in the housing market. That’s the play book in history.

So we’re trying to generate in Australia something different, which is a reduction in house prices without a knock-on impact to the economy.

If we can do that, we’re all winners but the probability of that happening is very low, in my opinion…

The household savings ratio now is at a decade low and people’s willingness to keep spending in an environment of falling house prices is going to change, in my view and I think the outlook is more subdued for many years going forward, where households adjust to the realisation that house prices just don’t go up forever, they actually can fall quite a bit.

Australia’s record wealth is also seen as mostly a mirage:

GEOFF THOMPSON: In terms of median household wealth, no country is richer than Australia.

But compared with the rest of the developed world our property prices are now completely divorced from the wages we earn…

GEOFF THOMPSON: The rules of Australia’s property game have changed.

It remains too expensive for many and some with mortgages are becoming resigned to never paying them off.

DARREN THOMAS, HOME OWNER: I don’t think you can personally keep up with it. The wage growth is quite stagnant.

GEOFF THOMPSON: Flight attendant Darren Thomas makes a little over $100,000 a year but has managed to buy and sell several family homes in Sydney’s harbourside suburb of Mosman.

You have done well out of property but do you feel wealthy?.

DARREN THOMAS: No. I don’t think I feel wealthy. That’s the scary part is that you have the trappings of wealth, but not the real wealth and the knowledge of, that the mortgage will never be paid off.

GEOFF THOMPSON: With about 10 years left in the workforce, Darren can’t see how he’ll ever pay back the more than $600,000 he still owes on his family home.

DARREN THOMAS: In my father’s generation, he could actually see a finish line and say, “Okay, well, I will pay off my mortgage by whatever date.”

However, I don’t see that finish line. I don’t ever think I will see that finish line.

Tomorrow’s report will look at negative gearing and the growing wealth divide.

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