Revelations of “flawed” lending practices uncovered by the royal commission could expose the property market to higher levels of risk, according to a research group.
RiskWise Property Research CEO Doron Peleg has claimed that the “flawed” provision of income and expense information identified by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry could have an adverse effect on the Australian housing market.
“The banking royal commission has found the current processes for ensuring prospective home loan customers provide true information regarding their incomes, expenses and debts are flawed,” Mr Peleg said.
“This includes the details that are gathered by mortgage brokers, who generate about 50 per cent of the loans, regarding the living expenses customers provide in their home loan applications.”
Mr Peleg pointed to moves by the major banks to increase scrutiny on income and living expenses, making particular references to changes introduced by Westpac which require brokers to capture all living expenses under 13 categories.
The CEO claimed that such measures could lead to a sharp decline in lending activity.
“In the short term at least, this is likely to result in a lower volume of loans, as seen in the UK which had a 9 per cent drop in volume as a result of the 2014 Mortgage Market Review (MMR) to address lax lending standards,” the CEO continued.
“It is also likely that the duration to approve loans will be significantly increased, and significant reduction is projected in borrowing capacity (as per UBS, house borrowing capacity could be cut by 21 per cent to 41 per cent, depending on the borrowers’ income).”
Mr Peleg alleged that high-risk properties, which appeal to investors, would be most susceptible to a price correction if tightened lending standards are introduced.
“Investors often use creative financial planning, and they often place strong reliance on cash flow and negative gearing. Therefore, further scrutiny on property investors is likely to significantly reduce their borrowing capacity, and this will mean demand for such properties will be reduced,” the CEO added.
Further, the RiskWise executive noted that the higher-end property market would not be immune to such risks and could also be exposed to price correction.
“[Unaffordable] areas and properties at the top end of the market also carry a higher degree of risk, as many borrowers need to rely on the current borrowing capacity to purchase these properties.”
However, Mr Peleg noted that he expects capital cities experiencing strong economic and population growth, with properties that appeal to both owner-occupier investors, would be more likely to avert such risks.