We’ve all heard about the Royal Banking Commission, but do we really understand what effects it may have on the property industry moving into the future? To make it simple, we’ve done all the hard work – we discuss the who, what, why and collated a list of 5 top effects. …
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (“The Commission”) was established on 14 December 2017 by the Australian government pursuant to the Royal Commissions Act 1902.
The Commission came about after years of public and consumer group pressure and continual accusations from whistle-blowers of misconduct and criminal activities by the Industry.
The Commission has looked primarily at the big four Australian banks and large financial services organisations.
Relevant to the property industry, The Commission to date has found, amongst other things, that banks have been lending to customers who in essence cannot afford the repayments.
It is important to note at this time that many of The Commission’s findings relate to conduct that occurred before the introduction of the Government’s Responsible Lending Regulations. Additionally, in 2014 the Australian Prudential Regulation Authority (APRA) required the big banks to test borrower’s ability to repay their loans at an interest rate of 7%.
Whilst some may argue The Commission will not have any effect on the property market, the following property related statistics cannot be ignored.
Whilst the big banks have recently adjusted their conduct, thanks to the Responsible Lending Regulations and updated APRA requirements, the effects on the property market should continue to play out. We outline our top 5 below.
Independent economist Saul Eslake predicts that a decline in lending would be clearly seen over the next 6 to 12 months whilst The Commission’s hearings are still happening. Further, he anticipates this to continue for a further 12 months while The Commission makes recommendations to the Government and implements them.
Mr Eslake has said unlike America during the global financial crisis, the introduction of APRA’s investment property lending restrictions and the Responsible Lending Regulations will result in a “long drawn out process” and as such the effects on the property market will be the same. Rather than a sudden crash, the property effect will be slow and long.
The Commission found that banks were heavily reliant on an applicant’s monthly expenditure estimates when deciding whether to approve home loan applications without verifying the actual expenditure levels. Banks are now tightening their lending criteria and requiring more documentation to prove an applicant’s actual financial position. With tighter lending requirements, a reduction in home loan lending is inevitable.
This means that where a bank might have lent money before, they no longer do so. Many first home buyers will be affected by these new restrictions. With less people able to obtain a home loan we will naturally see less demand for property sales and a softening of the market. Additionally, this could thus result in an increase in rental demand and increased rental prices.
With APRA’s limit on the big banks’ investment lending and an increase in interest rates for interest-only buyers, a reduction of demand for investment properties has already started to be seen. Investment property loans accounted for 55% of all residential home loans in the September 2017 quarter.
Peter Maloney, CEO of conveyancing provider Global X, has said that due to these factors “we can expect to see a significant drop in property investment moving forward. This will negatively impact property clearance rates and transactions, with buyers expected to find it even harder to get into the market.”
With fewer investment property providers comes less availability of rental properties on the market. This may lead to an increase in the rental demand and increased rental prices.
Due to loose lending practices and the over lending that occurred before the Responsible Lending Regulations came into place, home owners who are struggling with their mortgage repayments may be caught in a difficult position if they are unable to meet their monthly loan requirements. With increased lending criteria they may be unable to refinance with another lender at cheaper rates and fees and therefore may indeed default on their home loans.
Mortgagee sales often are designed to recoup the amount owed to the bank and as such in turn could create a softening of comparable market sales should this number grow significantly.
ANZ CEO Shayne Elliott, has advised that a consequence of the Royal Commission would be that loans may take longer to process and could require more documentation.
“People are still going to buy a home… but it will change the process and probably make it harder for people to be successful in their applications… We are going to be much more robust to make sure we have got everything.
…It is more likely we will say no when in the past on balance we would have said yes.”
The flow on from this could be an increased risk of sale contracts falling through as tighter lending requirements mean less loan approvals. Subject to Finance Clauses in Contracts of Sale may in turn also require longer than the standard 14 days to allow the buyer more time to go through the loan finance application stage.
The Commission’s findings are due to be finalised in February 2019. Some however believe that the findings may simply be tightening and adding to the current National Consumer Credit Protection requirements and APRA requirements created over the past four years.
Many will say that The Commission is simply levelling out the property market which saw house prices rise exponentially due to a fear of missing out scenario which led people to jump in and take mortgages beyond their commitments allowed. A slow normalisation of the market over the next two years is expected.
Whilst this normalisation occurs, it appears that Queensland is rebutting the trend in the property downturn. With increased population, interstate migration, foreign investment and increasing economy and employment rates, it’s a great time to be in real estate for either sales or property managers.
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