Why It's Getting Even Harder to Get a Mortgage in Australia

(Bloomberg) -- A deepening credit squeeze is making it harder to get a mortgage in Australia, further dragging down a property market already deep in its worst slump in a generation.

Gone are the days of banks throwing money at homebuyers. Instead they're tightening lending criteria, after an inquiry into misconduct in the finance industry heard how lax standards had lumped people with mortgages they couldn't afford.

In some cases, banks are now scrutinizing borrowers' spending habits line by line, on everything from rent to entertainment services like Netflix and Spotify.

“Stricter lending standards are a logical outcome following the Royal Commission, and we are likely in the early phases of a ‘new normal' for mortgage lending,'' said Tim Lawless, head of research at CoreLogic Inc. “Borrowers will face closer scrutiny around their expenses and ability to service a loan.”

Loans to buy houses rose just 0.2 percent in January from December, the weakest growth since July 1984, according to central bank data released last week.

Australia's property downturn deepened in February, with national home prices falling 0.7 percent, to be 6.8 percent down from their October 2017 peak, according to CoreLogic. In Sydney, dwelling values declined 10.4 percent from a year earlier -- the first double-digit annual decline since the early 1980s.

Read more: This is what's killing Australia's property boom

While property investors were first to feel the pinch of the tougher borrowing environment after regulators cracked down on risky lending, banks are now winding back on owner-occupier loans, which are generally considered to be the more stable segment of the market.

It could get even harder for borrowers after the securities regulator said it will review its guidance on lending standards. Under proposed changes, the Australian Securities and Investments Commission said lenders should take more steps to verify expenses such as school fees, utility bills and entertainment services, rather than rely on spending benchmarks that tend to underestimate expenditure.

Banks are also demanding borrowers have bigger downpayments, pulling back on lending to would-be homebuyers who haven't been able to save a deposit of at least 20 percent. That's forcing some to lower their sights to a cheaper property, or give up house-hunting altogether.

In a speech Wednesday, Reserve Bank of Australia Governor Philip Lowe said the free flow of credit is important to support the economy.

“As lenders recalibrated their risk controls last year, the balance may have moved too far in some cases,” Lowe said. “This meant that credit conditions tightened more than was probably required. Now, as lenders continue to seek the right balance, we need to remember that it is important that banks are prepared to take credit risk.”

The self-imposed lending freeze could also drag on earnings growth at the big four banks, which dominate Australia's A$1.7 trillion ($1.2 trillion) mortgage market.

Mortgage growth at Australia's largest lenders is expected to slow to 2.2 percent in fiscal 2019 and 2 percent in fiscal 2020, with “risk to the downside given scrutiny around responsible lending,'' Morgan Stanley analysts led by Richard Wiles wrote in a Feb. 28 note.

“We think ongoing market share losses for the majors are likely,'' Morgan Stanley said.

Analysts at Macquarie Group Ltd. estimate that housing credit growth could moderate to 2.1 percent this year and bottom out at about 1.5 percent in 2020.

“We continue to see the current fundamental outlook for banks as challenging, and our forecasts remain below consensus,” they wrote in a Feb. 28 note.

Australia & New Zealand Banking Group Ltd., which is leading the pullback among the big-four banks, conceded it may have been too cautious in its efforts to rein in lending. The bank's mortgage book shrank 0.2 percent in the December quarter, lagging behind industrywide growth of 0.9 percent.

Data released last week by the prudential regulator shows ANZ's lending growth trailed the industry in the year to January.

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Peter Vercoe, Edward Johnson

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