The credit squeeze is tightening
Even though interest rates remain near historic low levels, tougher banking regulations and scrutiny of the banking royal commission have reduced the ability of the self-employed to fund their businesses and for investors and would-be owner-occupiers to fund property purchases. Closer examination of customers’ ability to fund their borrowing is both reducing what can be borrowed and increasing the length of time to obtain loan approvals.
Unlike the process for employees, who can quickly provide proof of their current income and their expenditure commitments, the self-employed loan application process has been time-consuming. Now the regulators’ demand for greater scrutiny of expenditures and the ability to service borrowings has added to their difficulties.
The property sector, which relies on a continuing flow of mortgage finance, is also suffering. Worst affected are the off-the-plan purchasers with binding contracts entered into when the property market was buoyant and obtaining loan approval was much easier. Now, when buildings are completed, and funding must be finalised, banks are reducing the size of the mortgages available in line with lower property valuations and tighter lending standards.
The impact of this credit squeeze has the potential tomatch the impact of previous credit squeezes on property prices. The reduced availability of mortgages from traditional sources has already reduced investor demand.
The shadow mortgage industry funded by solicitors’ and other mortgage trusts, superannuation funds and fringe financial institutions is flourishing, helping developers unable to obtain bank funding and desperate purchasers willing to pay higher interest rates.
The Reserve Bank has little scope to reduce the impact on the property sector because the official interest rate is so low. The review of banking practices by the Royal Commission will make it more difficult for borrowers to access bank funding.
The message for first home-buyers and potential investors is that these funding restrictions will be reflected in lower property prices while buyers don’t have access to easy funding. The demand from overseas investors has been reduced by penalty stamp duties. A further reduction in investor demand will come from the decision of the big four banks not to make new loans to SMSF borrowers, even those who are eligible to stump up large deposits from their existing resources. This is a relatively small but until now fast-growing sector of the property market.