Opinion: Scrutiny, regulation and the looming credit crunch

This week, we’ve seen ANZ chief Shayne Elliott and RBA governor Philip Lowe both admit that lending is becoming more difficult.

On Tuesday, Mr Elliott said that tighter controls around customer living expenses — an issue given extensive coverage during the first week of the Hayne royal commission — would slow lending down.

Later that day, the RBA governor issued a similar warning following its decision to leave rates unchanged for the 21st consecutive month.

“It is also possible that lending standards in Australia will be tightened further in the context of the current high level of public scrutiny. We will continue to watch these issues carefully,” Mr Lowe said.

These comments follow APRA’s decision to remove the 10 per cent investor lending speed limit in favour of debt-to-income curbs.

Exactly what these will look like remains to be seen, but the banking regulator expects ADIs to develop their own portfolio limits on the proportion of new lending at “very high” debt-to-income levels.

The problem with things like forensic evidence of customer living expenses and tighter restrictions on mortgage lending is that they will reduce credit availability.

About 10 months ago, I wrote that “mortgages are the second-largest pool of assets in Australia after superannuation. Messing with that could have serious implications. Particularly at a time when property price growth is moderating.

“The risk is that measures designed to strengthen the system could inadvertently weaken economic growth, consumer sentiment and the propensity for Australians to continue spending.”

That observation was made following the 2017 budget, when it was revealed that APRA’s powers would extend to the non-banks.

Former Pepper CEO Patrick Tuttle told me that such action would “accelerate a credit crunch” and a sharp correction in house prices.

But the stakes are higher now and the risks to mortgage growth have intensified. Customer living expenses are at the centre of this, but I doubt common sense will prevail when it comes to regulation and tighter policies.

Over the last few weeks, I’ve spoken to a number of mortgage brokers, head groups and lenders about this issue.

On the record, they see more granular data around living expenses as a positive development. Off the record, they can’t stand the idea and anticipate a significant drop in volume.

One broker put it to me plain and simple: When a person gets a mortgage, they change their living expenses accordingly. They stop spending on rent, reduce their entertainment budget and work harder for that job promotion. In other words, they adapt to their new financial position.

Australians have a solid track record of paying down their mortgages. Arrears rates range from 0.76 per cent (ACT) to 2.5 per cent (WA).

While there have been no systemic problems in the Australian mortgage market, the banking royal commission is doing a great job of promoting a financial services industry rife with misconduct and risky behaviour. Which it is, to some extent, but how risky are the mortgages currently being written?

Are the banks tightening their lending policies because of risks, or is it simply a PR play to appease the regulators and the royal commission?

Either way, we can expect a reduction in credit availability and brace ourselves for what the knock-on effects of that will be.

The Adviser

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