Managing risks associated with the Banking Royal Commission

Tighter restrictions on mortgage lending could increase risk to property prices.

According to RiskWise Property Research the impact of any recommendation by the Banking Royal Commission to tighten lending could lead to some areas and property configurations carrying higher levels of risk. 

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

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.

Banks are already applying greater scrutiny to the living expenses declared by customers in loan applications.

Westpac has recently written to brokers informing them it will require customers to hand over more details about their spending when applying for a mortgage, breaking it down into 13 different categories, up from six.

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. 

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 21-41 per cent, depending on the borrowers’ income).

Areas that experienced low economic growth, poor population growth and overall low demand for dwellings had a higher exposure to price correction.

High-rise units, particularly when purchased off-the-plan, carried an even higher settlement risk and poor or negative capital growth than usual.

Areas already experiencing oversupply and low demand would drop even further if tighter lending restrictions were put in place.

Properties that largely appeal to investors, (i.e. not suited to families), such as small units, carry a higher level of risk.  

The likelihood that some investors do not have sufficient cash to cover ongoing shortfalls between the mortgage repayments and the rental return is higher.

Investors often use creative financial planning, and they often place strong reliance on cashflow 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.

In addition, 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.

So significant reduction to the borrowing capacity will have a direct impact on these properties.

On the other hand, houses in capital cities that enjoy strong economic and population growth, e.g.

Hobart and the Western Suburbs of Melbourne, which are affordable areas that appeal to both owner-occupiers and investors, carry a lower level of risk.

About Doron Peleg is the CEO/Founder of RiseWise Property Review. He has more than 20 years’ experience in risk management including, Co-Founder of Peleg, Kessel & Co, an assurance and advisory accounting firm & Executive Manager at Westpac Banking Corporation in Sydney. www.riskwiseproperty.com.au/