Housing lending flow to slow following banking inquiry

AUSTRALIA’S banks are likely to soon dramatically cut the amount they lend to homebuyers, potentially sending a shockwave through the housing market, leading analysts say.

In new research on the impact of the banking royal commission, investment bank UBS says the sweeping inquiry is “changing the game”.

In the extreme, the probe could give rise to a “credit crunch” in the Australian housing market as banks are forced to sharply curtail the sums they lend out, UBS analysts say.

They say this could lead to Australia’s ‘Minsky moment’ – a reference to a point in credit cycles where asset values abruptly collapse.

In a report for investors, the UBS banking team, led by analyst Jonathan Mott – regarded as one the best industry experts in Australia – said the first round of commission hearings “was more severe than we anticipated”.

Mr Mott said commissioner Kenneth Hayne was likely to recommend banks be far more diligent in their research before approving loans.

In particular, he said, lenders may be forced to “undertake a detailed assessment of each customer’s living expenses” rather than rely on statistical benchmarks.

According to the UBS calculations, banks may cut the maximum amount they offer homebuyers under that scenario by an average of about 35 per cent.

The lenders would only offer loans of three to four times borrowers’ income, on average, compared with a ratio now of five to six times.

“A sharp reduction in housing finance and credit growth looks more likely,” Mr Mott said.

If the total number of home loans offered fell 20 per cent, growth in Australian housing credit would flatline, he said.

“However, in a ‘credit crunch’ scenario, where approvals fall by about one third, housing credit outstanding would contract by about 2 to 3 per cent per annum,” he said.

“This could lead to Australia’s ‘Minsky moment’.”

Mr Mott said that the UBS “base case” was for a modest fall in home lending.

“A credit tightening scenario would likely see larger and sustained price falls,” he said.