Fears of a credit crunch

Fewer interest-only loans may mean forced sales

THE risk of “stressed selling” in the housing market is growing as an increasing number of property investors are forced to start repaying the principal on their loans, analysts say.

And the likelihood that Australia will be gripped by a credit crunch, where banks and other lenders dramatically rein in the amount they lend out, is also increasing, a leading investment bank says.

A UBS report has questioned whether Australia is at the “end of the beginning” of a housing correction.

It follows a week of conflicting reports from leading analysts on the health of the Australian property market.

ANZ economists on Tuesday forecast a 10 per cent slump in Melbourne house prices this year as tighter lending standards took effect.

Then, on Thursday, Moody’s analysts said they believed house prices in the city should recover and rise 1.5 per cent this year.

In their report, the UBS banking team, led by Jonathan Mott, noted there was an increasing flow of property investors switching from interest-only mortgages to principal-and-interest loans.

It comes as banks tighten criteria for loans regarded as higher risk, including loans for property investors and interest-only loans.

As a result, many borrowers coming to the end of interestonly periods – which typically last five years – are having to start repaying the principal.

Mr Mott said that as a result of the shift, borrowers were now having to fork out an extra $1.6 billion a year in home loan repayments.

“With (about) $120 billion of interest-only loans expected to mature every year for the next three years … the larger risk is from ‘stressed selling’ as some households struggle to meet their higher repayments,” Mr Mott said.

“We remain concerned with the large number of headwinds weighing on credit availability and the housing market.

“We believe the risk of a credit crunch is rising.”

Mr Mott had earlier this year warned the financial services royal commission could lead to a credit-crunch scenario in Australia.

Figures from the banking watchdog – the Australian Prudential Regulation Authority – reveal there was a 4.2 per cent slide in the number of mortgages approved by the major banks in the three months to March.

That was driven by a 16 per cent year-on-year fall in approvals for investment property loans.

Interest-only loans now accounted for only 16 per cent of new mortgages being written, collapsing more than half since March last year, when APRA introduced new limits on such loans, Mr Mott said.

As a proportion of all mortgages on issue, interest-only loans now clock in at 31 per cent, compared with 39 per cent a year ago.

The outstanding amount owed by borrowers with interest-only loans had fallen by $93 billion, he said.