Tighter lending conditions, cooling property prices and closer scrutiny of living expenses are expected to drive a more prolonged downturn in mortgage lending over the next five years.
Investment bank UBS has called the top of the housing market and expects the level of mortgage funding by the major banks to drop off significantly between now and 2021.
In its latest report, UBS explains that the Australian housing market faces a number of substantial headwinds that are likely to lead to a steady slowdown in the market over the coming years as the impact of record high levels of household debt weighs on the economy.
“As a result, we expect housing credit growth to continue to slow over coming years,” the report said. “This is consistent with the end of the housing leveraging boom which has lasted since the 1940s.”
UBS expects housing credit growth to decelerate more rapidly than originally anticipated.
“We now forecast housing credit growth of 4.4 per cent in FY18, 3.0 per cent in FY19, 1.7 per cent in FY20 and 1 per cent in FY21,” the bank said.
The impact of APRA’s 10 per cent cap on investor lending has been effective, with annualised rates now hovering around 6.9 per cent. However, UBS believes that the full impact of the regulator’s 30 per cent cap on interest-only lending is being felt only now.
The report pointed to a recent speech by Wayne Byres in which the APRA chairman indicated that interest-only fell to 23 per cent of new lending in the September quarter, down from around 40 per cent over the last few years.
“We expect this rate to continue to fall, consistent with data from APRA on mortgage approvals (differs to loans drawn down given timing issues and undrawn loans), with interest-only approvals at 16.9 per cent during the September quarter,” the UBS report said.
“We believe the recent action by the major banks to reprice their interest-only books (to pass through the cost of the Bank Levy) has not only led to some customers choosing principal and interest loans, it is also likely to have led to some borrowers choosing not to enter the market. This is likely to lead to an ongoing reduction in mortgage approvals.”
Housing market sentiment has turned
The booming real estate markets of Sydney and Melbourne have already started to cool. CoreLogic figures indicate that Sydney prices peaked in August or September this year.
UBS said: “Sentiment in the housing market has turned negative, with the auction clearance rate now in the mid-to-low 50s while a substantial number of houses are being withdrawn pre-auction.”
The investment bank believes that this combination of tightening lending conditions by the banks and softening sentiment in the housing market will lead to an ongoing slowdown in new mortgage drawdowns (fundings) by the big banks.
“Using the data provided by the major banks (which is highly correlated with ABS housing commitments data), we expect mortgage fundings to continue to soften over the next few years as these factors take effect,” the report said.
“However, we have incorporated a more prolonged slowdown in new mortgage fundings rather than a short, sharp correction in lending volumes which is usually associated with higher interest rates.”
UBS data shows that major bank mortgage fundings peaked at $297 billion in 2016 and fell to $293 billion this year. Next year, fundings are estimated to fall to $282 billion and then continue to decline before hitting $264 billion in 2021.
UBS has also highlighted that it is “very likely” that lenders will be required to incorporate much more substantial estimates of living expenses into affordability calculations going forward.
In fact, some banks have already started changing their credit policies in this regard.
Closer scrutiny of living expenses is likely to imply a lower Net Income Surplus (NIS), which reduces the amount that lenders are able to lend to borrowers, according to the report.
“In addition, the introduction of mandatory comprehensive credit reporting (CCR) from next year should enable the banks to see each borrower’s total debt position.
“This will enable the banks to assess each customer’s total Debt to Income (DTI) position as well as the Loan to Income (LTI). This is consistent with movement by regulators around the world.”
UBS sees these moves by APRA to continue to focus on sound lending standards as “significant”.
The investment bank said: “If banks are required to collect more accurate estimates of borrowers’ income (requiring tax returns to be provided appears to be an obvious starting point) and use more realistic estimates of customers’ household expenditure beyond the HEM benchmark, this may lead to lower levels of estimated Net Income Surplus. A more complete view of customers’ borrowings is also essential.
“The implication of this is that it is likely many borrowers will be offered less credit than they would have otherwise received in the past, which will have an impact on total lending commitments, credit growth and prices in the housing market.”