Credit crunch could ‘exacerbate’ price falls

Over the past few months, credit providers have reduced their risk appetites, tightening their lending policies in response to fears of a spike in credit losses off the back of a COVID-induced deterioration in labour market conditions and falling residential property prices.

These changes have included heightened scrutiny on applications from borrowers employed in industries hardest hit by the crisis, and reductions to debt-to-income ratios for serviceability assessments.

However, speaking to Mortgage Business, AMP Capital chief economist Shane Oliver warned that while moves to tighten lending standards are to be expected during an economic crisis, they could have unintended consequences.

Mr Oliver explained that tighter lending standards could further weigh on demand for housing, already subdued off the back of income loss and immigration restrictions.  

“If you go back to the time of the GFC in the United States, there were very [loose] lending standards up until 2006-2007, and then the tightening in lending standards that occurred once prices started to fall exacerbated the downswing,” he said.

“It has the very effect they’re trying to avoid.

“That could well happen here, that tightening by the banks exacerbates the downswing and then ultimately causes more weaknesses in the economy, which then [leads] to more forced selling of houses and puts more downward pressure on prices.”

He continued: “If the banks tighten their lending standards, you end up with a double whammy in terms of reduced demand.”

Property research group CoreLogic has reported that since the onset of the COVID-19 crisis, subdued demand for housing has spurred a 0.8 per cent fall in national home values, led by cumulative declines of 3.1 per cent in Sydney and Melbourne. 

Mr Oliver added that the expansion of the federal government’s First Home Loan Deposit Scheme and the rollout of the HomeBuilder package may help offset downside risks.  

“Whether they will in full remains to be seen, but the reality has been that housing finance has been slowing down,” he said.

According to the Australian Bureau of Statistics’ latest Lending Indicators data, the value of home loan approvals plunged 11.6 per cent (seasonally adjusted terms) to $16.4 billion in May – the largest fall in the history of the series.

This followed a 4.8 per cent decline in April, which was the sharpest fall since May 2015.

[Related: ANZ exec bracing for surge in loan deferral requests]