Banks pull back in loan stress zones - TOO LATE!!!
$1.6 trillion in toxic lending and rising...........Catastrophic consequences for victims of Low Doc Lending
The Australian 12:00am March 18, 2017
Michael Bennet
Banks are scrambling to pull back lending to stressed parts of the country and riskier borrowers, amid fears rising interest rates will exacerbate risks in a highly leveraged $1.5 trillion mortgage market that is “fraying at the edges”.
As Westpac yesterday followed National Australia Bank in hiking interest rates, former Reserve Bank board member Warwick McKibbin warned that an “adjustment” was looming and property prices could dive if overly leveraged borrowers stumbled under rising borrowing costs and investors ran for the exit.
He slammed governments for failing to undertake structural reform since the global financial crisis and relying on the RBA to prop up the economy by cutting rates to record lows, saying inaction had placed the property market in a similarly precarious state to the energy market crisis. “It may be a smooth adjustment or it may be a panic: it depends very much on how the political process handles it,” he said. “But it does seem given on any realistic interest rates above where they are now ... that the prices of houses in the Australian economy are excessive relative to the rates of return and risk that’s in the system.”
Westpac yesterday hiked variable mortgage rates by between three and 28 basis points, rewarding owner-occupier borrowers and those paying both principal and interest with lower rates than riskier interest-only and investment loans. Banks are also requiring buyers to have larger deposits, tightening serviceability assessments and turning away foreigners.
John Flavell, chief of broker Mortgage Choice, said banks were responding to regulators’ demands to curb investor lending by raising rates, reducing loan-to-valuation ratios and even outright refusing business in fear of breaching the 10 per cent growth cap. He said CBA’s decision to stop refinancing investor loans — one of several recent policy changes including lowering LVRs — after it neared the cap had opened up a $1 billion market for other lenders to step into.
Commonwealth Bank last month revealed it had increased provisions in Western Australia to buffer against losses as the proportion of borrowers falling behind on repayments rose to double the rate of the rest of its $460bn mortgage book. Banks have also reduced exposure to inner-city, east coast apartments amid fears of a glut, alert to the fact commercial property losses hit them hardest in the early 1990s recession.
Professor McKibbin said anyone who was highly leveraged and had been “working off capital gains rather than fundamental rental returns, they’re going to face a bit of a squeeze”. “Ideally, you wouldn’t be in this situation ... but now that you’re here, it’s really going to have to be done very carefully,” he said. “It’s pretty clear interest rates are rising (globally).”
The tightening in borrowing costs follows a jump in the unemployment rate to 5.9 per cent and a warning from veteran CLSA banking analyst Brian Johnson that the housing market was “fraying at the edges” after a “super cycle” for banks.
In its frankest warning yet, the RBA this week revealed it may step in with tighter “macro-prudential” policies to control risks, particularly a resurgence in borrowing by property investors who “can be the first ones to get out if things turn down”. Investor lending rates could rise up to three percentage points in coming years as banks differentiate pricing and offset regulatory headwinds, broker JPMorgan says.
“While banks’ move to increase investor mortgage profitability is positive for earnings in the short term ... it puts additional pressure on an already highly leveraged household sector,” Macquarie analyst Victor German said. “This, coupled with a rising global rates outlook, suggests the risk around investor portfolios appears to be increasing.”
With banks holding “hot spot” lists of suburbs where borrowers require larger deposits, real estate agents said conditions appeared to be tightening further as buyers in riskier areas withdrew bids after finance fell through..
“It’s quite clear the banks are tightening up their lending,” said Annie McCarthy, a sales associate at Perth agency Realmark Western Suburbs, albeit noting individual circumstances of finance being pulled were unclear. “There is limited stock on the market and with pent-up demand, buyers are keen to secure a property and probably over-extend. The feeling is there will be more finance being refused.”
NAB chief operating officer Antony Cahill said there were clear buffers in place when loans were written to ensure borrowers “should be in a position they can absorb increased repayments” if required. “Mortgage rates are still at historically low rates,” he said. “We are comfortable with our credit risk profile of our mortgage book at the moment.”
According to research group Digital Finance Analytics, 22 per cent of households are in “some degree” of mortgage stress. While pain is worst in regional areas and outer city suburbs, DFA principal Martin North warned that NSW borrowers had the greatest sensitivity to rising interest rates because surging house prices had significantly pushed up borrowing commitments.
Combined capital city annual house price growth touched a near seven-year high this month, powered by Sydney’s 18.4 per cent increase versus a 4.5 per cent dive in Perth.
Professor McKibbin said price rises had been powered by a “problematic mix” of low interest rates, tax incentives and expected capital gains. He urged politicians to make overall structural reform after putting it off since the GFC, rather than take the “easy” option of revising things such as the capital gains tax discount.
He also called on the RBA to lay out a vision of how the housing market was developing and “what’s in place to prevent any sort of large adjustment” as banks hiked mortgage prices to offset funding costs being pulled higher by rising US interest rates.
Morgan Stanley economist Daniel Blake agreed that governments’ lack of structural reform and tax incentives were to blame for the state of the property market. “We’re channelling foreign investment and domestic savings
intermediated by the banks into bidding up the cost of established housing and just collectively paying more for
the same assets, which is an unproductive use of (capital),” he said.
The property market is NO different from the US sub-prime boom that caused the GFC