Prospective borrowers have been cautioned to get a home loan while they can.
Some may soon find it tougher to borrow, with major banks expected to quietly turn the screws on who qualifies for a home loan.
Steep price rises across a number of key household items, combined with tougher lending rules, are likely to lead banks to take a more cautious view on how much they lend.
This is in contrast to the stand banks have been taking in recent months where they have been relaxing lending standards, mostly by increasing the maximum loan figure against the value of a house, or the loan-to-valuation ratio (LVR).
National Australia Bank is currently the most aggressive, lending up to 95 per cent of the value of a property. ANZ is the most conservative with a maximum LVR of 90 per cent.
Banks already apply an interest rate buffer on new loans to ensure borrowers have enough headroom to repay loans in the face of further interest rate rises. Banks also calculate a borrower’s average living cost to help them arrive at what figure they can safely lend out.
But an investment analyst with Merrill Lynch, Matthew Davison, said household budgets were under pressure after price rises across a number of household categories including food, utilities, insurance and petrol.
Banks already put a steep discount on living costs when assessing disposable income for new borrowers. This situation is likely to change as internal bank borrower models are updated and new responsible lending laws start to evolve.
”We believe the strain on the household budget is too big to ignore, and banks don’t accurately measure household costs,” Mr Davison said. ”These pressures could possibly prompt the banks to update household budgets models, thus tightening mortgage lending standards.”
Any revisit in bank lending models is likely to result in a reduction in the average mortgage size, further contributing to the slowing pace of mortgage lending.
Most economists are already tipping the pace of housing lending growth to slow to about 7 per cent this year from a growth rate of more than 8 per cent a year ago.
Banks have reported a spike in the number of loans turning sour, largely due to losses linked to severe flooding and cyclone Yasi across Queensland over summer.
”We’ve been hit with several large one-offs and that’s banking, unfortunately,” said the managing director of the Bank of Queensland, David Liddy. ”But in terms of the ongoing portfolio, I’m as confident as I can be in terms of the quality that sits there.”
For their part, bankers say the best leading indicator of defaults on housing loans remains rates of unemployment, with the number of jobless still running near-record lows.
Other indicators, including the rate of personal bankruptcies, continue to fall from a peak in September 2009, according to figures from Insolvency and Trustee Service Australia.
Story by Eric Johnston, domain.com.au