Australia’s economy finds itself wedged between a rock and a hard place – rising mortgage rates and falling home loan sizes – and the resulting mini credit crunch could be “a big problem for property”.
Deloitte Access Economics have become the latest group of leading economists to warn of a looming credit crunch in Australia, defined as a sudden drop in the availability of mortgage funds.
The assessment follows similar concerns voiced by UBS, Morgan Stanley and Capital Economics, while ANZ and NAB economists have also downgraded their house price forecasts, pointing to a drop in the availability of mortgage credit.
“House prices are essentially a function of how much people can borrow,” Deloitte economists led by partner Chris Richardson wrote in a 155-page quarterly report released on Monday, pointing out tighter lending rules have led to a noticeable drop in loan sizes over the last 18 months.
While arguing the global economic landscape is going from strength to strength, the economists say the local “credit negatives” for Australia’s economic outlook continue to darken.
The Royal Commission has uncovered a range of wrongs… the big banks are now running scared.Deloitte Access Economics
Specific concerns were raised that the recently-discovered rot in the lending system, and resulting correction, is seeing mortgage funds to dry up, which could cause house prices to slide further.
Meanwhile, many small-to-mid-sized lenders have begun lifting mortgage rates in response to higher funding costs, with Bendigo Bank, Bank of Queensland, Suncorp, ME, AMP and ING among them.
“Higher global funding costs are combining with a sudden tightening in credit availability from the big banks to turn the screws on credit-related sectors,” the report reads.
“That’s a big problem for property, and for some linked sectors as well.”
House price falls are said to be gathering pace, but “don’t pose larger problems for the overall outlook”.
The banks are ‘running scared’
Widespread lapses in ethical and responsible lending practices have been uncovered among the biggest mortgage lenders in the country, including cases of fraud, bribery, false documentation and failures to properly assess customer expenses.
Those failures need to be addressed, Deloitte says, but the problematic side-effect is that a wave of borrowers have less credit at their disposal.
“Big banks are now running scared,” the report reads.
“Their sudden surge of caution means borrowers with the same characteristics would now get a smaller loan than they would have 18 months ago.”
As a result, the economists predict the current phase of house price falls in Australia will “keep on keeping on”.
Eyes on Commissioner Kenneth Hayne
The warning comes less than two weeks after bank regulator chair Wayne Byres hushed concerns of a credit crunch by declaring the “heavy lifting” has now been done to correct the wayward sector.
While the message appeared to satisfy the market that further harsh lending restrictions wouldn’t be imposed on the banks in the near term, the regulator is in no way signalling a loosening of lending standards, according to UBS economist Carlos Cacho.
“As much as he’s saying the heavy lifting is done, there’s certainly going to be no easing of lending standards,” Mr Cacho said.
“APRA wants the banks to make these decisions themselves, but reading between the lines, if they don’t take action on [setting limits and restrictions], or APRA isn’t happy with the risk limits that they’ve set then they will set something from the top.”
With APRA’s position appearing set, for now, eyes turn to the outcome of the royal commission, which has seen public hearings run since March. Commissioner Kenneth Hayne is set to deliver recommendations to the government in an interim report on September 30 and a final report on February 1.
“The key thing is going to be is what recommendations the royal commission makes – particularly in relation to complying with responsible lending and how stringently they view that compliance,” Mr Cacho said.
“And, following on from that, it’s going to be how the government chooses to implement and respond to those recommendations.”
A fifth round of royal commission public hearings, focused on superannuation, will commence in Melbourne on August 6.
Global outlook looking healthy
Despite a turbulent global political situation, the world’s economic outlook is going “from strength to strength”, according to Deloitte, with the report pointing to a resilient Chinese trade and overblown US risks.
“If you think that Australian economic growth is substantially at risk because of the antics of the Tweeter-In-Chief, then you’re reacting too much to headlines and too little to analysis,” the report reads, in reference to US President Donald Trump’s repeated political gaffes.
“A final flurry of extra exports of minerals and energy thanks to our decade-long surge of investment is arriving on world markets at the same time as those world markets are having a bit of a party.
“That’s a double whammy of positives for Australia – we’re selling higher quantities of iron ore, coal and (especially) gas, plus we’re getting higher prices.”