Home buyers’ borrowing power could fall by as much as a third on the back of tighter lending standards, particularly for investors, analysts say.
Property investors have already been hit by repricing of mortgage rates amounting to a full percentage point, Morgan Stanley analysts say.
The investment bank this week called a peak in Australia’s housing boom with tightened lending standards prompting a cooling-off period.
While much attention has been on the financial regulator’s 10 per cent ‘speed limit’ for investor property loan growth, the Morgan Stanley analysts say tougher serviceability tests for loans are the most important aspect of the regulatory tightening.
“As these elements of lending standards are tightened, we expect credit limits for borrowers (especially investors) could fall significantly,” a Morgan Stanley research report said.
Many lenders have hiked interest rates for investors and made it harder for them to get loans while cutting rates for owner occupiers in response to the Australian Prudential Regulation Authority’s crackdown.
APRA wants the standards for underwriting mortgages tightened, such as tests of income, expenses and loan serviceability buffers.
There will also be a material tightening of credit conditions for investors with outstanding mortgage obligations going forward, Morgan Stanley said.
After an APRA test found the most generous lenders were prepared to lend 50 per cent more than the most conservative, Morgan Stanley predicts borrowing power could decline.
“We think it’s fair to say that credit limits for borrowers could fall by up to 33 per cent going forward,” its report said.
The Australian Securities and Investments Commission is also focused on tightening lending standards on interest-only mortgages.
“The implications of tightening standards on IO loans again come back to a fall in buying (borrowing) power, which will work alongside the investor property loan speed limit and tougher serviceability tests across the board,” Morgan Stanley said.
Rates on investor and interest-only loans have been raised by 27-29 basis points at the same time as many lenders have removed the mortgage discounts they once offered investors.
New investor loans face about 100 basis points of repricing, Morgan Stanley said.
The investment bank also cautions that while the investor loans speed limit will take some of the heat out of the market, it risks a credit crunch for the apartment sector where an impending surge of settlements could absorb up to half of that quota alone.
CoreLogic RP Data senior research analyst Cameron Kusher said there are signs that the regulatory measures are starting to have an impact.
“APRA’s changes to lending policies is starting to show signs of having the desired effect of cooling some of the housing demand, particularly from that investor segment of the market,” Mr Kusher said.
Tighter Property Lending Standards
– Speed limit – of 10 per cent growth for investor property loans
– Tighter lending standards – could see credit facilities lowered by about 33 pct
– Interest-only mortgage pullback – after breaches found in product guidelines and tests
– Mortgage repricing – 50 basis points on average overall – 100 bps on investor front book of newly-written mortgages, after hike in standard variable rates and removal of discounts
– For new mortgages across the board, full 50 bps of RBA cuts this year absorbed by banks, for no effective change in borrowing rates.
Factbox source: Morgan Stanley.