Even though interest rates remain near historic low levels, tougher banking regulations and scrutiny of the banking royal commission have reduced the ability of the self-employed to fund their businesses and for investors and would be owner occupiers to fund property purchases. Closer examination of customers’ ability to fund their borrowing is both reducing the size of the amount that can be borrowed and increasing the length of time to obtain loan approvals.
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Unlike for employees who can quickly provide proof of their current income and their expenditure commitments, the self-employed loan application process has traditionally been time consuming involving submitting past tax returns and detailed assets statements. Now the regulators’ demand for greater scrutiny of expenditures and the ability to service borrowings has added to their difficulties in obtaining reasonably priced bank funding.
The property sector which relies on a continuing flow of mortgage finance is also suffering. Worst affected are the off-the-plan purchasers with binding contracts entered into when the property market was buoyant and obtaining loan approval was much easier. Now, when buildings are completed, and funding must be finalised, the banks are reducing the size of the mortgages available in line with lower property valuations and tighter lending standards.
While it’s early days yet, the impact of this latest credit squeeze has the potential to match the serious impact of previous credit squeezes on property prices when interest rates and inflation were much higher. The reduced availability of mortgages from traditional sources has already reduced investor demand even before proposed new restrictions on negative gearing see the light of day.
The shadow mortgage industry funded by solicitors’ and other mortgage trusts, superannuation funds and fringe financial institutions is flourishing helping developers unable to obtain bank funding and desperate purchasers willing to pay higher interest rates to fund their commitments.
At a macro-economic level, the Reserve Bank has little scope to reduce the impact on the property sector because the official interest rate is so low. The review of banking practices emanating from the Royal Commission will, if anything, make it more difficult for borrowers to access bank funding.
The message for first home-buyers and potential investors is that these funding restrictions will be reflected in lower property prices while buyers don’t have access to easy funding. The demand from overseas investors has been reduced by penalty stamp duties on their purchases.
A further reduction in investor demand will come from the decision of the big four banks not to make new loans to SMSF borrowers even those who are eligible to stump up large deposits from their existing resources. This is a relatively small but until now fast-growing sector of the property market.
Daryl Dixon is the executive chairman of Dixon Advisory.
