The interim report into financial services is in from the Royal Commission – and the suggestion form Commissioner Kenneth Hayne is that the industry doesn’t need a whole lot of new laws and regulations, – rather they need to follow and obey the laws that are already in place.
If the banks are forced to follow the laws, this will be an expensive exercise for them, as it will mean additional work in assessing a borrower’s expenses to meet their lending criteria. The government on both sides of politics remain highly motivated to be seen to be fixing up the financial services industry so it will be unlikely to water down any recommendations and it may even bring in additional regulation.
USB analyst Jonathan Mott summed up the situation by saying, “It’s clear that the royal commission thinks the banks have been over-earning.” Most people would agree with his assessment.
What Does This Mean For Property Investors?
The Australian banks make the lion share of their profits from selling mortgages, so if the banks are forced to follow the responsible lending laws as a result of the Royal Commission, this would require the banks do a better job in assessing a borrower’s ability to pay interest or replay loans.
In the past the banks have claimed they do all they can to verify and check a borrower’s expenses, however the interim report suggests that banks aren’t doing nearly enough in this area as was highlighted during the hearings and in the interim report.
If there was a move by the banks to doing a full expense verification, then it is suggested by USB that this would likely “reduce maximum borrowing capacity by ~30 per cent”.
Since the start of the Royal Commission we have already seen a tightening of underwriting standards where the banks have reduced owner-occupied maximum borrowing capacity by 7-10 per cent and investment property by around 20 per cent. In this already tighter environment we have continued to successfully navigate new loans and financing approvals for our clients.
Given we are one year out from the peak of the Australian property Market (September) where the fall has been a relatively mild 2.7 percent across the whole market, it remains to be seen what the effect would be if there was to be a further tightening in lending criteria.
However, as with any potential challenge there is always the flip side of opportunity. We have highlighted in the past that the NSW Government is behind and helping fast track the medium density housing approval process, which we still see as a big opportunity for property investors.
With increasing demand across the Western Sydney corridor for suitable affordable housing for workers moving into the area, as government and industry look to establish hubs around the new Aerotropolis being built at Badgerys Creek and in Paramatta and surrounding suburbs – it’s business as usual for us where the only change is that you need to prepare and do your numbers even more diligently than in the past – and if you need any further help in researching into a specific market, finding out if you are sitting on a developable site (thanks to the new Medium Density Housing Code), or you simply need help arranging finance in this tighter lending environment, then be sure to give the team at Plan Assist a call.