More tightening in mortgage lending likely: Macquarie analyst

June 21, 2016 Clancy Yeates, Banking Reporter

Australian banks still allow property investors to borrow a significantly larger multiple of their income than owner-occupiers, despite a crackdown on lending to landlords, new research shows.

A report from Macquarie analysts argues that lending standards in parts of the mortgage market are likely to tighten further, after shadow-shopping suggested some banks are still aggressively targeting property investors, and that banks here are less conservative than lenders overseas.


“While the changes implemented by banks appear to be prudent, we expect further tightening in lending standards over time.”



The analysts, led by Victor German, also found that banks were offering deeper discounts of up to 1.4 percentage points off their standard variable mortgage rates, a trend that is likely to squeeze bank profit margins.

A critical change in the mortgage market over 2015 was the introduction of tougher bank lending rules for property investors.

Under pressure from regulators, banks tightened credit standards to property investors, demanding bigger deposits and charging these customers higher interest rates on loans. These changes reduced the borrowing capacity of all borrowers, especially investors.

Even so, Mr German’s research finds there remains a significant gap in how much credit an investor can get, compared with an owner-occupier in a similar financial position.

It said even the most conservative lenders were willing to lend an investor 6.8 times their income, compared with 5.3 times for an owner-occupier.

For someone earning $105,000 a year, the assumption used in this survey, that means an investor has the borrowing capacity of $813,000, on average, whereas an owner-occupier on this income can borrow up to $588,389.

The most aggressive lenders were prepared to write loans that were 9.4 times a housing investor’s income, the report said.

The report said that this gap between what an owner-occupier and an investor could borrow appeared “difficult to justify”, even if there valid reasons why banks would give investors higher loan limits. For instance, investors get the tax advantage of negative gearing, and they are often well-off.

Mr German’s report argued that the maximum amount investors or owner-occupiers could borrow would “converge” over time, especially if tax rules changed.

“While the changes implemented by banks appear to be prudent, we expect further tightening in lending standards over time,” the report said.

“This would likely result in further pressure on housing prices and credit availability, which would ultimately result in ongoing pressure on housing volume growth.”

It said a key area where standards might be tightened further was in interest-only lending to owner-occupiers.

The report assumed that a housing investor would make $40,000 a year in rent, or about $770 a week, while paying $325 a week in rent.

The research comes after some banks have in recent months reopened the door to property investors by accepting lower deposits or offering deeper discounts.

After a jump in house prices in May, Moody’s this month said banks’ appetite for investor property loans appeared to have grown, and some economists have argued the financial regulator may step up supervision of banks to prevent risks building up.

Mr German’s research also said banks were offering larger discounts to new customers, which was squeezing returns, and may lead to future interest rate hikes.

The report found banks in the US and Britain were generally more conservative in how much they would lend mortgage customers, while Canada’s banks to a similar approach to Australia’s.