Could one of the unintended consequences of the banking Royal Commission be tighter lending criteria for Australian mortgagees? UBS certainly thinks so and is claiming that the bank’s public shaming will likely force them to rein in irresponsible lending practices that have enabled false applications and loans to people who simply can’t pay them back. To quote UBS… "evidence has been presented of fraud, bribery, false documentation, failure to verify customer income, not assessing expenses, failure of internal controls, and failure to report misconduct to ASIC." 

While a more robust assessing and reviewing of the living costs of loan applicants will significantly reduce the amount of risky loans it will also squeeze the availability of credit. In a worst case, domino effect scenario, UBS claims this could send property prices spiralling downwards taking the economy with it. Perhaps a little hyperbolic but you get the picture.

And that’s not all. To date, the property market boom has been fuelled by cheap and easily accessible credit in a low inflation environment. But we currently have few competing forces. On one side — pouring water on the wildfire of property prices ­­— we have APRA’s tighter lending controls, the real possibility of banks being shamed in to more responsible lending practices and, according to media outlets, the once abundant Chinese investment pool rapidly drying up. On the other side we have Australia’s significant immigration growth that’s driving both demand and prices without increasing supply. After all we aren’t making any more land.

With the globe also firmly entering a rate rising cycle, the cost of funding for Australian banks will continue to increase. Australian banks will start having to pay higher rates of interest for the money they borrow from overseas to lend on to Australians. Those higher funding cost will be passed on to lenders in the form of higher rates. Add to that the RBA’s longest “hold steady” in its history and APRA’s reining in of investor loans and there may be a credit squeeze on the horizon.


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