Mortgage rejections skyrocket 1347% as credit crunches

Via Martin North:

DFA research was featured in a number of the weekend papers, discussing the rising number of mortgage loan applications which are being rejected by lenders due to tighter lending standards, meaning that many households are unable to access the low refinance rates currently on offer.

NEARLY half of all homeowners are now shackled to their mortgage, with refinance rejections up significantly cent in less than a year as banks rattled by the royal commission drastically tighten borrowing rules.

Loan sizes are being slashed by 30 per cent, trapping many financially stressed customers including some who have been slugged with “out of cycle” interest rate rises. House hunters are also being hit by the credit crunch, with dramatic implications for property markets. The crunch stems from two big shifts in the way banks judge borrowers.

Expense estimates have been raised substantially — the minimum outgoings for an average household are now assumed to be a third higher, according to bank analysts UBS.

On top of this, granular cost breakdowns must be provided. After the royal commission revealed in March that expense checks were so lax as to be borderline illegal, new tests have been imposed requiring in some cases detail of weekly, fortnightly, monthly, quarterly and annual spending in as many as 37 categories from alcohol and haircare to shoes and pets, as well as doctor visits.

As a result, we think that now four in 10 households would now have difficulty refinancing.  That means you are basically a prisoner in the loan you’ve currently got. This is based on our 52,000 household surveys plus data from a range of official sources. We estimate that 31,000 households’ refinance applications were rejected in July versus 2,300 in August last year.

Comparison service Mozo’s lending expert Steve Jovcevsk said . “There’s such a huge pool of people who are in that boat.” The most common motivation among those seeking to refinance was to save money by finding a better deal. Many were feeling the pinch because living costs were rising faster than wages and rates on interest-only or investment loans had increased.

The main issue these households are facing in seeking a new deal was banks’ definition of a “suitable loan now is different to six months ago because of the royal commission” and a clampdown by the Australian Prudential Regulation Authority. So there has been a big rise in loan rejections, particularly refinancing.

The borrowing power of hosueholds are being crimped, as shown on the banks website mortgage calculators. Those calculators, compared to a year or 18 months ago, are now on average showing a 30 per cent lower number. For some, the reduction in borrowing power is even greater. The head of UBS’s bank analysis team Jon Mott said that for a household with pre-tax income of $80,000 would get 42 per cent less from a bank; for a $150,000-a-year household, would get 34 per cent less.

Mozo’s Mr Jovcevski said in one example he was personally aware of, a person pre-approved to borrow $630,000 last year was recently offered just $480,000. The would-be borrower’s job and income hadn’t changed.

The implications for property markets were severe, Mr Jovcevski said. “There are fewer qualified buyers,” Reduced borrowing power would drag down selling prices and eventually cut valuations.

“It’s a double whammy for those mortgage prisoners,” Mr Jovcevski said. “Their valuations come in lower so their equity may end up being less than 20 per cents so they have to pay lenders mortgage insurance again” if they refinance.

Australian Banking Association CEO Anna Bligh said banks had to make reasonable inquiries to satisfy APRA’s strengthened mortgage lending standards but she said the term ‘home loan prisoners’ does not represent the facts of a fiercely competitive home loan market where everyday banks are seeking to attract new customers.

Mozo’ Jovcevski said homeowners seeking to give themselves the best chance of successfully refinancing should reduce their expenses in the months prior to applying and ensure all bills have been paid on time.

Mark Hewitt — general manager of broker and residential at AFG which arranges 10,000 home loans a month — said would-be borrowers whose budgets were at breaking point or beyond could still get a loan if they had equity, a clean repayments history and the ability to ditch key expenses such as fees for private school if under the pump.

Some people seeking their first home loan are signing documents in which they promise to cut their spending if a new loan is approved.

“When you get a mortgage you make sacrifices — you continue some of your discretionary spending but not all of it,” said Brett Spencer, head of Opica Group, which sells software to brokers that works out how much a prospective customer can cut back.

A figure is agreed between the broker and the would-be borrower which is then provided to the bank, which would otherwise rely on the higher, raw expense figures.

This makes in interesting point, mortgage brokers will be diving into household expenses more than ever before, but of course, household saying they will cut their expenses to get a loan is not the same a clear cash flow.

Thus even in this tighter market, the industry is still trying to find ways to bend the affordability rules. And it’s worth remembering that according to the latest figures from APRA more than 5% of new loans currently being written are outside standard assessment criteria.

This suggests that even now; bank lending standards are still too lose.  All this points to more home prices falls ahead.

The latest from the UBS team, which has been ahead of all on the credit crunch, is that prices will not only fall further they will fall for much longer that other post 1990 corrections. The principle cause is an RBA that does not want to rescue prices nor does it have the power to given the approach of the zero bound:

…we still expect a cumulative 20% drop in home loans, & prices to fall 5%+; with little prospect of the typical 20%-40% rebound of loans & 10%+ for prices. If demand did drop (say amid tax changes), the outlook would be even more negative.

…the average time to eclipse the prior peak is 21 months; or 2-9 years in real terms. But, history reflects the RBA almost always cutting soon after prices peaked, with an average 9 month lag. Given a likely lack of policy easing, prices probably keep falling next year, seeing the longest downturn in decades.

My own view remains that the RBA will be forced to cut, it always is. Sometime after the Labor victory. So that may mean the correction appears less long than UBS reckons.

But I do not expect that to last as seven exogenous shocks pour in on housing all at once.

Comments

    • “…the 39-year-old mother of three will be forced to declare bankruptcy, writing off both the Baldivis residence and an investment property in Armadale.”
      Do we reckon she might have been better without the IP?!

      • boomengineeringMEMBER

        Rupert, Seems to be something in the air there.
        My old man In the late sixties early seventies can’t remember exactly, put a deposit down for 22 acres in Baldivis mostly swamp. He must have been the worlds worst money handler (mum was good). Anyhow he went back to have another look and got attacked by a swarm of mosquitoes tried to get out of the deal and lost his deposit plus about half the price but still went ahead with the renege.

      • Watching new estates going up on swamp land bordering the Kwinana Freeway always astounded me. The greedy developers piled so much sand down in The Rivergums and surrounding areas the settling apparently had concrete slabs cracking while settling, mosquitos, flooding and insurance rejections apparently.
        Postage stamp lots at a premium price for swamp land. (They parcelled up a lot of the Sh!t land early)

        https://www.communitynews.com.au/weekend-courier/news/baldivis-mp-urging-planners-and-developers-to-do-more-research-after-baldivis-flooding/

  1. The Median family income in sunny Melbourne is 80k which means borrowing capacity is sub 200K. Meanwhile run down ex commission dumps on tiny blocks in the prestigious suburb of Frankston sell for 600K plus. Got to luv this country.

    • Not anymore they don’t! I’ve seen prices falling in the area and auctions failing. Starting to see more in the high 400s and low 500s hitting the market. Frankston South gets a Premium, but Frankston North doesn’t.

      • Millie Vanillie

        Gav- same with Rezzy eh? Seeing more in the sub 800 range and sh1ttier houses languishing longer (the ex council tarted up ones)

      • Yep Reservoir has turned quickly too! Most auctions failed on the weekend and stuff that was $800k is back around $600-$650k.

        There is the odd ethnic palace that gets $800k for around 700-800k but it’s now the exception and not the rule. Must be all those lemon trees out back? 😁

        Nice article on the weekend.
        https://www.miragenews.com/two-crop-houses-located-in-reservoir/

        As a side note I was in Geelong yesterday, bit depressing. I think prices will get smashed there come the next big correction.

        Sydney may be massively over valued but the inner west where I live is at least pleasant. I can’t say it’s the same for other places around the country where prices went nuts.

      • Millie Vanillie

        Crop houses lol

        Yeah agree about Geelong… last to boom, first to bust you’d think. That commute to Melb is a nightmare..

        Rezzy and its poorer cousin Fawkner (what a dump srsly) already going back to the 650s for 500sqm wogbrick palaces (1 piss pot)

        Still 50% too high

      • Millie Vanillie

        Mates spent 650k in Fawk. Had to spend a fortune removing asbestos sheds that housed families of pigeons (!)

        Mates sort of whine that the Fawk locals dont want to mix because of their religious beliefs…

        My one time up there there were kids on motocross bikes riding around the reserve and pissing against fences

        Just needs 5 or 6 latte bars right!

    • mild colonialMEMBER

      I still think, given I think a third of the economy is cash, that winks and nods go on in estimating incomes and expenses at the bank. But happy if that’s not true or if cash economy crashes first.

  2. I have faith that the Opica robo-lie software will effectively deal with this expenses nonsense. If not right now, certainly by the next version!

  3. reusachtigeMEMBER

    Like others have said, this guy is the Steve Keen of this major cycle. He’ll get the same rep as Keen when the next boom hits hard. Thanks North for all the warnings! Affirmative action has been taken to make sure the next boom is bigger than ever. Cheers!

    • The Horrible Scott Morrison MP

      His figures are pure false facts, employed to try and deny reality. He failed when had the chance to have a go at fair go.

    • I suppose if property declines by 20% or more (on average – and it is down > 6% so far in your hallowed Sydney) and then halts eventually starting to “recover” you will say that is a continuation of the boom; conveniently ignoring the fall in the first place. As you have opined before, “property always goes up” . So please explain the market action of the last year, or is it simply the pause that refreshes! Dumb.

    • Yes, I heard a boatload of wealthy Vietnamese immigrants made landfall in north QLD recently — in a croc-infested swamp.

      Hopefully the crocs didn’t get too many of them otherwise that might put a dent in efforts to keep the rickety property edifice propped up.

    • Alexandra ChapmanMEMBER

      I am in love with Reuse and his comments. So appealing and adorable. And all those relations he gets. I can understand why.

    • Surely he knows he can’t win ! Won’t he like to hang around as long as possible and enjoy the rewards for all of his hard work.

    • Every time there is a change of PM by knifing – whether Lib or Lab – the smart move is always to NOT rush to an election, but instead build up some narrative and incumbency. And they never do it, they always rush, and it always backfires.

      The reason is they can’t keep the internal divisions together for long enough and need to win an election for “legitimacy”. Never goes well.

  4. Wonder effect of this on auction clearance rates. Have a mate who was pre-approved, but come settlement, couldn’t get the mortgage. Probably a few auctions registering as ‘sold’ but can’t settle.

    • Yes for sure, so any offers should have the clause subject to finance in them.

      I’m seeing quite a few properties go under offer then a few weeks later I get a notification “X is back on the market” I always smile a bit. Real Estate app is good for it. 😁

      • A home near me failed to sell at auction three weeks ago and ever since, the billboard outside has had a “Selling Now!” label on it. I’m so tempted to spray-paint “Lol” under the sticker.

    • Jumping jack flash

      Sales should just about stop completely very soon if the banks’ plan works correctly.

    • Yep. Mad to bid at auction under those circumstances, cos you can’t make it subject to finance. Bring on the private treaty sales with published for sale prices.

    • Probably turned them on before he left the office on Friday.

      Been running all weekend already.

    • That he will!
      Expect changes to support Australia’s ‘economic security’.
      Economic security is the new buzzword replacing jobs n growth.
      Relies of increasing immigration and house prices.

  5. “NEARLY half of all homeowners are now shackled to their mortgage, with refinance rejections up significantly cent in less than a year as banks rattled by the royal commission drastically tighten borrowing rules.”

    Indentured servitude crystallised…

    • God forbid it was a “starter home, just to get on the ladder before we trade up to start a family”. Plenty of those pennies starting to drop. Fortunately we’re able to import people to paper over the way we’ve utterly failed our own.

  6. Mr Jovcevski said. “There are fewer qualified buyers,” Reduced borrowing power would drag down selling prices and eventually cut valuations.

    It’s almost as if borrowing capacity determines affordability if housing? I mean restrict the punters diet of debt and suddenly prices become more affordable.. funny that.

    • Millie Vanillie

      Nah mate – surely not – The Kouk told us about Supply Demand 101… you are blasphemous

      All hail the wisdom of the Pascoe Kouk Wargent triumvirate

    • Jumping jack flash

      The banks already admitted a little while ago that the driving force behind property price inflation was the availability of debt.

      Since they admitted it, they’re in damage control mode.

      The ones who are getting out now and causing the price falls are the ones that need to get out at any price.
      Rational people don’t want to lose money. The banks are counting on this. Rents are still high and will remain high.

      If prices continue to fall a significant amount – despite the cutting off of debt, the banks will probably start to get a bit worried. But for the moment “the problem is contained”.

      • The key break point to me is when completed dog boxes are worth less than what was paid for them. Settlement crisis hits construction job and then all the over leveraged tradies living in hellburbia go under.

      • “…despite the cutting off of debt…”

        Cutting off of debt is guaranteed to cause prices to fall. It is credit growth that causes them to rise, so the reverse must be true.

        This is a bona-fide ponzi scheme. In order for prices to rise 4EVA lending into the housing market must grow at a brisk pace – always. Even a slow-down in lending growth rates is capable of causing softness in prices.

  7. That borrowing power chart is fantastic. If households were restricted to borrowing those amounts process would be lower and they would have more spare cash each month for the real economy.
    4100k Household income mortgage of $32k, repayments P&I of about $1500 + ?? Probably leave around $4500 a month to live on not too bad.

  8. The concept that Mortgage application Rejection is the main force behind price falls worries me because it implies that average Aussies haven’t learned a thing from this down-turn. I mean deep down they’d still be buying RE as fast as they could and at any price if only someone would lend them the money. At some point I’d assume that average people would take control of their own personal financial situation and impose their own limits on the price that they were willing to pay for a house.
    Surely Australia needs to reach a point where each individual imposes their own limits and thereby creates a myriad of savings and investment strategies all driven by their personal circumstances with RE being but one of the paths forward …..ahh but I am talking utter rubbish after all Houses are the only true savings and we all know that to be the one true fact….

    • Of course nothing has been learned yet. Not till we hit our rock bottom. I’d say we’re currently at the stage of squirreling the cheeky bottle of vodka away in the laundry. Just to take the edge off, mind.

      • Yeah nah Yeah, unfortunately this can’t end any way other than for the prudent to be bailed-in and those that engaged in this insanity to be bailed out. Makes utter fools out of those that thought they could win by simply refusing to overpay for shelter F’ed on the way up and F’ed again on the way down …welcome to the new Advanced Australian version of Fair.

    • Absolutely
      Where else would you get our wonderful CGT discounts and NG holidays? Yes, the sacred cow will be coming home to roost very shortly. The trouble is, it’ll be coming home at Mach 2. Just don’t be underneath it when that baby hits…

    • This is where Reusa will no doubt agree with me, people love Big Government, they want to be told what they can and cannot borrow, there is no taking responsibility for their own actions. Hence why we have governments mandating we wear seat belts in cars and helmets when riding bicycles, otherwise we’re fined. There is no personal responsibility for our own actions. Therefore if a bank lends someone too much money, someone must be do something about it.

      You see this at Universities now with the demand for safe spaces, they want to police language so nobody is “hurt” by it, or they don’t have to hear ideas that challenge their beliefs. Bunch of damn snowflakes everywhere, that love big Government or some authority figure controlling their lives.

      Most Australian’s of working age buying their PPOR now have never seen a bad economic downturn. I recall joining the work force full time in 2004-ish and hearing rumbles about the dot com bust and how the company I was working for escaped it (Melbourne IT) and not really being aware it happened to be honest. I do recall in University that folks were saying there would be no IT jobs when I graduated but it didn’t really eventuate.

      However I was in Ireland for 2008 and I’ll never forget it, hence that’s kept me on the sidelines and unattractive now for at least 8 years. I should have heeded Reusa’s advice and ignored the Keen’s of this world, but that in itself is another lesson. When I bid on properties I went in eyes wide open and had a limit, most punters just bid until the other party gave up.

      Now when I go to low ball with offers on properties I have relatives telling me you can’t do that. haha..good thing nothing has come up I really really want.. so far.

      • Read about Stocism Gav, you might find that you identify with some of the ideas,you will at least blunt the regret you appear to be feeling.

      • At least low ballers can now also blame the banks. Look at the agent sorrowfully, “we really want to make this work but the banks simply won’t lend me more than $X”. Hey presto we are no longer low balling vultures but decent people getting screwed by the banks (in our own interests for once)

        Should help make those low offers more palatable to Ye olde desperate seller.

      • Seriously Low balling…what kinda unAustralian scum are you?
        It’s just not done, never done…not the done thing!
        It took me a long time to relearn that when I returned to Australia, I lost count of the number of friends that took me aside and tried politely to explain why …you just can’t do that…you can’t bid less than the ask and you definitely can’t lower your initial bid when they F you about. Yeah I’m guilty of all these sins, I too was a low-baller until I properly learned my RE religious studies, so it’s not to late for you, but you’ll need to study hard and make recompense for past sins.
        Over paying is the only proven path to redemption.

      • @Gavin
        Careful with the loose talk about our universities. And for God’s sake don’t blunder into the wrong computer room. Triggs agents could be anywhere…

      • All this talk of negative equity and mortgage stress makes me wonder if making cold (lowball) offers to a few unadvertised properties might actually yield a result.

    • The bigger issue here is that the concept of ‘personal responsibility’ has largely been eradicated — most likely by the citizens witnessing endless rounds of Govt bailouts of a variety of special-interest groups, most recently during the GFC.

      The Govt and the RBA will do everything in their power to bail out reckless borrowers this time too.

    • It’s not dissimilar to what happens in stocks. People rush in to buy the dip! As property isn’t as liquid this plays out over a year or two. For most people this looks like the dip in 2012 and look what happened in the years after. Only when the dip buyers get burnt, sometime next year when prices continue falling (or accelerate) does it change the psychology. Doesn’t matter that the underlying factors are different now to 2012, the average first home buyer is just going to see it as a chance to get into the market, if they can get their broker to find them someone to lend them the money.

  9. Jumping jack flash

    “NEARLY half of all homeowners are now shackled to their mortgage, with refinance rejections up significantly cent in less than a year as banks rattled by the royal commission drastically tighten borrowing rules.”

    Sounds like everything is going according to plan.

    No money. No sale.
    No property revaluation.

    House prices locked in. Not going up. Not going down – after the initial shock of course. Banks can then say the LVR is golden which will not put too much upward pressure on their interest rates.

    The banks sit back for 30 years and harvest their debt slaves until the debt is repaid.
    And only after that interest rates can rise, then after that, the economy can heal.

    Get ready for 30 years of low interest rates. 30 years of stagnant wages. 30 years of gouging oligopolies. Basically, the current economic landscape is snapshotted and extended for 30 years – our own lost decade x 3.

    • Intrest only roll over has taken care of that possibility. People were leant 40% more than they could afford. Once the principle holiday is over they will be forced to sell.

    • There is no way this can happen Jumpin Jack. Sideways happens only for a while – even in our highly manipulated markets and society. People die (deceased auctions). People go bankrupt (mortgagee sales). This is the only place where price discovery is happening and the prices will trend downwards quickly. If there is money owed on either property (deceased or mortgagee) then the banks can’t ask bullshit prices forever and must settle for a piss weak offer.

      The other thing is that businesses are purchased on the back of house evaluations. Aint nobody gonna be buying those elevated business prices. People gotta sell and move on… Lots of Baby Boomers won’t get a cent for things that might’ve gotten them half a house or more in better times. They’ll die at the shop counter.

      Sideways means you not only pay off the bank for 30 years but you are also tied to your job. There will be enormous stagnation in the jobs market I reckon. Everyone will want a secure government job and we’ll turn into a mob of low-paid paperwork pushers in a pseudo-communist state where effectively the government owns or prices everything.

      The best response the indentured servants can do is to collectively do the Samson response and lots of them to declare bankruptcy on one day of glorious action. Pull the whole forkn house down in one sweet move. That way, they don’t get picked off one-by-one.

      Economies have to breathe – in and out.

      • I think things have ground to a halt here in 2443 few listings even less than normal some sales but yes frozen up is how it looks to me. Very recent development too.

    • Have been quietly confident that this would be the eventual outcome.

      Borrowers unable to refinance their IO loans will either have to sell, endure 25-30 years stuck in the mortgage trap or take a chance on a dodgy lender. Selling and having to rent will have the negative psychological impact of making them a “loser,” so they will try and avoid this for as long as reasonably possible. Most people will keep up the charade, being unaware that others around them are also doing the same.

      The owner occupier may persist with holding on, but those overdosing on debt with multiple IPs will be affected in proportion – the dream of an early and easy retirement based on living off the returns of “other people’s money” may well turn out to be a nightmare. Some will look to applying for hardship grounds, but there are only a temporary panacea, only delaying the inevitable.

      And even for those investors who manage to sell and are able to reap a large capital gain after the debts and taxes are settled – if the amount isn’t enough to stop working completely, then they also enter the “loser” bracket by virtue of being forced to return to work like any other regular chump.

  10. This will be inflationary for rents, as those who now cannot afford to buy will be forced to continue renting.

    • Rents track wages. Raising the rent doesn’t work if the tenant can’t pay it. They get a cheaper place and the landlord gets an empty house.

      And wages are flat. And rents are falling, right now, in Sydney.

      Sorry pal

      • I suspect that falling Sydney rents is a transient thing due to availability increases from would be sellers that just dont want to meet the market and so decide to Rent the house until the housing market recovers. However if the market fails to recover I suspect we’ll see a lot of IP owners looking for the exits and for many their first step to-this-end will be to reoccupy the house, make some repairs and sell as owner occupied. This reoccupy the house is likely to result in a lot of renter churn and possibly some supply disruption accompanied with rent increases. That’s when the market will get really interesting…can you imagine being a renter and getting unceremoniously tossed out of the house you rent for the family every 6 to 12 months…creates a lot of motivation to buy if it is possible. Definitely interesting market conditions, now if rents fail to recover than things will get really interesting.

    • If they continue renting, then no change?
      Only increasing the number of renters can increase the rent. and the vibrancy, i’ve heard.

      • No – Syd vibrancy is up and rents are down.

        It’s wages. Because people will rent the best place they can afford, but will never rent a place they cannot afford. So if rents go up but not wages they can’t afford it. And if they can’t afford it they can always get a cheaper place, or share, or go back to Mum and dad. Usually the landlord blinks first.

        And as an aside, most landlords don’t actually want to rent cash in hand to twelve migrants crammed in four to a room because agents won’t do it, the law frowns on it and most importantly it wrecks the property.

      • Absolutely Arrow… it would destroy a decent house in short order. Ok for knock over dumps however.

    • They can only rent what they can afford.

      If there are ten parties looking to rent and they all have budgets around the $500 pw mark and there is only one property available to rent (asking price $1,000) there is nothing doing. Demand outstrips supply by 10-1 but, it does not move the price dial and the rental property remains vacant. Demand/supply is only one part of the picture.

      • Actually 2 or 3 of them join up and rent together aka share house, or slum sublet , depending on your bent.


      • Actually 2 or 3 of them join up and rent together aka share house, or slum sublet , depending on your bent.

        Sure, but there are two problems with that.
        One is that landlords with brains who value the improvements to their property try to avoid having those tenants, as expressed by Arrow above. In Melbourne before the Nitin Garg case, for example, there was a spate of fires resulting in gutted properties strongly linked to over crowded tenancies. Obviously, though, there will always be lanlords who are either brainless or don’t value the improvements to their properties, probably because they were so crap to begin with.

        The second is that you need more and more people to get the same effect, and pretty quickly adding an extra tenant isn’t doing anything, or you reach some kind of practical limit where even hot-bedding won’t get an extra person in there.