Aussie property’s next big risk: mortgage tightening

Australian mortgage lenders are reportedly undertaking stricter employment checks of pre-approved loans, suggesting they are rationing credit in response to the COVID-19 economic shutdown:

Homeloanexperts.com.au managing director Otto Dargan said… “A mortgage approval is no longer as certain as it was before the pandemic. Borrowers shouldn’t assume that the lender will honour their pre-approval when they find a property”…

“We’ve been warning customers not to buy a home if their income is unstable so we haven’t had any customers left high and dry. From what we can see it appears that lenders are doing this check for all loans.”

Mr Dargan said most lenders have started doing employment checks as late as a day or two prior to the loan being released…

“The problem is that if you have committed to buy a property and then you fail the employment check, then you may lose your deposit and be unable to complete the purchase. Even if your loan is approved, the approval may be withdrawn.

This has negative feedback loop written all over it.

With unemployment across Australia surging (see next chart), and the Grattan Institute forecasting that up to 3.4 million Australians could lose their jobs, banks are likely to tighten mortgage credit even further.

This would shatter buyer confidence, since nobody could be assured that they can settle, as well as result in failed settlements. Both of which would send Australian property prices and transaction volumes plummeting.

Easy credit was the foundation of Australia’s property bubble. Therefore, credit tightening would necessarily send the property market into a tailspin.

Unconventional Economist

Comments

  1. Jobs aren’t lost, their on hold. In any case if you have trouble just call up the bank to defer payments…..or dip into the super. Perhaps they can do a HECS sort of a system where if you earn under a certain amount you dont have to pay

      • No parody mate. if some said just a few months ago that banks will let you go into IO if you have lost your job or that you could dip into your super without any penalty, you would have thought they were crazy. Yet here we are.

        • Shades of MessinaMEMBER

          I think multiple punters on here pointed at those exact responses likely to occur in the event of a slowdown, it’s just that the bulk of readers didn’t want it to happen.

          Loosening lending standards ala NZ probably the next play.

    • DPM I think you’re missing the point a bit. The point is about new loans, not maintaining existing loans.

      Right now, nobody on JobKeeper or employed in one of the at-risk sectors or industries can count on getting a new loan to buy a house.

      According to my broker, at risk sectors include retail, hospitality, tourism, not sure what else.

      • Yeah i know. I am playing devils advocate.
        My broker is saying the same thing and most of their time is spent negotiating some sort of leniency for clients that cant keep up with payments

    • That could work. Renters should also be able to pause paying rent, until their income exceeds a threshold. Wouldn’t it be wonderful if we all provide for others’ well-being. It would be refreshing to not talk about money all the time.

  2. SnappedUpSavvyMEMBER

    Now job keeper is just starting, payments coming soon, the amount of people stood down will increase and mortgage payments… lol 😂 can banks afford so many mortgage holidays….pina colada anyone

      • It will happen. The LNP will do anything to keep property prices high.

        The RBA might even start buying real-estate with QE money, like the BoJ buys shares.

          • A good way to replenish the depleted stock of, what we call, State Housing? Housing for the less fortunate in society that will never own a home.

          • Just checked. You used to call it the State Housing Commission.
            “The Housing Commission of Victoria was a Victorian State Government body responsible for public housing in Victoria, Australia. It was established in 1938, and was abolished in 1984.
            The main activity of the Commission was… providing low rent housing for low-income families. The most visible legacy of the Commission is the 47 or so high-rise apartment towers in inner Melbourne.”

  3. No wukkas. Remember from last year, as long as Coreliar says Green, things are up. It can’t possibly be that something is seriously wrong with their index. Any crash talk is always 18 months, not 18 days.

  4. How many barrels of oil would you need to secure an Australian property? Asking for a friend.

  5. DrBob127MEMBER

    “This has negative feedback loop written all over it.” *facepalm*
    A negative feedback loop is one that reduces the effect by feeding back to the input and subtracting from it, whereas a positive feedback loop amplifies the effect by feeding back into the input and adding to it.

    This has positive feedback loop with negative consequences for economy written all over it

  6. Two weeks ago we missed out on a good house because the seller wanted a cash buyer. According to the agent the seller was worried that anyone relying on finance might have the loan fall over and leave the seller stranded in a rapidly falling market.

    So the house sold to a cash buyer that paid probably $30K less than I (with finance) would have paid.

    The price was I reckon 10% off its top-of-the-market (ie Feb 2020) value.

    I should have asked the agent what field the seller worked in, it seemed unusual that a random seller would have been so concerned about buyers getting finance pulled…

      • Could have been a lie by the buyer that they had cash I suppose. Perhaps they had like half in cash and so knew finance was a cert.

        But could certainly have been someone who sold an existing property fully paid off. Especially if a Sydneysider moving to Canberra!

    • More likely the other offer was an ‘unconditional’ one… hence it was lucrative.
      If unconditional offer reneges then seller keeps the deposit. For eg: 10%deposit is a chunky bit of money anyways there is enough time to chase up the remaining amount.