Just four years ago, just about anyone could get a loan to buy a house, unit or undertake a property development. Well, the times have changed and rules from bank lenders have also changed.
Think for a second of home loan guidelines being similar to the old pendulum clocks. Just a couple of years ago the pendulum was to the left, and it was probably too easy to get a home loan. But now the pendulum has swung all the way to the right, and it is very difficult to get a home loan. It seems the lending industry swings its requirements from one extreme to the other without stopping at a sensible middle ground.
If you bought property pre-GFC you will know credit was easy. If you had a job and could meet your monthly repayments you could get a home loan. This type of lending and easy credit contributed to rising property prices and a rising stock market which finally ended in a stock market crash and credit crash which sent house prices in the US and Europe crashing.
Australia had a relatively gentle GFC compared with the US and Europe and the banking system has remained largely unscathed. It seems that our Australian banks were indeed tougher on lending practices then our friends overseas. Credit was easy but at least you had to have a job.
The banking game is all about risk: the taking of risk; the laying-off of risk; the measurement of risk; and, perhaps most importantly, the appropriate pricing of risk. Pre-GFC the banks couldn’t move cash out the door fast enough into Australian residential property. Today it seems many Australian banks are cautious to lend money to first home buyers, investors and especially developers in order to limit furthur exposure to Australian property.
Are the banks pricing the Australian property market as risky?
At the height of the financial crisis in 2008, all the major banks cut their maximum loan ratios to about 90 per cent from 105 per cent. As credit was drying up in Australia, house prices were beginning to register falls across the board.
Even in today’s market banks are still being much more careful who they lend to offering a 95 per cent to 98 per cent LVR for first home buyers and property investors with other criteria such as evidence of a saving plan and ability to service that debt coming under closer scrutiny.
Perhaps the hardest hit group for obtaining finance is property developers. Many developers are reporting that obtaining finance remains very difficult due to strict lending criteria. As a result building approvals are down Australia wide, meaning there are less home being built to accomodate our rising population.
With an estimated 60 per cent of Australian banks’ loan books secured by residential property it would seem the banks are looking after their own interests by reducing their exposure to the Australian property market.
The banks must really think our property markets are risky!
Wait a minute. If the banks hold a 60% interest in residential property than why are they forcing the property market down with tighter lending policies?
If the property market crashes, our banks will be in real trouble. Our banks can see the number of existing houses on the market and the time taken for them to sell. Why would they finance further overloading of the market with more development? It’s just not in their interest.
While our banks are again making it easier for first home buyers and investors to borrow money, they are still reluctant to lend to property developers in an effort to underpin the property market. During this current correction we could have seen real estate prices in some areas fall a further 5 per cent to 10 per cent if more dwellings were funded by the banks over the last few years.
At first glance it looks like our banks are indeed pricing the Australian property market as risky. But on further inspection all they are trying to do is protect a softening property market for their own interests. A small correction now is much more palatable than a 20 to 30 percent price drop which could potentially wipe billions of dollars from their bottom line.
With such powerful groups such as the banking industry and government both supporting a rising property market, those waiting for a significant property price cash could have a long wait indeed.
It is always easier to play by the systems rules than it is to change the system.
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Justin Wood is the director of Property Toolbox Australia, a successful investor and a leading expert in wealth creation through property, businesses and commodities. Justin has educated himself to build an extensive investment portfolio through a safe strategy of buy, hold and renovate.