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House prices to fall if lending laws changed, experts warn

Sydney Morning Herald logo Sydney Morning Herald 5 days ago Sarah Danckert
a house with trees in the background: House prices have already fallen. If the banks have to fully assess customers' applications before issuing a loan then they could fall even further. © Rob Homer House prices have already fallen. If the banks have to fully assess customers' applications before issuing a loan then they could fall even further.

Mooted changes to laws governing the way banks assess home loans would have a significant impact on the banking industry and possibly the economy, according to experts.

The fresh warning comes after the Age and the Sydney Morning Herald revealed the corporate regulator will ask the government to change mortgage rules that could make it harder and more expensive for borrowers to get a new home loan if it loses a landmark case against Westpac over its use of a benchmark to assess and approve home loans.

The big banks use benchmarks like the Household Expenditure Measure to estimate whether a borrower’s declared expenses are realistic.

To do this, banks assume that all customers are in the bottom 25 per cent quartile for discretionary spending expenses – which are items that we would like to have but are not essential, like clothing or coffee – regardless of how much they actually spend.

The banks claim to have reduced their reliance on the benchmark since the royal commission but none have provided any data regarding the reduction of their reliance on the HEM.

Sally Auld, a managing director and chief economist at investment bank JPMorgan, said a change to the laws would have a potential flow-on effect for house prices, which are already in the doldrums.

“It would be quite a considerable change for how loans are processed for a significant segment of the market,” she said.

“It would mean that every single person who went into the bank and wanted a mortgage would have to go through a verification process. It would take a lot of time and put a lot of impositions on the bank’s resources.

“I would think that if all else is equal that would slow down the supply of credit into the economy.”

UBS chief economist George Tharenou is also concerned about steps the banks have already taken to reduce their reliance on the benchmark.

"We retain the view that the lagged impact of the implementation of verification of living expenses (and income) – with the HEM still used widely for more than half of home loans – will still likely see the total value of home lending and house prices fall further in 2019."

None of the banks contacted about the HEM would comment on the record.

The royal commission heard that between 50 per cent and 60 per cent of loans were approved using benchmarks. At one point, ANZ had 74 per cent of its mortgage approvals based on the benchmark.

Last week, CBA boss Matt Comyn said the bank had already introduced new rules making customers detail expenses.

“So what you have seen from us and across all of the financial institutions, is a much greater focus on very granular expense verification. Now that has seen us reduce the number of applications that are relying on HEM,” he said.


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