A key outcome of the current banking royal commission shapes as reduced borrowing capacity for homebuyers.
Investment bank UBS has released research into the effect of expected tightened lending standards coming out of the commission and say homebuyers’ borrowing limits could be cut by between 20 – 40 per cent due to higher expense benchmarks, and it could lead to falling house prices.
George Tharenou from UBS told the ABC that the Australian Prudential Regulation Authority had already cracked down on lenders but the royal commission had found irresponsible lending was worse than first thought.
“In particular, APRA raised an alarm regarding the over-reliance on the Home Expenditure Measure benchmark,” he said.
“This benchmark assumes only a very modest or frugal level of household expenditure – it assumes that a family of four in Sydney has living expense slightly less than the income provided to a retired couple on the old age pension.”
“When we re-ran the major banks’ home loan calculators using the higher living expenses, we found the borrowing limit fell sharply, by 30 to 40 per cent in many cases,” Mr Tharenou told ABC.
The sharp reduction in borrowing capacity and credit would most likely have a negative impact on the broader economy and would see downward pressure put on house prices.
“There is a strong correlation between home-lending volumes and house prices,” Mr Tharenou said.
“If this correlation holds and housing finance falls, this could lead to a substantial reduction in Australian house prices.”