Property investors could be stung if the royal commission catalyses further scrutiny on investors’ borrowing capacity and lenders’ lending capacity, a property research group has forecast.
RiskWise Property Research CEO Doron Peleg has argued that tighter restrictions on mortgage lending could increase risk to property prices.
He said the impact of any recommendation by the royal commission to tighten lending could lead to some areas and property configurations carrying higher levels of risk.
“The banking royal commission has found the current processes for ensuring prospective home loan customers provide true information regarding their incomes, expenses and debts, are flawed,” Mr Peleg said.
“This includes the details that are gathered by mortgage brokers, who generate about 50 per cent of the loans, regarding the living expenses customers provide in their home loan applications.”
He said the short term ramifications of this examination will be fewer loans written, as occurred in the UK following its own 2014 Mortgage Market Review which assessed the country’s lax lending standards.
“It is also likely that the duration to approve loans will be significantly increased, and significant reduction is projected in borrowing capacity (as per UBS, house borrowing capacity could be cut by 21-41 per cent, depending on the borrowers’ income),” Mr Peleg continued.
He explained that areas with low economic and population growth, and low demand for dwellings may also suffer an increased exposure to price corrections.
As for specific property types, high-rise units – particularly those purchased off-the-plan – also had a higher rate of settlement risk and lacklustre capital growth than usual.
Areas with an oversupply and low demand could also see softening markets dip further, he continued.
“Properties that largely appeal to investors, (i.e. not suited to families), such as small units, carry a higher level of risk. The likelihood that some investors do not have sufficient cash to cover ongoing shortfalls between the mortgage repayments and the rental return is higher.”
He continued: “Investors often use creative financial planning, and they often place strong reliance on cashflow and negative gearing. Therefore, further scrutiny on property investors is likely to significantly reduce their borrowing capacity, and this will mean demand for such properties will be reduced.”
Further, more expensive areas and properties carry with them higher levels of risk as borrowers are bound to current borrowing capacities to buy these properties.
“So significant reduction to the borrowing capacity will have a direct impact on these properties.
“On the other hand, houses in capital cities that enjoy strong economic and population growth, e.g. Hobart and the western suburbs of Melbourne, which are affordable areas that appeal to both owner-occupiers and investors, carry a lower level of risk.”
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