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Wind-back of responsible lending obligations to cement 2021 housing rebound
30 Sep 2020

Credit taps set to loosen

Doron Peleg, CEO of Riskwise Property said that the proposed wind-back of responsible lending obligations cemented the already expected housing rebound mooted for 2021. 

Mr Peleg said "a significant day for banks and other lenders played out on Friday last week as it was announced that the responsible lending obligations that have been in place since 2009 will likely be wound back".

"All of the major banks saw an immediate and significant jump in their stock prices, which reflected the expected easier flow of credit going forward."

"This will ultimately act to speed up the pace of loan approvals and bank lending, albeit probably not for 6 to 12 months, with less of the forensic poring over household expenditure for mortgage applications now expected, which has at times made the lending process more akin to an audit than a credit approval" Mr Peleg said. 

"We expect that most likely there will be an easing of some of the existing HEM restrictions as and when the legislation is passed, and less scrutiny of household expenditure line items."

"The responsibility will more so fall back on to borrowers to declare complete and accurate information, instead of looking to lenders or brokers for the allocation blame whenever or wherever a loan goes bad. 

Potential for higher borrowing capacity

"The proposed changes may also increase the availability and capacity for some individuals to borrow, though it remains to be seen how much" Mr Peleg said. 

Offsetting this to some extent will be the introduction of the best interests duty for brokers, effective 1 January 2021.

The Reserve Bank had previously noted that lending had become excessively risk averse, and this move will slash approval times assuming it is legislated on a timely basis.  

Mr Peleg said that there was little prospect of higher interest rates for the foreseeable future.

"If anything yields imply that a continuing easing bias remains a distinct possibility, and this is likely to further embolden investors as the economy gets back up to speed" Mr Peleg said. 


 

Symbolic shift

"Moreover, the announced planned changes are symbolic, suggesting that the credit pendulum is now likely set to swing back in the other direction, after half a decade of tightening which reduced the total borrowing capacity of some borrowers by half".

Mr Peleg said that "the announcement will also foster more competition between banks, with one large lender immediately offering lower variable rates, including on investment loans". 

"There are still significant headwinds for the economy to be navigated, of course, but the combination of record low mortgage rates and the signalling of a simplified approval process should bring the housing market back to life in 2021". 

"We had already forecast a rebound the intention of this announcement only serves to reinforce our previous forecast" he said. 

"It has been proven previously that changes to credit restrictions, either tightening or loosening, can have a significant impact on the supply of credit to businesses and homebuyers, and in turn to property buyer sentiment and prices".

"We saw this previously when APRA constrained the market with credit restrictions in 2017, but then the subsequent amendments to the floor assessment rate lifted the housing market in 2019" Mr Peleg said.