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Credit controls pose house price risk

The Hayne royal commission into Banking might result in tighter lending standards for Australian banks and this could trigger the coming crash of Australian house prices.

  • The spectre of tighter lending standards has been flagged by the Hayne royal commission which spent two weeks exploring examples of loose lending standards at the banks.

  • UBS analyst Jonathan Mott was even more bearish. On Thursday he said believed the banking royal commission was likely to recommend a much higher level of due diligence from the banks which would translate into fewer loans being written and potentially a credit crunch. "This could lead to Australia's Minsky moment. Our economic base case is a modest fall in home lending seeing house prices flatten to down 3 per cent year-on-year in 2018 and 2019. A credit tightening scenario would see larger and sustained price falls," Mr Mott said in a note to clients. He noted that Westpac - which ASIC has launched civil proceedings against over a series of breaches of responsible lending laws - had doubled the number of expense categories for borrower assessments as an example of tightening that was already taking place. Under a scenario where banks adopted a tighter definition of what constituted "reasonable inquiries" about a borrower's income and expenses Mr Mott assumes home loans are roughly flat in 2018 before falling 20 per cent in 2019. Under a more extreme credit crunch scenario, Mr Mott says home loans would fall 8 per cent in 2018, 25 per cent in 2019 and a further 10 per cent in 2020 in a development he says would not be inconsistent with the GFC.

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