May brought with it some concerning news for real estate, both in terms of reduced lending and potential legislative changes. With housing prices slumping and an upcoming election, the future of real estate remains a little uncertain. Nevertheless, there’s light at the end of the tunnel — it isn’t all bad. Ripples from the Royal Commission are still being felt, and the market may still yet find its equilibrium.
Here’s the May Market Wrap with Theo Chambers.
“Overly conservative“ lending policy has led to a $1.9 billion decline in ANZ’s home loan portfolio, both in terms of investor capital and owner-occupant borrowing. ANZ has seen its bank home loan portfolio shrinking for three consecutive months, according to data compiled by the Australian Prudential Regulation Authority (APRA). However, this is a direct result of changes that were initiated by the bank itself.
Now turning away 1 in 5 loan applicants, ANZ’s CEO Shayne Elliott has urged the company to roll back some of its new lending restrictions as buyers are being priced out of the market presently.
“It’s not a case of us saying we’re suddenly changing strategy,“ said Elliott. “But we accept that we went too hard and became too conservative in assessing investors.“
ANZ is primarily interested in courting the owner-occupant space as this is where the company believes that it can deliver most of its value. However, it’ll need to make up for its quarterly shortfall to remain stable moving ahead. According to the APRA statistics, ANZ saw a decline of $700 million in January, $400 million in February, and $800 million in March. However, it seems as though ANZ is optimistic that it can recover by loosening its restrictions.
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A letter written by Scott Morrison and signed by Treasurer Josh Frydenberg states, “Labor will end trail commissions and hit the mortgage broker industry… Mortgage brokers are critically important for competition and delivering better consumer outcomes in the mortgage market.“
With elections upcoming, concerns have grown that the Labor party could potentially do damage to the mortgage broker industry and, consequently, real estate as a whole. This is a reaction to the recommendations by Kenneth Hayne that commissions be removed entirely and replaced instead with upfront fees that are paid by borrowers.
Prohibiting trailing commissions would reduce the amount that mortgage brokers make, and it’s feared that this would also reduce the value that mortgage brokers are able to provide for their customers.
If brokers are not paid a trail commission after the loan is established, there is no incentive for the broker to service the client ongoingly and make sure the client is consistently on a competitive rate. Banks will never call existing clients and offer to lower their home loan rates as brokers currently do for their trail commission. Labor has claimed they would increase upfront commissions instead of trail commissions however this is not ideal for smaller second tier lenders as the cost of distributing funds would significantly increase. Thus meaning, there will be less competitive options in the market place for borrowers.
Mortgage brokers presently do a significant amount of work for both homeowners and home buyers post settlement to keep the lender competitive. Mortgage brokerages may need to scale back due to this reduction in profit, which at the end of the day will hurt the customer and in turn the real estate market could suffer from this lack of specialised talent.
Not everything in real estate is trending downwards. According to the Australian Bureau of Statistics, first-time home buyers rose to 27.1% from 26.8% in February. Owner-occupant home loans are increasing in comparison to investor loans, reaching a six-year high. This makes sense: most of the initiatives by banks have cut back primarily on investor funding and high-value loan funding, rather than first-home buyer loans.
Scott Morrison the liberal party leader has just proposed a new first-home scheme which would allow eligible buyers to purchase a first home with a deposit of just 5 per cent or more of the purchase price under a government-backed guarantee.
In 2018, house prices fell 4.8% nationally, with the majority of the reduction occurring in Melbourne and Sydney. Like ANZ, other Australian banks have tightened their assessment criteria and in turn are lending less money. Over the past two years , many banks became overly cautious about their policies and pulled back on their high-value and interest-only loans.
Following this reduction in lending, a reduction in property value has naturally followed. With investors priced out of the market, there’s less purchasing overall; with lessened demand, prices naturally go down. Further, this reduction in lending hasn’t necessarily helped many owner-occupants as owner-occupant loans have also gone down for lenders such as ANZ.
Analysts fear that the Australian Labor Party could exacerbate these issues by reducing and controlling capital gains tax discounts and negative gearing, further pushing investors out of the market, increasing rental prices, and reducing the value of housing.
Australia’s real estate market is presently in a state of flux. The largest banks in Australia are seeing their home loan portfolios shrink, following tightened lending policies. Investors have been the hardest hit by these lending restrictions; first-home buyers are growing. Yet with property values decreasing, both owner-occupants and investors have the right to be concerned.
Upcoming elections and political party shifts may have a significant impact on Australia’s real estate market, with a number of proposals that are geared towards increasing home ownership and reducing investor funding. The Labor party presently advocates not only for a reduction in capital gains benefits but also in a reduction of mortgage broker commissions — something that could have widespread consequences for real estate.
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