Mortgage lending slowdown could help take heat out of property market: Experts

A slowdown in mortgage lending would take the heat out of the property market and possibly result in a price correction, industry experts claim.

The comments follow a report suggesting the big four banks may reduce lending in the residential property sector, after an 18-month home lending binge, mostly fuelled by the Government’s increased first home owner grants.

Among the big four, Commonwealth Bank has 65% of its loan book in mortgages, with Westpac at 62% and ANZ and NAB both over 50%.

JPMorgan analyst Scott Manning said in a recent report that the speed at which residential mortgages were sold during the past year and a half cannot be sustained, with business borrowing to take its place.

”Business will want to borrow again and that means banks will have some tough decisions where they allocate their funding going forward – not only for the best return, but also where the best growth profile is,” he said in the JPMorgan Fujitsu mortgage industry report.

“Accordingly, the Australian major banks will look to achieve the best possible returns on the increasingly scarce wholesale funding that they are able to secure. Further, funding may shift away from the housing portfolio towards the potential re-emergence of attractively priced business credit growth in 2011,” he said in the JPMorgan Fujitsu mortgage industry report, released yesterday.

“Against this backdrop, banks may now be in a position to be happy with the size of their current housing portfolio and look to optimise profitability, rather than chase further market share gains.”

The comments also come as a number of banks are reducing loan-to-valuation ratios (LVRs), with Westpac cutting its target from 92% to 87%, which means borrowers are required to provide much more cash upfront.

Louis Christopher, head of SQM Research, says more banks will take the likely move of cutting their LVRs in order to curb the flow of residential borrowing.

“If they were to do that, it sets up the market for a correction, in my opinion. The same thing happened in the UK market, the banks there reduced their LVRs to 80% in an attempt to shore up balance sheets and the market was slammed.”

“But it depends on a few specific things. We need to understand how exactly the banks will cut residential lending, and exactly understand what the magnitude of decline will be. How do they intend to do that? Those are the two key questions. But LVR cuts are one of the main things banks can use to cut lending rates, and they’ve done it before.”

David Airey, president of the Real Estate Institute of Australia, says residential lending will slow if banks cut their LVRs, but suggests it won’t necessarily stop the solid price growth the market has seen over the past year.

Recent RP Data figures suggest Australian prices grew by 12.7% over the 12 months to February 2010, and by 1.4% just within that month. The findings revealed Melbourne prices grew by a staggering 5.4% in the previous quarter to a median of $480,000.

“Reducing LVR ratios will certainly stop borrowing. We’ve been suggesting that while interest rates affect home owners, they don’t really affect buyers all that much and we believe LVR ratios will do that. If they tighten up lending criteria, and update deposit requirements, that would cause a slower market.”

“Such a move wouldn’t reduce prices, but certainly slow price growth and curtail lending. Demand will be reduced, which will effectively see an increase in supply over time.”