Tough Love: How Banks Declining Loans May Actually Help Us

The closer we get to the top of the market, the more we hear scare stories of a possible property crash.

Thankfully, our banks’ conservative lending criteria make a crash unlikely.

We all know that the Global Financial Crisis was generated by banks lending to people who had no hope of ever paying-off the loan.

Even though Australian banks were not burned too much by the GFC they ended up sharpening their lending policies to avoid risky business practices which drove-up property prices beyond sustainable levels. For example, it is much harder now to get a lo-doc loan compared to before the GFC.

There are many properties against which the banks just will not lend or at least with much stricter criteria, for example:
• Few lenders will lend on small CBD units
• NAB will not lend against properties with company title
• No lenders will advance more than 70 per cent of a commercial property’s value (and then only a few will do it)
• If you are halfway into a construction project, you have got Buckley’s chance of switching lender

One reason why Australian banks have been more conservative than their US or European counterparts is due to our regulatory environment. The Australian Prudential Regulation Authority (APRA) closely monitors lenders to preserve their resilience.

In 2015 APRA concluded that the banks’ lending standards had come a little too lax, accordingly it set certain standards to ensure a more prudent approach. As a result, for some, it is now much harder to get a loan compared to 18 months ago.

These changes have done much to limit growth in a property market that some feared risked running away with itself.

This does not mean that, as Sydney and Melbourne approach the top of the market, no-one will make a loss; some investors in Perth and Darwin have experienced significant losses since the end of the mining boom. But, in general, rather than making a loss what is most likely is that property price growth will be subdued over the next few years.

Maybe the banks have been practicing tough-love with us?