High property prices to put the brakes on credit growth
Article from: SMH

High house prices will challenge credit growth more than cause a mortgage crisis over the medium term, a Credit Suisse report suggests.

Falling demand for overvalued homes will have an impact on the ability of the big four to grow their mortgage books, Credit Suisse said. But an imminent mortgage arrears crisis appears unlikely, it said.

 That was because growth in lending was shrinking at an orderly rate, national turnover of housing stock had fallen to 4 per cent and construction had dropped, causing a tightening of housing supply.

''Factors such as house price declines are often necessary, but in themselves usually not sufficient to bring about a mortgage arrears crisis,'' it said.

The report said the global financial crisis had been a ''silver lining'' for the banking industry because it forced a tightening of slack ''low-doc'' underwriting standards prevalent between 2004 and 2007.

A more real risk over the next three to five years was that banks, under pressure to grow credit in a stagnant property market, would again begin to relax lending standards, the report Banks and House Prices said.

''The risk build-up inherent in a mortgage arrears crisis takes many years to accumulate,'' it said.

Banks were already increasing loan-to-value ratios - the amount they're willing to lend against the purchase price of a house - under competitive pressures, the independent banking expert Martin North said.

''There is a small but significant risk of default … but it's not massive,'' Mr North said. ''People who previously relied on house price growth to get them out of jail won't be able to rely on that.''

Mr North said the average mortgage was twice what it was in 2005.
''Recent (interest rate) cuts have helped, but nevertheless there's about 25 to 30 per cent of the market who are pretty stretched,'' he said.


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