Home loans could be harder to obtain

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Obtaining a home loan is about to get more difficult due to the Hayne-led Royal Commission, according to Jason Murphy, a Melbourne-based economist.

The ongoing Royal Commission is investigating allegations of misconduct in the banking industry, including claims of anti-money laundering laws being breached, benchmark interest rate meddling, and fraudulent broker activity.

Shayne Elliott, CEO of Australia and New Zealand Banking Group (ANZ), said the Royal Commission will make the home loan approval process more difficult.

“People are still going to buy a home, so it doesn’t change fundamental demand, but it will change the process and will probably make it harder for people to be successful in their applications,” Elliot told The Australian Financial Review.

“One of the biggest surprises from the Royal Commission has been discovering how lax banks have been when they hand out home loans,” Murphy said in a recently published op-ed piece.

Most approved home loans don’t depend on any sort of actual assessment of the borrowers’ monthly expenditure. Instead, some banks use a measure called the Household Expenditure Measure (HEM), which is based on more than 600 items in the ABS Household Expenditure Survey (HES).  

The HEM is calculated as the median spend on absolute basics (such as food, transport, and utilities), as well as the 25th percentile spend on discretionary basics, which include dining out and childcare.   

“For a family of four, they simply write in the HEM expense measure of $32,400 a year. If you’re thinking that’d be a generous budget, I can only assume you fell into a coma sometime around 1996 and have just woken up. I live in a family of two and we will probably spend that much by midwinter this year,” Murphy said.

If banks are forced to use a more realistic assumption of borrowers’ expenses, it is likely the size of loans will decline as well. According to UBS, someone who could borrow over $800,000 under the HEM estimate could be restricted to $538,000 under the new, more realistic assumption of expenses.

“More realistic assessments of expenses will lead to smaller home loans,” Murphy said. “Smaller home loans will make people less able to pay big bucks for houses. Fewer big spenders in turn, should lead to lower house prices, or at least slower house price growth.”
 
 
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