Analysis from UBS suggests mortgage borrowing limits could fall by 35% if changes are made to estimating the cost of living.
The report comes after findings from the Royal Commission, where it emerged some banks were not completing adequate checks on borrowers’ living expenses.
ANZ admitted to using the Household Expenditure Measure (HEM) benchmark to determine living expenses. The current benchmark for living expenses for a family of 4 is $32k, less than the benchmark for an old age pensioner.
UBS calls out brokers after APRA analysed up to 400 approved loans in 2017. They found that this benchmark was used for 100% of low income borrowers and for 75-80% of middle to high income borrowers, saying this was “especially the case via the broker network”.
Counsel Assisting Ms Rowena Orr said there was “a lack of questions and verifications about expenditure”.
UBS believes the Royal Commission will take a strict view on these inquiries and as such there may be a much higher estimate of customers’ living expenses. This would in turn cut the amount a customer can borrow to buy a property.
The company believes this would lead to a ‘credit tightening scenario’ with larger price falls and the RBA not raising the cash rate for both 2018 and 2019.
In the analysis they said: “The banks are currently undertaking significant work to improve underwriting standards and comply with APRA's 'sound lending' guidelines. However, we believe there is much further to go to potentially comply with a strict definition of 'reasonable inquiries' which may be recommended by the Royal Commission.
“We estimate what this could mean for borrowing capacity. We assume borrowers' living expenses for a family of four with gross income of $100,000 moves closer to the HEM 'lavish' lifestyle benchmark ($58,320). That said, we do not believe that raising two children in Sydney or Melbourne on approximately $58k would provide a truly 'lavish' lifestyle, especially when lumpy, unexpected items and potentially school fees are taken into consideration.
“We believe once banks undertake proper due diligence on many living expenses this is more likely to be closer to reality than the current 'basic' HEM assumption.”
