In an effort to cool Australia's soaring property prices, Australia's banks could be forced to introduce tougher lending standards for those seeking new home loans.
Although the Reserve Bank and Australian Prudential Regulatory Authority have in the past suggested that climbing house prices were not an issue, they have recently changed their tune. With properties in Melbourne and Sydney becoming increasingly expensive, they are also concerned that borrowers taking advantage of the low interest rate environment could be taking on too much debt as a result.
As it stands, home lending is rising at an annualised rate of nearly 7% which far exceeds the growth in household incomes. At the same time, auction clearance rates are above average and borrowing by investors is growing at an annualised rate in excess of 10%, which all but confirms the Reserve Bank's fears.
While the banks are aggressively competing for new customers, fears have risen as to whether their lending standards are sturdy enough. As was highlighted by the Global Financial Crisis, it is imperative that banks only extend credit to the customers who are able to repay their debts in the event that interest rates begin to rise. Otherwise, not only would bad debt charges soar but borrowers would be forced to cut their everyday spending in other areas which could seriously fracture Australia's economic growth.
Should the banks be forced to impose these tougher "buffers", investors could expect share price falls. Each of them have already been hit hard this month with Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) each down 6%. Westpac Banking Corp (ASX: WBC) shareholders have been hit even harder with the shares down a concerning 7.5%.
