Mortgage lending has crashed and it's going to take property prices with it

Australia's property market looks set to fall as lending drops

a woman

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Home loan approvals have dropped by 6.1% in May, in what could the start of a new trend, which could see property prices, particularly in Sydney, drop.

That figure was double what economists were expecting and reflects borrowers fears of a property bubble, and recent moves by some of the big four banks, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC) to slow investor lending.

As we mentioned yesterday, Westpac has gone the furthest so far, limiting investor loans to LVR ratios of 80%. In other words, investors need to come up with at least a 20% deposit to qualify for a bank loan.

According to the Australian Bureau of Statistics (ABS), the value of total housing finance also dropped, losing 4.4% to $31 billion, with investor loans down 3.2% and owner-occupied sliding 5.3%.

The news is likely to make a mockery of Reserve Bank of Australia (RBA) senior research manager Peter Tulips' assertion that Australian house prices were 30% undervalued.

Just a few days ago, mortgage broker Australian Finance Group Ltd (ASX: AFG) reported that investment loans had dropped to 36.9% nationally in June, compared to a peak of 43% in April 2015. In NSW, investor loans dropped from 49.8% in May to 41.6% in June. The trend was similar in other states, suggesting some of the heat is coming out of the housing market.

As Brett McKeon, AFG's managing director noted, "These figures suggest that APRA controls are taking effect, but not at the expense of the overall mortgage market. If this trend continues, it should help allay concerns about overheating in Sydney, in particular, as investment levels there come back into line with the sustainable, long-term, national average."

The news could also have a negative effect on the big four banks performance in the short-term. Credit growth (rising levels of borrowing) is their life blood, and this could impact on their earnings. Should that occur, we could see the big four banks cut their dividend payout ratios – albeit slightly.

Foolish takeaway

Despite the large fall in lending, don't expect property prices to crash. As I wrote yesterday, Sydney median house prices fell by 13.9% in 2008/09 and by 10% in 2011. I'm not sure anyone even noticed, but similar falls could be on the way.

Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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