Will the current credit squeeze turn into a credit crunch?
As the housing market continues to fall sharply around most parts of Australia, the risk of the current credit squeeze turning into a credit crunch is real and is rising, according to Jonathan Mott, banking analyst at UBS.
Times are certainly tough. Home loans have slumped 14% over the year until the end of September 2018 compared to the previous year, making it the worst fall in eight years as tighter credit bites, says UBS economist George Tharenou.
At the same time investment loans slid 18% over the year while owner-occupier loans fell by 11%. Total construction loans also dropped sharply by 15%, the worst fall since 2011.
Tharenou says that UBS's predicted tighter credit thesis is playing out even before the next three game changers come into effect - these include the elevated debt-to-income limits and potential negative gearing and capital gains tax that would be introduced by a Labor government.
"Loans already slumped by 17% since the peak in August 2017, to the lowest level in five years. Our long-held forecast of a peak-to-trough drop of 20% increasingly looks like heading to 30%; seeing housing credit growth slow towards flat by 2020, and house prices to drop by a record 10%," says Tharenou.
As a result the banking sector is facing a period of substantial and sustained earnings pressure which is likely to last several years, explains Mott. Underlying revenue trends continue to weaken but, despite this, bank dividends remain at all-time highs.
Mott says the bank reporting season ended with a fizz. The banking sector's earnings per share growth went back to 2012 levels of 7%. Mott says he remains very cautious on the banks.
Other bad news for banks includes a big drop in home loan intentions, according to new research from Roy Morgan. It shows that in the three months to October 2018, 1.21 million Australians said that they intended to take out a home loan in the next 12 months.
This is a decline of 260,000 people or 17.7% less than the 1.47 million recorded over the same period last year. This represents a major challenge to banks in achieving new lending volumes over the coming 12 months.
The reason that home loan intention levels have fallen over the past year is due to the decline in first home intenders, explains Roy Morgan. In the October 2018 quarter only 411,000 first home borrowers intend to take out a loan in the next 12 months, down by 44.5% on the 740,000 recorded a year earlier.
The largest group of intenders are existing borrowers who plan to switch their home loan to a different provider. This segment accounts for 549,000 people or 45.4% of all intenders and has held steady, having recorded 544,000 at the same time last year.
The biggest gain over the past 12 months was in the group that has had a loan in the past but wish to move and take out a loan, says Roy Morgan. They number 249,000 currently, an increase of 64,000 or 34.6% over the year.