Australian property: The super-squeeze is coming as lending dries up

Australian property: The super-squeeze is coming as lending dries up, by Robert Gottliebsen.

One of the reasons the Australian sharemarket underperforms the US is that the impact of the current credit squeeze is gathering momentum.

It’s a credit squeeze without any Australian precedent.

And since the Wentworth by-election, the squeeze’s effects are being multiplied by the fear of ALP policies that were conceived before the squeeze had taken hold. At this stage, the squeeze is restricted to dwelling prices and developers but it’s about to spread to retail and beyond. …

This credit squeeze is mainly due to an exogenous event — the banking royal commission. The banking system and the central bank didn’t see its outcomes coming and didn’t plan for them.

Bank credit standards have been too low. So the banks have been told they must raise those standards, which effectively cuts at least 20 per cent from what they would loan on a property. …

Specific areas of the residential property market have been singled out for special attention. For example, it has been made very difficult for investors to gain interest-only loans. … And if you happen to be overseas Chinese, then there’s no money for you. …

ASIC has correctly been attacked for being too soft on banks. Had ASIC and APRA done their jobs in past years (granted, that’s a hindsight judgement) the property boom would not have got out of hand. Now they are about to show us that they have learned their lesson. ASIC says that there are around 50 charges, many criminal, that are likely to be laid on banks, their executives and possibly board members.

Add to that the huge payments set to be made to customers who were wrongly charged. As property falls in the light of the credit squeeze, many of those who borrowed from the bank will sue because the lending to them was “irresponsible”. It’s true that sometimes high-pressure, commission-driven bank sales people did cajole customers into taking too much debt. But the customers accepted risks for big gains. Nevertheless, litigation lawyers are preparing for a harvest. …

Now enter Bill Shorten and Chris Bowen with their negative gearing plan. When it was announced many years ago it would have curbed the boom. But its impact would have been muted by the virtually unlimited bank credit that was then flooding the market.