Why The Hayne Report Is Bad News For Residential Developers And Commercial Lending
It has been impossible to avoid reports on the Banking Royal Commission’s findings, yet most analysis has focused only on the impact of proposed changes on the mortgage broking sector.
Few commentators have discussed the inevitable flow-on effects on the residential property development sector and its many related industries.
The proposed changes to the residential mortgage commission structure will ultimately lead to the destruction of the mortgage broking industry with some 20,000 small businesses to be adversely impacted by these changes.
At first glance, this seems to have little impact on property development, yet the ramifications are significant.
Over the last two years, more and more investors, first home-buyers and owner-occupiers have turned to non-bank lenders, small banks and regional bank lenders as the big four banks have increasingly tightened credit with stricter lending criteria.
Smaller lenders have minimal direct distribution capacity and many rely solely on third-party mortgage brokers to sell their products.
The proposed changes in the Hayne Report will simply drive consumers back to the big four banks, effectively wiping competition out of the home loan sector.
Mortgage brokers currently originate more than half of all home loans in Australia, and this has been growing for decades. There is a simple reason for their popularity: mortgage brokers offer genuine alternatives, real service and prioritise the customer’s needs.
If mortgage brokers are removed from the home loan market, it’s bad news for borrowers.
But it will also have flow-on effects for residential developers and is likely to lead to further tightening in the commercial property finance space.
Every bank’s credit department will be reviewing this right now. My guess is that they will come to the same conclusion as we have: the risk of residential presales default will increase if Hayne’s recommendations are implemented by the Government.
Inevitably, this means the banks will further tighten credit conditions.
For residential developers - instead of requiring 100% pre-sales, they will require 120% or even more to mitigate the increased risk of pre-sales not settling. Alternatively, gearing will be reduced to reflect this likely scenario.
After all, when a purchaser enters into a pre-sale contract, neither the developer or the financier validates their capacity to settle. However, if these same buyers are then unable to borrow thanks to the removal of choice and competition in the home loan market – a consequence of the destruction of the mortgage broker sector – then their capacity to settle is lost. And the residential property development market will be deeply impacted.
It has been a rocky road while the Royal Commission was undertaken and it is set to only become rockier as we wait to see what changes are implemented because of its findings.
All eyes are now on the mortgage broking sector. Any drastic changes that come into play will have significant ramifications across a range of related industries including residential property development and commercial property finance.