Commonwealth Bank is About to Make Housing Much Less Affordable

If you’re a first home buyer, the market just got that much tougher. That’s because the Commonwealth Bank [ASX:CBA] is raising its lending standards.

Over the next few weeks, the bank will start restricting loans to new housing developments. To achieve this, CBA is delaying loan approvals for buyers of housings lots. Under the new regulations, buyers will need to wait until all preparatory land work is finished. That applies to everything from roads to sewerage pipes.

This is a major problem for developers in particular.

Smaller developers trying to pre-sell houses won’t have it easy. Many require pre-sales of up to 50% on lots to secure financing. Without bank loans, developers can’t lay the necessary groundworks to sell houses.

You can see why that’s a problem. Developers can’t prepare the lots, and buyers can’t purchase anything until the lots are ready. It’s a policy that’ll severely limit new housing developments.

In fact, there’s no better way to grind housing developments to a halt. But that’s the CBA’s aim after all. The CBA wants to reduce lending to developers for two reasons.

Firstly, they want to comply with APRA regulations by limiting investor lending growth to 10% a year. By restricting developers, they rein in lending to investors too.

The second concerns the growing imbalance between house and unit sales. The sales of detached homes is outpacing apartments fourfold. CBA recently tightened lending for apartments and units. It hopes to do the same in the housing market.

Yet it’s hard to tell who comes out worse for wear. Developers will suffer, but it’ll hit investors and home buyers in equal measure.

Housing affordability will plunge on lower supply

Fewer housing developments will do nothing but ramp up pressure on supply. That’s not what the markets in Sydney and Melbourne need right now. Both cities require more developments to keep a lid on surging house prices.

Instead, house prices in Sydney and Melbourne will only rise. This policy would work better in other cities where prices are falling. Limiting new developments in cities like Perth would arrest the price decline by cutting supply. But the CBA isn’t aiming its measure at Perth’s real estate market. It’s aimed squarely at Sydney and Melbourne.

First home buyers in these cities face a tough future. But it’s not only them who will feel the brunt of this.

Investors make up 45% of buyers for new housing developments. They have an equal stake in this game. Unfortunately, both investors and first time buyers are watching as house prices outpace wage growth. As this worsens, housing affordability will only fall.

First home buyers and investors can only hope the buck stops with CBA. If other banks followed suit, housing affordability would tank. Applying a handbrake to supply is the last thing the real estate market needs.

Worst of all, it hits the most affordable housing options available to most households. By this I’m referring to new land developments in outer suburbs.

Most new housing developments take place where land is plenty, far from city centres. And there’s a good reason why the CBA is targeting this segment of the market.

Over 73,000 detached houses were sold in the last year alone. That amounts to a four-year high. And it almost quadruples the number of units sold in the same period. By restricting new housing developments, the CBA hopes to close the gap. In doing so, it would bring it in line with CBA’s recent policy to tighten lending for units and apartments.

The only winners from this are existing home owners. They couldn’t have asked for a better leg up from a major bank. The minute you think house prices could plateau in the near future, things like this crop up.

The other problem facing the Commonwealth Bank

Home loan lending is a touchy subject for banks. It’s been that way since regulator APRA demanded a slowdown in investor lending. Lending is slowing, but not nearly quickly enough to ease pressure on house prices.

This measure has the added bonus of helping CBA comply with these demands. But banks also have concerns about falling land values to think about.

The AFR reports that national land values dropped by 5% in the first half of 2009. That came on the back of a 17% decline in new housing developments. By using this new measure, CBA is limiting its exposure to any further drop in land values.

But the net effect of this measure could do more damage than good in the long run.

We know it’ll put pressure on supply, pushing up prices. But it’ll also affect the wider economy. Slowing construction will only results in fewer jobs across the board. That means fewer workers to carry out earthworks, and fewer still to build the houses.

When one sector takes a blow, it doesn’t do so in isolation. Imagine for a moment that all banks limited lending to developers. It wouldn’t take long for other sectors of the economy to feel the effects of this.

It’s hard to get away from the implications CBA’s move might have for the economy. If other banks follow suit, you can forget about buying a new house anytime soon.

Mat Spasic,

Contributor, Markets and Money

PS: The CBA’s decision to limiting lending practices will only push up prices in the future. Markets and Money’s property expert, Phillip J. Anderson, isn’t surprised by this.

He reckons house prices are set for a decade long boom.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.

He was right on both accounts.

In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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