Risks of tighter lending flagged by economists

According to a survey of 16 economists, conducted by rate comparison website Finder.com.au, 94 per cent (15 out of 16) of respondents said a move to tighter lending practices could impair the broader economy amid a softening housing market.  

Graham Cooke, insights manager at Finder, said that tighter lending could add further deflationary pressure on property prices.

“The housing market has been bounding from strength to strength in recent years, fuelled by easy credit; however, in a declining market, it’s even more important for lenders to make sure borrowers can pay off their debts and avoid issuing interest-only loans.

“While tighter lending rules will hasten the decline of prices in the short term, they should be beneficial to overall stability in the long term. You could call it short-term pain for long-term gain.”

Saul Eslake, economist at Corinna Economic Advisory, added that while stricter lending criteria could improve overall credit quality, such practices may cause more harm than good.

“In the longer term, a reduction in the extent of risky lending – particularly for property speculation – would be a positive development,” Mr Eslake noted.

“Stricter criteria for business lending would on balance be a negative development in both the short and long terms.”

ABC Bullion chief economist Jordan Eliseo agreed, stating that the credit crackdown could spur sharper drops in house prices and impede retail spending, but also noted the potential long-term benefits of tighter lending practices.

“If you think it’s a negative that stricter lending will mean less money flowing into real estate, a sharper fall in house prices and a knock-on effect from that across discretionary retail and household spending, then yes, [tighter credit] will be a negative,” Mr Eliseo said.

“If you’re more focused on the long term and worry that households are over indebted and that the banks might have much riskier mortgage books than is commonly thought – mortgage arrears are rising, though are still exceptionally low – then tighter credit will be a positive for the economy over the long run.”

As part of its survey, Finder also asked 32 economists and industry pundits to predict the Reserve Bank of Australia’s (RBA) pre-Christmas cash rate decision, with all respondents correctly predicting a hold verdict.

Following its monthly board meeting, the RBA held the cash rate at 1.5 per cent, for the 26th consecutive month.

Further, 78 per cent of respondents said they expect the next rate move to be a rise, with 10 per cent predicting a rise in the first half of 2019,  43 per cent expecting the move to come in the second half of 2019, and 48 per cent expecting an increase in 2020 and beyond.

“Through the last few months, we say the forecast for when the next rate increase will come push further and further into next year,” Finder’s Mr Cooke added.

“Now it looks like we could see another 11 RBA hold decisions, as economists foresee the possibility of no movement in 2019.”

[Related: Major banks hit hard by credit crunch]