A UBS banking analyst says ‘one quarter to one third of the mortgages on Australian banks’ books are based on factually inaccurate
One of Australia’s most respected banking analysts has warned there are $500bn worth of “factually inaccurate” mortgages sitting on the books of Australia’s banks, with the problem getting worse.
UBS banking analyst Jonathan Mott said one third of Australians who took out a mortgage in the past 12 months were not “completely factual” with their financial information, and the level of factually inaccurate mortgage applications has risen significantly since 2015, from 27% to 33%.
He said many Australians were overstating their income and the value of their assets in their mortgage applications, and a “substantial number” of applicants were continuing to say their mortgage consultants were suggesting they misrepresent their documentation.
He said the level of inaccurate mortgages meant the probability of default, and loss in the event of default was being underestimated by Australia’s biggest banks, and he has warned his clients he is “very cautious” about the medium-term outlook for the sector.
“In Australia, the average life of a mortgage is approximately four and a half years,” he has written to clients.
“As a result this would imply between one quarter to one third of the mortgages on the banks’ books are based on factually inaccurate applications.
“This equates to approximately $500bn of factually incorrect mortgages (aka ‘Liar Loans’) on the Australian banks’ books, or 18% of all outstanding Australian credit.”
Mott has sounded his warning after UBS anonymously surveyed 907 Australians who took out a mortgage in the past 12 months, following similar surveys in 2015 and 2016.
The online survey was conducted between 7 July and 4 August, with respondents, who were over 18, answering 70 questions.
It found just 67% of respondents stated their mortgage application was “completely factual and accurate” in 2017, a statistically significant reduction from 2016 (72%).
It found 25% of participants said their application was “mostly factual and accurate”, 8% said it was “partially factual and accurate”, while 1% “would rather not say”.
It also found consumers did not feel as though it had become harder to attain credit in the last 12 months, despite efforts by the banking regulator to tighten lending standards.
It said mortgages originating with brokers were statistically significantly more likely to misrepresent their information than mortgages originated by banks.
“We believe that 26 consecutive years of GDP growth in Australia has led to a large level of complacency within the economy,” Mott said.
“This survey suggests many people have come to take house price inflation as a given and are prepared to be factually inaccurate on their mortgage application to ensure they get access to housing leverage. And why not … housing has paid off handsomely for decades.
“However, as many regulators have highlighted, household indebtedness is at concerning levels and housing credit growth is continuing to run at many multiples of household income growth despite macro prudential tightening.
“[The] survey findings suggest that the risks within the mortgage book [of Australia’s banks] may be more elevated than the banks believe.”
Last month, data suggested Australia’s housing boom may be coming to an end as investors disappear from the market.
Figures released in August by the Bureau of Statistics revealed that, over the past six months, the growth of housing finance has stalled, with the value of investor housing falling 6% in the first six months of this year.
Mott said one of the reasons mortgage arrears were still so low in Australia, despite the high level of inaccurate mortgages, may be due to sustained house price inflation in many parts of Australia, so customers who had been under financial stress had been able to sell their properties, repay their debts and get a capital gain.
“[But] in the event that household income growth remains subdued or interest rates continue to rise (via the Reserve Bank or bank mortgage repricing) this is likely to place pressure on many households,” he said.