"They are delving deeper into your life and your situation.  I did not feel so scrutinised six years ago,” says Jenkins, a full-time sub-editor.  Previously, for example, the bank was unconcerned about her HELP debt.  Such loans are seen as "good debt," as they only need to be repaid when income reaches a minimum level.  Now, her bank is demanding she wipe the entire $14,000 debt clean before it gives the final green light.  It is just one example of the extra lengths banks are going to to scrutinise potential customers.  Mortgage brokers tell of banks trawling through customers' credit and debt card statements, examining their spending habits in extreme detail.  One broker was even questioned about a client's spending on kebabs for lunch.  And while the intent of all this vetting is sensible - to check whether customers can afford their loans - a growing number of experts are getting nervous the credit crackdown may have gone too far. 

'Eye-opening' process Jenkins says being put through the bank's process will allow her to start 2019 on a “clean slate” in financial terms, but the experience has also been “eye-opening”.  While acknowledging her financial situation is different from six years ago, as she is now single, she worries that the banks' tougher stance might make it harder for first home buyers to enter the market at what might otherwise be a good time to buy. “ It’s becoming more of an attainable goal, but the problem lies now with the gate-keepers, the banks, to actually get the loan,” Jenkins says.  Her concerns come as powerful figures in finance air their concerns about the economic impact of tighter bank lending, which regulators helped initiate several years ago to contain a runaway housing market. 

As house prices in Sydney and Melbourne have fallen faster than most expected over 2018, and the royal commission has put banks under unprecedented scrutiny, the slowdown in credit is clearly grabbing attention at the Reserve Bank.  After a series of comments from RBA officials in recent weeks about the risks of banks clamping down too hard on lending, the RBA-chaired Council of Financial Regulators this week said some banks had become "overly cautious" in their lending decisions.  The pace of the house price is starting to alarm economists.  Credit:Rob Homer The slump in house prices - blamed in part on tighter credit - has also prompted some economists to cut their growth forecasts for next year, as they predict households will tighten spending in response to perceptions of falling wealth.  Markets have pushed back their bets on interest rate rises, with futures pricing in no change in the cash rate next year. 

Yet at the same time, bankers insist they remain open for business.  They point out the underlying economy remains in reasonable shape, and far from being a national credit crunch, it is mainly among property investors in NSW and Victoria where lending has fallen the most, because these buyers are simply less keen on putting their money into property.  Forensic inquiries As the royal commission has put bank misbehaviour under the microscope, the natural response from lenders has been to become more cautious.  Although housing credit growth started slowing in 2015, once the royal commission got under way, it became clear that a key focus would be whether banks were complying with responsible lending laws.  These require banks to make "reasonable inquiries" into customers' finances.  Public hearings in March put the spotlight on lenders relying too heavily on a statistical index called the Household Expenditure Measure (HEM) as a proxy for customers' living expenses, instead of checking out their actual living costs. 

Loading In response, bankers are now looking more forensically at customers' declared expenses, which the banks say many people find hard to estimate.  The chief executive of Mortgage Choice, Susan Mitchell, says that in one case, a lender even questioned the company's broker about a customer's daily purchase of a kebab for lunch. " The broker submitted a customer’s living expenses, including their grocery expenses," Mitchell says. " The lender came back and noted that the customer had a recurring expense of what seemed to be a doner kebab everyday for lunch and his 'grocery expenses' cited on their home loan application didn't cover the expense." 

In another case, she says a bank queried a couple's credit card spending on weight-loss meal delivery service Lite n' Easy. " The lender saw the expense on their loan application and wanted the broker to increase the groceries section in cost of living on the home loan application to cover it, even though the expense would not be ongoing over the long term of the 25-year loan," Mitchell says.  Loading Replay Replay video Play video Play video 'Minute detail' Jonathan Preston, a mortgage broker with Homeloanexperts.com.au, recalls a well-off client whose recent expenses were higher than usual because of a series of one-off expenses such as home improvements. 

Preston says he spent two hours on the phone with the bank going through a series of recent purchases the client had made at stores including Ikea, JB Hi-Fi and EB Games.  The bank wanted to know whether a $400 purchase at the video retailer was for games or a console – as the console would be a one-off, but games might not be. “ We went through such minute detail,” he says. “ Not only did we identify where the money had gone, but also what actual items had been purchased.. and whether they would be one-offs or not."  In the past, Preston says, brokers did a more general comparison between what customers wrote on expense declarations and their actual bank statements, to look for any glaring inconsistencies or undisclosed debts.  Now, it has become a line-by-line exercise. 

“They want us to do a full interrogation of three months of bank statements and credit card statements,” he says.  Not a credit crunch, so far The added scrutiny is being blamed for accentuating a slowdown in the $1.6 trillion mortgage market, where growth has slowed from 6.3 per cent to 5.1 per cent a year over 2018, dragged down by lending to investors that's grinding to a near standstill.  National house prices last month posted their sharpest monthly falls since the global financial crisis, dragged down by investor-heavy markets of Sydney and Melbourne.  But just how much the banks' tougher examination of borrowers is to blame for slowing credit - and the potential economic impact this may have - remains up for debate. 

The fear of officials appears to be that if all the banks become more cautious at the same time, the slowing credit trend could feed on itself, accentuating the housing slump and curbing household consumption.  RBA deputy governor Guy Debelle alluded to such a scenario in a speech this month, when he said the banks' tendency to act in a similar manner could "amplify" the housing downturn.  Guy Debelle, deputy governor of the Reserve Bank, has expressed concerns.  Credit:Bloomberg Independent economist Saul Eslake says it is too early to say how significant a risk tighter credit is to the economy, and it may depend on part on the royal commission's final report, due by the start of February, and whether more of the banking regulator's credit restrictions are eased.  But Eslake, a former ANZ Bank chief economist, says there's little doubt the home loan slowdown is becoming a "more significant issue" than it was a year or six months ago, as banks run the ruler over customers more carefully. 

“That’s clearly having an impact on how much banks are willing to lend to particular borrowers, but it’s not clear if it’s a matter of taking longer or being less willing to lend after a longer process,” Eslake says.  Risk of 'vicious cyle' AMP Capital chief economist Shane Oliver says we are not in a credit crunch, but the big risk is that too much tightening in credit may compound other potential sources of vulnerability in the mortgage market.  He nominates three risks in particular: interest-only loans converting to principal and interest loans; a move to "comprehensive credit reporting" that will give banks a better view of customers' total debts; and the risk of falling house prices turning into a "vicious cycle" that prompts a wave of investor selling.  Oliver, who is at the more pessimistic end of market economists, says that while some cooling in the mortgage market had been warranted, the worry is that things could move too far in the other direction. 

Loading “You don’t want it to go the other way, where it feeds on itself in a downward spiral.  There’s a risk there that as prices go down, the investors start to think about heading to the exits,” he says.  Oliver does not foresee a housing "crash".  But he is one of the few economists who believes the RBA will cut interest rates next year in response to weaker-than-expected growth, due in part to softer spending by more nervous households.  Banks also maintain the market is experiencing a controlled slowdown after a long boom - a point made by Westpac chairman Lindsay Maxsted this week. “ We think what’s happening now is a natural correction, particularly in the Sydney and Melbourne markets, where as we know, the increase in housing prices has been very dramatic over the last six or seven years,” Maxsted said. 

Aside from the royal commission, yet another source of uncertainty will be the federal election, with Labor promising to only allow negative gearing on newly-built homes, and halve the capital gains tax concession for property investment.  Labor, royal commission Oliver points out the whole point of this policy is to make housing less attractive to a group of buyers - investors.  Yet Goldman Sachs economists this week said the changes to negative gearing would have a "relatively small" impact, from the perspective of individual investors.  The analysts said Labor's change would make property investing less attractive from a cash flow perspective, but "negatively geared rental properties are already an unattractive asset from a cash flow perspective."  Labor's planned capital gains tax changes were "somewhat more important," Goldman said, but would only matter when house prices were rising.  Adding another layer of complexity, there have been predictions Labor may struggle to pass the changes through the Senate's cross-bench. 

Into this swirl of uncertainty, royal commissioner Kenneth Hayne will in early 2019 deliver his final recommendations.  Given the erosion in trust in banks, the commision's ideas are likely to find strong political support, months out from an election.  Whatever commissioner Hayne and his team decide, when it comes to bank lending practices, it looks highly likely to have some impact on the $1.6 trillion mortgage market.