Commonwealth Bank of Australia (ASX: CBA) is reportedly getting tough with property developers, which may put more pressure of house prices to rise.
Fairfax media reports that Australia's largest bank plans to increase its criteria for lending to new property developments, which could hit first homebuyers and investors in outer suburbs. The bank plans to delay approving finance for buyers of lots until the land is ready for development and all preliminary work such as roads has been completed.
The problem is that it will also restrict pre-sales, with developers expected to pre-sell at least 50% of housing lots in a planned estate before a bank will lend them the finance to start installing utilities and earthworks.
Fairfax reports that the decision is expected to become policy within the next few weeks. It's going to slow development of new housing. And could cause major headaches for developers and new home buyers in cities like Sydney that already struggle with ultra-slow land releases.
It won't just be first home buyers either – investors account for as much as 45% of new housing developments in some areas.
The news is likely to have mixed follow-on effects for the bank. Slower lending means lower credit growth and likely lower revenue and earnings. Add in changes such as higher interest rates for investors and anyone might think CBA is trying to deter property buyers from borrowing.
Foolish takeaway
Rest assured that CBA is unlikely trying to damage its business. The moves mentioned above signal more about protecting the bank from a property price crash and reduce its lending to higher risk developers.
The Commonwealth Bank share price is currently at $81.30 – well off the target share prices by many brokers of over $100.
