The amount of home loans that have been extended based on "factually inaccurate" information is estimated to have reached $500 billion, according to an updated study by investment bank UBS.
The broker said that its latest survey of over 900 mortgage applications originated over the last 12 months revealed that about one third of home loans contained information that was not accurate, a significant increase compared to around 28 per cent in 2016.
Given the "rising level of misstatement" of many years, UBS said it estimated $500 billion of home loans were "liar loans", the researchers, Jonathan Mott, Rachel Bentzvelen and George Tharenou wrote.
"While household debt levels, elevated house prices and subdued income growth are well known, these finding suggest mortgagors are more stretched than the banks believe, implying losses in a downturn could be larger than the banks anticipate.
The broker said it was "underweight" Australian banks and cautious of the outlook.
"Overall, we believe the accelerating level of mortgage misstatement by Australian borrowers is a substantial problem and more needs to be done by the banks to address it."
There was little evidence that regulatory efforts to tighten lending standards was working and that the probability of home loan defaults and potential losses was being "underestimated".
"The impact on the broader economy from a housing downturn is likely to be more severe than the banks currently anticipate," UBS said.
The UBS report suggested more borrowers were lying by under-represting their expenses and living costs. About 30 per cent of respondents to the UBS survey said this was the reason their loan was inaccurate, up from 23 per cent. Borrowers also over-stated income and assets and understated loans - with each reason being cited by 15 per cent of respondents.
Some respondents said they understated their expenses by 30 per cent but the median extent of under-statement was around 10-12 per cent.
The UBS report coincided with new findings from the Reserve Bank of Australia which said that while house prices were increasing and debt was rising, new home buyers were more able to service their debts than a decade ago, even though its much harder to save for a deposit.
"'Generation rent' is an important trend but a consequence is that those who do step onto the property ladder are, on average, better placed to pay off their loans," The Reserve Bank's economists John Simon and Tahlee Stone wrote.
"While saving a deposit is a stretch, it is also a sign of financial discipline that is associated with fewer subsequent difficulties,"
Borrowers said it was also becoming easier to get a home loan with 27 per cent of respondents stating that lenders had become more accommodative.
A decline in first home buyers, the report said was not because of an unwillingness to take on debt but the challenge of saving for a big enough deposit.
In April UBS economists "called the top" of the housing market, for both activity and house price growth. It also comes amid more recent signs of cooling in the property market as more sellers are choosing to sell prior to going to auction.
The latest report said that there was a higher level of inaccurate information in loans originated by mortgage brokers, with 39 per cent of these loans containing information that was not accurate and factual. UBS said it was of concern that 11 per cent of survey respondents said their loan application was only "partially" factual and accurate, compared to 4 per cent, two years ago.
In May, Mott and his team angered the mortgage broking industry with research that claimed these middle-men added 16 basis points to every home loan"
Mortgage & Finance Association of Australia chief executive Mike Fenton said the findings were "wrong" and were based on an incorrect calculation.
But UBS is understood to have stuck to its findings.
Read more: http://www.afr.com/business/banking-and-finance/liar-loans-hit-500b-mortgagors-are-more-stretched-than-banks-believe-ubs-20170911-gyew5j#ixzz4sLCrK4Fg