Freelancers and casual workers set to struggle in the wake of the banking royal commission

The workforce is more fluid than ever and mortgage lending is about to become more rigid. That’s a recipe for friction.

In fact, the fine print of the Australian Prudential Regulation Authority’s latest guidelines make extremely grim reading for the growing number of Australians who earn an income without being in full-time employment.

Australian banks are under the public blow torch after the royal commission exposed systemic wrongdoing and much higher lending standards are now being prescribed by the regulator.

That’ll mean the slowdown in mortgage lending gets worse from its already gloomy position, according to UBS economists, who note the steep fall in March housing finance data forms part of a broad downward trend.

But that slowdown will hurt some more than others.

Permanent full-time employees are quickly finding it harder to land a mortgage, so what about the booming freelancer population? They could soon make up a tremendous portion of workers but, as banks pull themselves into line, those freelancers are going to face even higher hurdles into the property market.

The latest APRA prudential practice guide on mortgage lending says that when it comes to self-employed borrowers — that’s freelancers — banks will have to make “reasonable inquiries and take reasonable steps” to verify available income.

Given that was a key area of scrutiny during the first two rounds of the royal commission, banks are expected to take those “reasonable steps” much further in the future.

So, where does that leave a growing number of freelancers who want to buy a home?

In short, not in a strong position.

“I would think that, yes, in this environment freelancers would be facing more difficulty getting mortgages,” UBS economist Carlos Cacho told Domain, adding the trend for overall mortgage lending is “definitely down” and will stay that way for some time.

And those difficulties won’t be felt by a small pocket of the workforce, but a growing number of Australians, according to Indeed chief Asia Pacific economist Callam Pickering, who points to a long-term “casualisation” of the Australian labour market.

“If we look at the labour market since, say, the GFC, it is true that part-time employment has been the dominant form of employment,” Mr Pickering said.

“There is a distinct casualisation of the Australian workforce, which partly reflects opportunities – the sort of jobs that are being created – but it also reflects the demand for greater flexibility.”

It’s a global phenomenon, according to Morgan Stanley International, which last week released a report stating freelancers now represent 35 per cent of the total US working population and are expected to reach 50 per cent by 2027.

Meanwhile, the number of freelancers in France is said to have shot up 70 per cent between 2008 and 2015, while the UK saw 49 per cent growth in that period and the Netherlands 52 per cent.

Morgan Stanley International research points to a strong rise in the number of freelance workers around the world.

And while the real proportion of freelancers in Australia is difficult to attain with much certainty, according to Mr Pickering, it’s a significant and growing group.

A crackdown set to continue

While full-time mortgage applicants often use payslips to prove their income, those on short-term contracts tend to have income viewed over a six-month scope, and those who are self-employed – perhaps with several ongoing gigs – will usually have to produce a tax return to prove their earnings.

It could be about to become more rigorous.

On April 26, the banking regulator, APRA, tweaked the rules that govern major lenders, but offered yet another stern warning.

“There is more to do to strengthen the assessment of borrower expenses and existing debt commitments, and the oversight of lending outside of policy,” APRA chairman Wayne Byres told the market.

Source: Morgan Stanley International

A message taken by the market to mean that mortgage applicants will need to have their finances running like clockwork when they go in search of a mortgage.

“We think the Royal Commission is likely to recommend greater due diligence is required for banks to comply with responsible lending laws,” UBS wrote in a recent report. “Banks may need to undertake detailed assessment of customers’ living expenses rather than relying on the HEM [household expenditure measure] benchmark, while overstated income may require greater validation.”

Banks will likely aim to keep freelancers in the game, but tighter regulations might become a heavy burden – at least for a while.