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Is the Australian Housing Bubble about to burst?
Tighter credit rules to halve home loans
AUSTRALIA is facing a credit squeeze that will prevents tens of thousands of borrowers from buying a property because they do not have big enough deposits.
Last week Westpac cut its loan-to-value ratio (LVR) for new customers to just 87 per cent of the property's value - a new low for a big bank.
Although it may appear relatively small, such a cut has a disproportionate effect on how much people can borrow and can halve the value of the property they can afford to buy.
"If you have a $50,000 deposit and you can get a 95 per cent loan, you are able to bid on a property worth $1 million," said Steve Keen, associate professor of economics at the University of Western Sydney.
"But if the LVR is cut to 90 per cent, your $50,000 deposit is only equivalent to 10 per cent deposit on a $500,000 property, so the amount you can spend is halved."
Westpac's reduction from a maximum LVR of 92 per cent means that buyers with a $50,000 deposit will see the maximum that they can afford to pay for a property slashed from $625,000 to $384,615.
Somebody with a $20,000 deposit would see the amount that they could spend reduced from $250,000 to $153,846, says Professor Keen.
Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse.
According to research by broker Mortgage Choice, fewer than half of all new home buyers have a deposit of more than 10 per cent of the property's value.
"Westpac's move could affect many thousands of buyers and they will be forced to go to new lenders," a spokesman said.
"It's a very worrying development because if others follow suit, we could see the majority of first-home buyers priced out of the market."
Further restrictions now appear to be inevitable.
Lisa Davis, managing director of GE Money - part of one of the world's biggest finance companies - said Australian banks were facing higher costs that would limit the amount they could lend.
"We definitely see further tightening in the lending market," she said.
"Australian lenders have a significant amount of debt that they need to refinance in 2010 and funding costs are continuing to increase."
As a result of these cost pressures, GE pulled out of the home loan and car finance market almost 18 months ago.
"As a US company, we got hit early - but we are a leading indicator," she said.
"And banks can't go on lending forever."
Lenders have gradually been cutting back the size of loans that they are prepared to offer home buyers.
Just over a year ago, 100 per cent - or even 105 per cent - loans were relatively common.
But over the past 12 months, the LVR has fallen steadily to 95 per cent, then to 90 per cent, and now to 87 for new borrowers approaching Westpac.
It was this same tightening of credit that led to the collapse of property prices in the UK in 2008, even though the country was still suffering from a massive shortgage of homes at the time.
- By Nick Gardner
- From: The Sunday Telegraph
- January 24, 2010 12:00AM
AUSTRALIA is facing a credit squeeze that will prevents tens of thousands of borrowers from buying a property because they do not have big enough deposits.
Last week Westpac cut its loan-to-value ratio (LVR) for new customers to just 87 per cent of the property's value - a new low for a big bank.
Although it may appear relatively small, such a cut has a disproportionate effect on how much people can borrow and can halve the value of the property they can afford to buy.
"If you have a $50,000 deposit and you can get a 95 per cent loan, you are able to bid on a property worth $1 million," said Steve Keen, associate professor of economics at the University of Western Sydney.
"But if the LVR is cut to 90 per cent, your $50,000 deposit is only equivalent to 10 per cent deposit on a $500,000 property, so the amount you can spend is halved."
Westpac's reduction from a maximum LVR of 92 per cent means that buyers with a $50,000 deposit will see the maximum that they can afford to pay for a property slashed from $625,000 to $384,615.
Somebody with a $20,000 deposit would see the amount that they could spend reduced from $250,000 to $153,846, says Professor Keen.
Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse.
According to research by broker Mortgage Choice, fewer than half of all new home buyers have a deposit of more than 10 per cent of the property's value.
"Westpac's move could affect many thousands of buyers and they will be forced to go to new lenders," a spokesman said.
"It's a very worrying development because if others follow suit, we could see the majority of first-home buyers priced out of the market."
Further restrictions now appear to be inevitable.
Lisa Davis, managing director of GE Money - part of one of the world's biggest finance companies - said Australian banks were facing higher costs that would limit the amount they could lend.
"We definitely see further tightening in the lending market," she said.
"Australian lenders have a significant amount of debt that they need to refinance in 2010 and funding costs are continuing to increase."
As a result of these cost pressures, GE pulled out of the home loan and car finance market almost 18 months ago.
"As a US company, we got hit early - but we are a leading indicator," she said.
"And banks can't go on lending forever."
Lenders have gradually been cutting back the size of loans that they are prepared to offer home buyers.
Just over a year ago, 100 per cent - or even 105 per cent - loans were relatively common.
But over the past 12 months, the LVR has fallen steadily to 95 per cent, then to 90 per cent, and now to 87 for new borrowers approaching Westpac.
It was this same tightening of credit that led to the collapse of property prices in the UK in 2008, even though the country was still suffering from a massive shortgage of homes at the time.
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