Loan stan­dards drop to keep the bub­ble afloat

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I’ve just been alerted by Bank­ing Day (a sub­scriber-only ser­vice) that West­pac–via its sub­sidiary St George–is now allow­ing poten­tial bor­row­ers to treat their rental pay­ments as “evi­dence of gen­uine sav­ings” when apply­ing for a home loan.

This is of course por­trayed as  good thing in the press release that announced the development–issued by the bro­ker Loan Mar­ket (see the press release at the end of this post). It will, they state, enable Aus­tralians who cur­rently can’t afford to buy a home–because they can’t save a deposit–to do so. All good news.

The more cyn­i­cal inter­pre­ta­tion is that this is a way to let banks increase their max­i­mum LVR (loan to val­u­a­tion ratio) with­out actu­ally say­ing so, and to expand their pool of poten­tial bor­row­ers as a con­se­quence. At present, you need a $30,000 deposit to bid $1 mil­lion for a prop­erty if you get a loan from the Com­mon­wealth Bank, which cur­rently has one of the high­est max­i­mum LVRs of 97%: “The max­i­mum we will lend you is 95% of the val­u­a­tion amount. We also add the Lenders Mort­gage Insur­ance or a Low Deposit Pre­mium to your loan (up to a max­i­mum of 97%), so it doesn’t cost you any­thing upfront”.

This press release implies that you could approach St George with $20,000 in sav­ings, be given a $1 mil­lion loan, and have it recorded as a 95% LVR loan (since St George prob­a­bly has the same max­i­mum pub­lished LVR as West­pac of 95%) where $20,000 was your actual deposit and the effec­tive LVR was actu­ally 98%.

The effect of this trick is to expand the pool of poten­tial bor­row­ers to whom St George can extend a loan, while appear­ing not to alter its lend­ing stan­dards.

There’s at least one line that I agree with in the fol­low­ing press release: “This is a major step for­ward which will also boost activ­ity in the strug­gling home finance sec­tor and we expect other lenders to fol­low suit.” It will enable the banks to meet their loan sale tar­gets, by expand­ing the num­ber of appli­cants who qual­ify for a loan.

To me, this move smacks of des­per­a­tion. The house price bub­ble has made entry into the mar­ket impos­si­ble with­out sky-high LVRs, and this in turn has under­cut the banks’ busi­ness model.  Increas­ing their max­i­mum LVRs by around 5% back at the end of August appar­ently wasn’t enough to secure the level of loans busi­ness they wanted, and St George’s response is this ruse that gives a higher LVR with­out call­ing it such.

It will be inter­est­ing to see how reg­u­la­tors treat this: will they allow rent that you’ve already paid to a land­lord to be recorded as “evi­dence of gen­uine sav­ings” and pre­tend that St George hasn’t increased its max­i­mum LVR?

The Loan Mar­ket Press Release


Decem­ber 22, 2010

Call For Banks To Recog­nise Rent Answered

Repeated calls by Australia’s largest inde­pen­dently owned mort­gage bro­ker Loan Mar­ket for banks to allow peo­ple apply­ing for a home loan to use rental pay­ments as evi­dence of gen­uine sav­ings has been answered by one of the nation’s major lenders.

Loan Mar­ket Chief Oper­at­ing Offi­cer Dean Rush­ton said St George had become the first Aus­tralian bank to change its require­ments in regards to rental pay­ments, in a move which will pro­vide much needed assis­tance to first home buy­ers.

Mr Rush­ton said St George will accept rent as a form of sav­ings for a home deposit if there is evi­dence of a min­i­mum of 12 months’ con­tin­u­ous, sat­is­fac­tory rental his­tory and the prop­erty is leased through a licensed prop­erty man­ager.

This is a sig­nif­i­cant break­through for first home­buy­ers and a move which could be a major boost to the home finance indus­try,” Mr Rush­ton said.

Higher inter­est rates, tougher lend­ing con­di­tions and the end of the boosted fed­eral gov­ern­ment grant at the end of last year have dri­ven first time buy­ers out of the mar­ket.

Another major restric­tion for them has been the dif­fi­culty in sav­ing a deposit for a home loan, par­tic­u­larly in this eco­nomic cli­mate with peo­ple hav­ing to cope with mas­sive cost of liv­ing increases includ­ing rental pay­ments.

Aus­tralian lenders require a per­cent­age of the pur­chase price — nor­mally five per cent min­i­mum — to be saved for all loans but it is extremely dif­fi­cult for peo­ple pay­ing the exor­bi­tant rents cus­tom­ary these days to save money.

But if rental pay­ments were taken into con­sid­er­a­tion as a fac­tor in assess­ing gen­uine sav­ings that would enable many peo­ple to pur­sue the dream of home own­er­ship.

St George has now moved to accept rental his­tory as a form of gen­uine sav­ings and they should be applauded for this deci­sion as it will enable a lot more peo­ple to realise the great Aus­tralian dream of home own­er­ship.

This is a major step for­ward which will also boost activ­ity in the strug­gling home finance sec­tor and we expect other lenders to fol­low suit.”


For fur­ther infor­ma­tion:

Dean Rush­ton

Mb: 0411 555 850

Paul Smith

Mb: 0406 679 821

The spin on this

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Vfe

    They can drop loan stan­dards all they like, the sup­ply of greater fools has been exhausted.

    Mel­bourne sales vol­umes over the last 3 months have been bru­tal.

    Cou­ple this with stock lev­els, for instance this FHB ter­ri­tory in Mel­bourne and it tells a most unsavoury tale.

    Com­pare cur­rent stock lev­els on that chart to 2008, at which point we pro­vided $2B of direct and $10+B of indi­rect fis­cal stim­u­lus to sup­port the indus­try (not to men­tion the ben­e­fits of mon­e­tary pol­icy). The ques­tion is can we and will we do it again?