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

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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.