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

RENTAL HISTORY CAN NOW HELP OBTAIN HOME LOAN

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.”

ENDS

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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151 Responses to Loan standards drop to keep the bubble afloat

  1. Vfe says:

    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. http://www.myrp.com.au/melbourne_house_prices.do

    Couple this with stock levels, for instance this FHB territory in Melbourne and it tells a most unsavoury tale.
    http://www.sqmresearch.com.au/graph_stock_on_market.php?postcode=3030&t=1

    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?

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