Lending standards aren’t deteriorating, but a change to assessment rates is possible
17 Mar 2021

Doron Peleg, CEO of RiskWise Property Research said that the First Home Loan Deposit Scheme (FHLDS) has led to an expected return of higher loan to value (LVR) ratio lending in the housing market.

"As previously projected, the FHLDS has been a roaring success and first homebuyer loans are being initiated at the fastest pace since 2009" Mr Peleg said. 

"Therefore an increase in the share of higher LVR lending is to be expected, and we have seen such an increase in the second half of 2020".

Figure 1: Loan to Value Ratios of new housing loans

Mr Peleg said that this doesn't mean that lending standards overall are loose, however.

"Lending standard typically remain robust and appropriate."

"For example, the stock of interest-only loans has fallen by more than half from $580 billion at the 2017 peak and continues to decline. In fact, the stock of interest-only loans is now under 15% of the housing loan stock for the first time on record" Mr Peleg said. 

Figure 2: The stock of outstanding interest-only loans

"There is also very little activity in the self-managed super fund lending space, loans to non-residents have dropped sharply since the peaks, and low-doc style lending is a shadow of its former self" Mr Peleg said. 

"Lenders haven't really loosened up much on the assessment of loans. Clearly the environment is not as chronic as it was during the banking Royal Commission, but overall lending processes are still fairly tight". 

"In addition, the housing market is experiencing strong capital growth that is likely to last at least until the end of 2021. This means that the properties used as securities for loans substantially appreciate in value. Consequently, the ‘effective' LVR if calculated based on the fair market value, will be reduced significantly over the next 18 months. Any stressed borrowers will be simply able to either refinance or sell their properties at a profit. Therefore, overall credit risk rating is substantially lower for the lenders."

Pete Wargent, co-founder of BuyersBuyers.com.au said that the driver of the housing market rebound had simply been lower mortgage rates and an increase in confidence. 

"A lot of the chatter on lending standards has largely been due to economists and talking heads forgetting that lower mortgage rates tend to drive asset prices higher. If they'd actually applied for a mortgage recently they'd probably see things differently" Mr Wargent said. 

"Mortgage rates are at record lows, and due to competition between lenders they are still edging lower."

And that makes real estate attractive, but to date the share of investors in the market has been extremely depressed, and it's all been about first homebuyers and upgraders so far" said Mr Wargent of BuyersBuyers.com.au.

"It's hard to imagine we'll see any macroprudential intervention given all of the above, especially given that regulators have been practically urging lenders to loosen their purse strings. In any case the property market exuberance is largely Sydney-centric, and even then it's not been city-wide, while unit prices are lower than 2017 levels".

Mr Wargent said that "there has been some activity relating to higher debt-to-income lending at above 6x, which is being driven by the recent outperformance of the detached housing market in the more expensive Sydney and Melbourne markets".

"That in itself is unlikely to be a pressing issue given that mortgage serviceability is at the easiest level in nearly 45 years, while we know from our client base that those sub-markets are often driven by inherited wealth and professionals with a strong earning capacity".

"But I don't suppose regulators will want to see too much of that happening where it's also combined with skinny serviceability calculations" Mr Wargent said.

"On that basis I think it's quite possible that we see a small 25 basis points increase to assessment rates for loans above 80% LVR before the year is out, just to nudge that part of the market back into line. But overall there's been a lot of hype here about not very much". 

"We hear about problematic lending endlessly in Australia, but there have rarely been any major issues, and overall lending standards are far, far tighter than they used to be". 

"As for the responsible lending obligations, honestly I doubt most commentators have properly read and understood the implications of changing the rules" Mr Wargent said. 

RiskWise CEO Doron Peleg said if there were any changes to assessment rates that this wouldn't be likely to change their upbeat forecasts for 2021. 

"A tweak to assessment rates in the latter part of 2021 would not materially change our earlier forecasts for double-digit gains in the major capital cities this calendar year" Mr Peleg said.

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