Buyers' borrowing power at risk with LVR change

Buyers' borrowing power at risk with LVR change

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Homebuyers’ borrowing power may be severely curtailed if the Australian Prudential Regulation Authority (APRA) implements limits on loan-to-value ratios (LVRs).

Speaking at the Customer Owned Banking Association (COBA) and AM Institute Convention in Melbourne earlier this week, chairman of APRA John Laker said the banking regulator hadn’t ruled out implementing an LVR ‘speed limit’ similar to New Zealand.

“Declining net interest margins, high levels of prepayments and lower yields on investments are, we know, creating pressure to search for new sources of profit [for lenders],” Mr Laker said.

“That search might take you into riskier types of lending, new channels of origination, or into regions or markets not familiar to you … One area of higher risk that APRA is monitoring closely is high loan-to-valuation ratio (LVR) housing lending.

“You may be aware that the Reserve Bank of New Zealand has placed speed limits on this type of lending in its market. We are keeping our powder dry on that option, but we will take supervisory action if an [authrorised deposit-taking institution] ADI is skewing its housing loan portfolio too heavily in favour of high LVR lending.”

The Reserve Bank of New Zealand implemented a maximum 80 per cent LVR at the beginning of the month, which chief economist of AMP Shane Oliver said may make an appearance on our shores.

However, Mario Rehayem director of sales and distribution at specialist non-bank lender Pepper Australia told Real Estate Business' sister title The Adviser that if APRA was serious, then it hadn’t considered the long-term effects on the market.

“First home buyers would effectively have to double their deposit, which means it will take twice as long to get into the market,” he said.

“But the issue there is that it has an impact on demand, which has an impact on both property prices and building, which has an impact on tradies and other businesses. It’s a domino effect that will affect quite a few industries, not just the banking sector.”

Mr Rehayem said that if APRA only targeted ADIs, then the market for high LVR lending would shift to other lenders – and in turn draw the ire of APRA once their books were skewed.

“There’s only so much volume a non-bank can write in that sector without skewing its books because at the moment, that concentration is shared across all lenders," he said.

“Look at what percentage of business is written for first home owners and what percentage of business is written post 80 per cent – both of these revenue streams would be severely affected if this course of action was to happen.

“APRA won’t put a restriction this overbearing on the market, or an individual ADI because of the massive repercussions it would have.”

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