The new regulations announced by the Reserve Bank today, are designed to curb lending on housing over 80% of Loan to Value ratios ( LVR’s) effectively requiring buyers to find bigger deposits.
Larger deposits will hurt first home buyers, builders, and push people back into renting,
This will likely lead to increased rents, and possibly create a new wave of second tier lenders ( i.e. finance companies) who will make up the difference.
It was exactly these sort of restrictions back in the 1960’s and 70’s that led to the creation of finance companies – and we all know the result of that.
As the new regulations come into effect ( 30th September) there’s bound to be an early rush of bank applications to squeeze in a last chance which could push up prices even further.
What about those who need loans to set up or expand their businesses?
Will they be held back increasing the chances of more unemployment?
As the vast majority of the market does not rely on low deposits how effective will these measures be?
Nor is it clear if the banks will tightening lending on individual higher amounts per transaction or whether the banks must keep their average amount of lending lower. If for instance half a banks lending is at 40% LVR and the other half at 90% LVR the average is only 65%, which is well within the margin of safety.
You have to the question:
Will this measure work?
I doubt it .
House prices increasing risk in financial system
The Reserve Bank has moved to dampen down the hot housing market as it warns of “increasing risks to financial stability”.
The central bank is bringing in higher capital requirements for big banks for high loan-to-value ratio loans. The move will apply from the end of September and could cool high-ratio house lending.
The Reserve Bank sounded a warning about overvalued, rapidly rising house prices and rising private sector credit, but said the financial system remains sound.
Issuing the central bank’s latest Financial Stability Report, governor Graeme Wheeler said: “Housing pressures are increasing the risks in the financial system.”
The risks in the financial system had risen in part because of the greater willingness of big banks to lend a high proportion of a home’s value, with borrowers only having to find a deposit of as little as 10 per cent.
The Reserve Bank has been undertaking a review of the capital banks’ hold against housing and has now announced it will increase the “risk weights” applying to high loan-to-value ratio home loans for the four big banks.
The aim is to provide a bigger buffer because of the risks of home loans equal to 80 per cent to 90 per cent of a home’s value, or more. That is likely to cool such lending with the buffers increased as the loan to value ratios rise past about 70 per cent.
The increase in risk weights will apply to all current and new high-LVR loans for the big banks from now.
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