Lending curbs will shrink LMI market

Research by Morningstar warns that while a blanket limit on high LVR loans is not expected, a restriction on high LVR lending to investors is a more likely measure to be introduced in an attempt to cool investor activity.

While a mandatory requirement to purchase LMI on high LVR loans would provide a tailwind for the LMI industry, the regulator may take the view that a reduction in high LVR loans is appropriate, shrinking the potential size of the market in which LMI providers operate, Morningstar analyst Nathan Zaia said.

“In Australia, about one-third of new residential lending is at an LVR above 80 per cent, so a similar regulatory move would severely shrink the market for mortgage insurance,” he said.

Mr Zaia has increased his predictions for Genworth’s claims ration to 35 per cent next year compared with 24 per cent in 2014, driven by the inevitability of interest rate rises and a continued increase in unemployment.

Meanwhile, with easy and cheap access to debt, competition for limited supply can quickly push house prices higher, he said.

“For investors, it also pushes up the value of their existing properties, meaning equity in the property can then go towards the next investment property, and so the cycle continues,” Mr Zaia said.

“Limited demand from investors should help slow rising house prices, but could also have the unwanted consequence of restricting new supply,” he said.

“We believe any tools implemented should target loan sizes and serviceability – perhaps restricting high LVR loans in suburbs where house prices are above the city average, encouraging people to buy within their means, even if in less desirable suburbs.”

This would not necessarily require new regulation given that the prudential regulator is already actively working with banks to manage risk, Mr Zaia said.

Last October, the Reserve Bank of New Zealand (RBNZ), implemented restrictions prohibiting banks from issuing more than 10 per cent of new residential loans to customers who have an LVR of more than 80 per cent.

While this looks unlikely to be implemented in Australia, Mr Zaia said a key reason why the policy was introduced in New Zealand was because LMI providers exited the market.

“With banks in New Zealand electing to use LMI less frequently, it became an uneconomical proposition for the likes of Genworth, QBE LMI and Westpac who withdrew from the market in 2006, 2011 and 2013 respectively,” he said.

In Australia, a combination of limits on high LVR loans to investors and tightening of serviceability requirements are preferable measures to ensuring people are at less risk of default on mortgages even if their wealth has diminished, Mr Zaia said.