Regulatory flux driving down average application LVR

The LVR index from Equifax and CoreLogic has revealed a continuing downward trend in the national average application loan-to-valuation ration (LVR).

A recent report on the index showed that the average has decreased from 74.3 per cent in September 2016 to 73.4 per cent in April 2017.

Speaking to Mortgage Business, CoreLogic Asia Pacific head of research Tim Lawless emphasised that the downward trend isn’t a recent phenomenon.

“In fact, looking at the national series, it peaked back in early 2013 when the national application LVR was about 79 per cent, and it's been generally trending lower since that time, which really coincides with the beginning of the growth cycle that we're currently in.

“The connection between the very strong growth rates in Sydney and Melbourne and the trend towards lower application LVRs suggests to me that we're seeing a lot of the equity, a lot of the wealth that's being created, in these housing markets that have been very hot like Sydney and Melbourne, is being utilised to either upgrade in the housing market or to re-invest.”

Further, Mr Lawless explained that another factor contributing to the downward trend is the shifting regulatory environment and lenders’ “changing appetite” for risk.

“We are seeing that lending and credit policies from the banking sector have tightened, and that means that banks are generally looking for deposits of at least 15 to 20 per cent from most buyers.

“The downward pressure is partly due to regulatory changes, but also through the banking sector's own risk management policies. With the rate of value growth in Sydney suggests the marketplace is becoming imbalanced in terms of values relative to incomes, values relative to debt levels, and values relative to rental rates.

“So, I think when we start to see signs that there's some imbalance, the banks will naturally start to become more averse to risk, and they'll start to try to ameliorate some of that risk through larger deposits and tighter lending and credit policies,” he explained.

Mr Lawless’ comments come after a series of lenders have announced changes to their maximum LVRs.

Earlier this week NAB announced that it will require a new maximum LVR on interest-only loans of 80 per cent.

Meanwhile, CBA said it will reduce the maximum LVR from 95 to 80 per cent for new owner-occupied, and from 90 to 80 per cent for new investment home loan applications with interest-only payments.

ANZ announced that from Monday, 29 May, interest-only availability for both owner-occupier and investment lending will be restricted to maximum 80 per cent LVR for new and increased lending, and Westpac said its new maximum for owner-occupied interest-only is 90 per cent.

It is not certain as to whether the downward trend in LVRs will continue, according to Mr Lawless, who explained that it depends on what occurs in the housing market.

“There are signs at the moment that the market's moving through a point where we're seeing growth rates slowing down. I think the jury is still out as to whether the market has peaked or not. There's growing evidence to suggest that the market has lost momentum.

“If [there are] some price falls in markets like Sydney and Melbourne, then they would probably reflect in this downward trend in LVRs starting to level out as well.”

[Related: Big four bank announces IO lending changes]