Property loan-to-value ratios rising but economy well placed to handle debt, RBA report finds

Loan-to-value ratios are continuing to increase but mortgage arrears aren’t becoming a problem yet, the Reserve Bank of Australia says in its latest Financial Stability Review report.

But mortgage experts say while LVRs are continuing to increase and banks are becoming more lenient with regard to lending practices, arrears aren’t becoming a problem and consumers are well placed to handle debt.

The RBA report noted that although the share of new loans with loan-to-valuation ratios of above 90% has fallen “significantly” over the past few years, “it has edged up over the past year as competition in the mortgage market has intensified”.

While banks dropped their LVR ratios during the financial crisis, they are starting to creep up again. ANZ has LVRs at 90% for new borrowers, and 95% for existing borrowers, while customers at NAB, Commonwealth and Westpac are also able to access a 95% rate.

However, the RBA also found that while loans made before 2009 are causing the recent uptick in arrears, the current state of mortgages is sustainable.

“Despite the increase over the first half of 2011, the overall mortgage arrears rate in Australia is still low by international standards, and the bulk of housing loans in arrears are well collateralised.

“Moreover…there are a number of reasons why mortgage arrears are unlikely to rise as much as they have in some other countries. Not least is the more favourable macroeconomic environment in Australia.”

Fitch structured finance associate director James Zanesi says it is true that higher LVRs are associated with higher arrears and defaults, but overall he agrees with the RBA.

“I would say the main driver in terms of likelihood of default is the LVR. It is logical to say that if you have an LVR of 70%, and an LVR of 90%, the 90% mortgage holder is more likely to default, which is proven by historical data.”

However, Zanesi says it is too difficult to make sweeping statements regarding LVRs, saying instead the mortgage market performs differently based on location and differences between metropolitan areas need to be taken into account.

“If one of a few lenders increase LVRs, they don’t all jump the same way. It’s also not a short-term impact, so you wouldn’t see results of raising LVRs for quite some time.”

“Arrears rose in the first quarter, but there are not as dramatic as in other jurisdictions such as the United States. Relatively, our arrears and defaults rate is fine.”

Meanwhile, the auctions market has remained flat with clearance rates in both Melbourne and Sydney reflecting the ongoing buyer’s market.

According to the Real Estate Institute of Victoria, Melbourne recorded a 53% clearance rate, down from 55% last weekend. REIV chief executive Enzo Raimondo said in a statement consumers are still unwilling to spend.

“There can be no doubt that ongoing concerns about the health of the global economy are having an impact on the confidence of buyers in the Melbourne auction market.”

Sydney recorded a 58.6% rate, followed by Adelaide and Brisbane with respective rates of 23.5% and 13.3%.