Buyers beware the cost of latest property boom
Given the property boom now taking place, it's hardly unexpected that the broking industry's Adviser newsletter reports a "perfect storm" for monster October results. Many mortgage broker groups are reporting record figures for last month.
Competition between the big four banks and the smaller lenders is heating up with growing confidence in the securitisation of loans as a source of finance. The industry super fund Members Equity Bank is now offering a 97 per cent loan valuation ratio (LVR), apparently to match the offerings of the larger lenders.
Whether such developments will further fuel the boom remains to be seen. First home buyers are being squeezed out by the price rises of 10 per cent or even more. The risks for purchasers with low or virtually no deposits are now much higher than they were when the market was depressed.
As Asset Check discussed last week, interest rates may have already bottomed and mortgage brokers generally are expecting fixed-term interest rates to rise. Even without rate rises, latest forecasts are for a slowing economy and rising unemployment. These developments are likely to dampen domestic demand for property.
Even if overseas investors absorb a large part of the new apartment developments triggered by the boom, supply pressures will probably slow down the future growth in prices.
The major risks of high LVR loans fall on the borrower because of the requirement for borrowers to purchase mortgage insurance. The requirements vary from lender to lender but generally for loans in excess of an 80 per cent LVR insurance is required. The higher the LVR, the higher the cost of insurance with premiums in the range of $10,000 to $15,000 or even more for LVRs in excess of 90 per cent.
There may be good reasons for borrowers to purchase properties with a high LVR ratio, such as having a high cash flow and an ability to repay the loan quickly. But when property prices are high, there is a much greater risk of the borrower moving into a negative equity situation.
There are benefits in building up a substantial deposit before purchasing. These include avoiding the need to purchase mortgage insurance and tangible proof of the ability to service a mortgage on a continuing basis. Especially if prices continue to rise, the increased development activity triggered by the boom could, as in the past, result in over-committed borrowers.
The loss of a job or marriage breakdown due to financial pressures all too often results in forced sales or even repossession of the property. This is an outcome that benefits neither the community nor the individuals directly affected. Ideally, the regulators need to ensure that products are offered only to customers who understand and can afford the risks involved.