DJ Australian Banks Boost Home Loans Despite Record Negative Equity - Study
SYDNEY (Dow Jones)--Australia's banks are so desperate to drive mortgage growth that they are increasing their loan to value ratios at a time when a record number of homeowners are in negative equity, according to a report released Wednesday by Fujitsu Consulting and J.P. Morgan. About 6.4% of homes across the country are now valued at less than their initial purchase price, the joint study found, confirming data from the RP Data Equity Report for the December quarter released this week. The average mortgage cost in Australia is now twice what it was in 2005, said Martin North, the executive director of Fujitsu Australia and New Zealand. "Nearly one in three borrowing households have very little free cash," he said. "The rising cost of living, coupled with negative equity for some, is putting these households under extreme and long-term pressure." Yet the average loan to value ratio offered by Australia's big four banks--ANZ Bank (ANZ.AU), Commonwealth Bank of Australia (CBA.AU), National Australia Bank (NAB.AU) and Westpac (WBC.AU)--has risen to 68% from 64% in recent months as banks have tried to boost lagging lending growth. The growth in loans to first-time buyers of between 90% to 95% of the value of the property--the type of leverage seen in the U.S. before the sub-prime mortgage crash--has also "seen a significant escalation," with some banks now offering loans of 95% to 100% of the property value, the Fujitsu-J.P. Morgan report said. Australia's banks have been well-regarded in the global financial system due to their high levels of capital and low exposure to the bad debts that have rocked their peers in Europe and the U.S. in recent years. However, slowing credit growth in Australia--which Fujitsu and J.P. Morgan pegged at 3.5% in January on a 12-month annualized basis and expect to remain in the "mid-single digit range" for years to come--means the banks now face slowing profit growth at a time when the cost of raising funds overseas remains high. Australia has entered a "new normal" for the mortgage industry, with slower growth in home loans likely for years to come, J.P. Morgan banking analyst Scott Manning said. But he said the Big Four banks are unlikely to be able to raise interest rates any time soon, as any rise in funding costs this year is likely to be limited to between 5 and 10 basis points, compared to an average rise of 25 basis points since mid-2011. "We have seen a fundamental shift in risk appetite by borrowers, lenders and regulators leading to a more subdued home lending environment," he said.
