High house prices make a mockery of the bank lending crackdown

The banks once lent roughly four times a mortgage applicant’s annual income, rocketing house prices have seen that double.

For generations, the banks lent on a rule of roughly four times the mortgage applicant’s annual income, that’s now doubled.

If you want hard evidence that our property market has decoupled from reality perhaps this is all you need to hear: NAB has decided to introduce new rules about how much it will lend home buyers — the details emerged in recent days when the bank let it be known it will not allow new customers to borrow more than eight times their annual income.

Eight times income! What on earth? This is supposed to be NAB responding to concerns about household debt getting out of hand.

The average income is about $80,000 — the average house price is about $640,000 so the bank has to get a ratio that allows the average earner buy a house, so it comes up with a maximum of eight times income.

Cut to the chase, the average borrower cannot afford the average house under any logical lending structure, so an eight times LTI (Loan to Income) target is introduced which effectively retrofits lending rules. This is not a jab at NAB, any bank might do it, rather it is to point out that property prices are now so high what passes for normal is not normal in any way.

For generations the way it worked was that the banks lent on a rule of roughly four times the applicant’s annual income.

Now the dial has moved for sure but it has not doubled.

Cameron Kusher at property researcher CoreLogic suggests: “It’s a useful new metric and I would see it as complimentary to the indicators we have already, but it certainly seems like a pretty high figure.”

In the UK where house prices have also been rising strongly — and similar to Australia the rises are heavily loaded towards metropolitan suburbs — British regulators have recommended LTI for most new loans (85 per cent of all new lending) should be 4.5 times.

A few weeks ago the Governor of the Bank of England, Mark Carney, announced that the 4.5 ratio “insurance measures” will become “structural features of the UK housing market”. In other words 4.5 times is the new normal.

The new limit for NAB — at almost twice the UK amount — will also be used across its subsidiaries such as the Advantage Group which is used by the nation’s mortgage brokers.

LTIs are based on total gross income as revealed in application documents — the veracity of the numbers on these documents is already under question across the mortgage industry.

But at least the LTI is a measure which looks at the actual earning capacity of the loan applicant. Until now, the more commonplace loan to valuation ratios — used by the ANZ this week in its postcode crackdown in Brisbane and Perth — concentrate on the value of the home. NAB is, at least, moving in the right direction, the only problem is that it is not doing it seriously.