With market concerns over a housing bubble forming in Sydney, and possibly Melbourne, it's timely to take a look at who's most exposed to potential falls in property prices.
As the chart below shows, Sydney median house prices have galloped ahead in recent times, leaving most other capital cities behind.
For those who may not remember, Sydney median house prices crashed down by 13.9% between September 2008 and March 2009 and dropped by 10% within six months in 2011, according to data from the Australian Bureau of Statistics (ABS).
The biggest concern, of course, is how much of that is driven by investors, perhaps speculating on short term rises to lock in capital gains, or those jumping into the market for fear of missing out (FOMO). Investors may be also much more likely to sell out if property prices begin to fall back, perhaps exacerbating the falls.
The following chart shows that the value of investors' loans has overtaken that of owner-occupied loans, particularly as the official cash rate has dropped, taking mortgage rates with it.
The following table also shows that Westpac Banking Corp's (ASX: WBC) has the highest dollar value of investor loans at $151 billion as at May 2015, compared to Commonwealth Bank of Australia (ASX: CBA) with $128 billion, with National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) with less than half that exposure.
| Investors | Owner-Occupied | Mortgages percent of loans | Total All Loans ($m) | Investors ($m) | |
| Australia and New Zealand Banking Group | 18% | 43% | 60% | 343,421 | 60,375 |
| Bank of Queensland Limited (ASX: BOQ) | 35% | 44% | 80% | 30,194 | 10,658 |
| Bendigo and Adelaide Bank Ltd (ASX: BEN) | 24% | 42% | 66% | 46,358 | 11,147 |
| Commonwealth Bank of Australia | 24% | 45% | 70% | 522,170 | 127,904 |
| National Australia Bank | 17% | 41% | 58% | 397,736 | 65,759 |
| Suncorp Group Ltd (ASX: SUN) | 26% | 54% | 80% | 47,919 | 12,335 |
| Westpac Banking Corporation | 32% | 39% | 71% | 471,106 | 150,869 |
Source: APRA
Westpac's recent move to limit Loan-to-valuation (LVR) ratios to 80% for investor loans shouldn't then come as much of a surprise. In other words, investors wanting a mortgage loan will have to stump up a deposit of 20% of the property value or more, before the bank will give them a loan. Investors could previously get a loan with just a 5% deposit.
National Australia Bank has capped investor LVRs at 90%, and ANZ is reportedly taking the same action. One thing to note from the table above is that Bank of Queensland is the only bank with a higher percentage of investor loans than Westpac, but still has a maximum LVR of 95%.
The move by the three majors is to slow the rate of investor loan growth, which has jumped by 10.4% compared to May 2014, above the banking regulator's speed limit of 10% a year. The Australian Prudential Regulation Authority (APRA) announced the cap in December 2014, but clearly, the banks were unable (or unwilling) to slow investor lending until now.
Foolish takeaway
Clearly given its dollar value exposure ($151 billion and 32% of all loans) to Australian property investors, Westpac is at the forefront of any pullback in property prices. Double digit falls across the country like Sydney has experienced twice in the past six-to-seven years would be a huge problem for the bank, and it could be facing a similar issue it faced back in 1991-92 when it almost went bust.
Buyer beware.
