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Is Westpac Banking Corp taking on more property risk than it can handle?

Credit: Donaldytong

Reversing a move last year to tighten lending conditions, Fairfax media reported this morning that Westpac Banking Corp (ASX: WBC) has reduced its deposit required for property investors to 10% of the property’s value, down from 20% previously.

The changes are in line with the deposit requirements of Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB), although Westpac has additionally decided to stop lending to foreign investors.

Many banks last year raised the interest rates for property investors and lifted their income and documentation requirements in an effort to reduce growth in investor loans to below the 10% threshold set by the Australian Prudential Regulatory Authority.

An unintended side effect of this has been to reduce demand for property in the booming Melbourne and Sydney CBD areas. Separate reports by Fairfax have suggested that property developers could see a period of rising contract delinquencies as the resale value of some apartments is substantially below the ‘off-the-plan’ asking price.

Ironically however, investor demand could again be on the rise thanks to recent cuts in interest rates and now, Westpac’s cuts to its required deposits.

But what’s the impact on bank shareholders?

For now, not a lot. Westpac may have needed to reduce its requirements to remain competitive among other banks which didn’t use the higher Loan To Valuation (LVR) ratios. Over the next few years, investors will want to evaluate the risks from a cooling property market or potential declines in housing prices.

Westpac and the other banks remain well placed with quite low delinquencies on their loans, although a significant amount of its earnings are derived from home loans to investors and owner-occupiers.

A decision to buy the banks today involves an implicit assumption that the housing market won’t deteriorate, and investors would be well served to do their research in this area first.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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