More Granular Approach Means Postcode Scrutiny

2 May 2016

http://www.australianbankingfinance.com/banking/more-granular-approach-means-postcode-scrutiny/

There has been a lot of media attention recently on postcodes where lenders have applied more restrictive lending policies, usually around LVR, LMI availability and or absolute dollar amount that they are prepared to lend. However, this practice has been in place across most lenders, for many, many years and Nigel Butler, head of CoreLogic’s Banking & Finance, Advisory Division, asks why all the fuss?

HISTORICALLY MOST GEOGRAPHICAL  restrictions were driven by the availability of new purchasers in an area, and therefore the ability to resell at a reasonable value should this prove necessary. Hence, metro and rural zones were often the major source of differentiation.

With high profile property price crashes, in western Sydney back in 2007, the Sunshine Coast in 2012, and most recently in the mining areas such as Mackay and Moranbah, what we are seeing today is a greater focus on the market dynamics of an area, not just the numbers of properties available. Increasingly, lenders are thinking about how regions have been performing historically and are looking at early indicators of markets turning. Traditional risk factors such as rising arrears levels, unemployment rates and population growth are being complemented with rates of change in property prices; analysis of how long properties are taking to sell and whether this is lengthening; and applying an understanding of the basic supply and demand equation at a granular level.

With regard to the latter, banking executives sitting in major cities only have to look out of their office windows to appreciate how the tide has turned with new structures and cranes dominating many of our major capital landscapes. Long starved of supply, house prices have risen particularly in Sydney and Melbourne. Population growth rates have been strong with the total increases in population well above that of other capital cities, forcing wannabe buyers to fight over the limited number of available properties. However, in some areas, this dynamic is on the turn with zoning changes enabling the approval and subsequent construction of more developments, not  just the ones that can be seen with the eye, but an increasing pipeline of new properties approved for construction and awaiting for development to commence.

Startling dynamics
An analysis of data held by CoreLogic reveals some startling dynamics with many areas such as Schofields and Kellyville expected to see a significant increase in the numbers of units in the region over the next 2 years, in some this represents a 3-4 fold increase in stock. The potential impact on rental prices and subsequent demand by investors will be something to watch very closely. Of particular note will be areas which have seen depreciation in property values since the development was approved resulting in off-the-plan purchases now being worth less than customers are obliged to pay for them.

Finally, but no less importantly, lenders are imposing additional restrictions to ensure their portfolios remain strong and diverse. APRAs ‘guidance’ on levels of investment growth has generally been heeded with changes in  servicing models, credit policy and pricing making this much less attractive to many potential borrowers and has taken the heat out of a buoyant market, at least for now. However, to ensure they continue to grow effectively, lenders are taking a more granular look at markets to identify areas where growth appears to remain robust and their own concentration levels provide opportunity for further expansion without undue expo-sure risk. This ‘smart growth’ principle requires a much more sophisticated and dynamic approach to pricing, target setting, resource allocation and customer engagement, increasingly being made possible through the availability of granular data and CRM systems which enable appropriate customer activity based targeting.

In conclusion, as most informed observers have commented, the Australian economy re- mains strong and the probability of a national recession accompanied with large, widespread falls in property prices, remains remote. However, we live in a large and diverse country and this assumption does not apply equally across all geographies, a point which is not lost on our financial institution