National Australia Bank has released a list of suburbs where it identifies higher risk of loan default on dwellings.
As a result, the lender has announced limits to the amount of money it will loan to home buyers as a percentage of what the dwelling is worth.
This is known as putting a cap on the loan to value ratio (LVR).
The highest risk suburbs identified, classified by NAB as ‘Group A’, will have a LVR cap of 70%.
Of the 91 suburbs identified in this group, 58 suburbs were in Western Australia while 20 were in Queensland.
The rest were spread across Tasmania (9), South Australia (3) and the Northern Territory (1).
Many are mining towns
Many of the suburbs in this high risk group – such as Boddington (WA), Emerald (QLD) and Olympic Dam (SA) – are actually mining towns.
It is unsurprising to see these towns on the list.
Suburbs such as these, where employment is largely reliant on one sector, are subject to higher risk from global economic shocks.
It is the local economy equivalent of putting all your eggs in one basket and then sending that basket down some white water rapids.
Take Boddington as an example.
At February 2011, the iron ore price averaged $168 per dry metric tonne.
ABS Census data showed at this time that 36.8% of the working population in the suburb were directly employed in metal ore mining.
A further 10.9% were employed in the related sectors of land development and preparation, and engineering construction.
That’s approximately half the Boddington workforce – who live in the suburb – employed on mining projects.
So, what does the risk in Boddington property look like?
Graph 1 shows the boom and the bust of the house and unit markets in this town.
Graph 1: Boddington Dwellings – Annualised Capital Growth, 1995-2015
The Graph displays the annual rate of growth in houses and units at every month between 1995 and 2015.
The highest annual growth rate was 54% in houses, in the year to October 2006.
In this year, house values increased from $214,000 to $331,000.
Fast forward to 2013 when the mining construction boom began to wind down.
Unemployment in the region increased and it became more difficult for once wealthy workers and investors to repay loans that were taken out at the peak of the boom.
Slowdown in the growth rate of China’s GDP has greatly exacerbated the situation
China demands approximately 50% of Australia’s metal ore exports.
Couple this with a drop in the iron ore price to $76 per unit, and it is no wonder the banks are nervous.
Suburbs classified as ‘Group B’, which have slightly lower risk than ‘Group A’ suburbs, will have a LVR cap of 80%.
In other words, the bank will not provide more than 80% of what the house or unit is selling for.
What has many people spooked is that a high majority of the 90 suburbs identified in ‘Group B’ are in New South Wales.
Unlike the mining towns in Group A, Group B saw more diverse employment areas such as most of the major capital city CBD’s and metropolitan suburbs including Glebe, Chatswood and Darlington.
Among the risky factors of a record low cash rate, record high dwelling commencement figures and home loans for investors outstripping owner occupiers, employment diversity tends to be overlooked when characterising risky dwelling investment.
In fact, many heralded the real estate boom as absorbing unemployment from the mining sector.
In 2014, approximately 14% of GDP was made up of just the buying and selling of real estate.
However, the safe suburbs are likely to be ones where residents can sustain their mortgages once the market moves into down swing, and developers stop building.
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