The evolving role of LVR in the housing market

The loan-to-value ratio (LVR) in Australia plays a key role in securing finance approval, as well as accessing better interest rates and loan features. However, LVR also has a significant impact on the housing market in general.

What is LVR?

LVR is a percentage figure that banks and lenders use to assess the risk of your home loan. It represents the balance of a loan relative to the current property value. You can easily calculate your LVR yourself using the following formula:

LVR = (Loan Balance / Property Value) x 100

While your LVR is one of the main factors that lenders consider when assessing your loan application, it also plays a dynamic role in the Australian housing market. But before we dive into the role of LVR in the housing market, it’s important to understand how the property market works.

How the property market works

The Australian property market generally cycles through four phases: boom, downturn, stabilisation and upturn. These phases are influenced by various factors, including economic conditions, interest rates, government policies and demographic trends.

During the boom phase, property prices rise rapidly. This phase is characterised by high demand, often outpacing supply, leading to significant property price increases. Once the market reaches its peak, price growth slows down as properties become less affordable and demand starts to taper off.

Eventually, the market will reach the downturn phase. During this period, property prices begin to decline. This phase can be triggered by various factors, like economic downturns, rising interest rates or an oversupply of properties as homeowners try to take advantage of strong sales prices during the boom.

After a downturn, property prices stabilise at their lowest levels and market activity is subdued. There’s often less activity than usual as buyers and sellers wait to see what the property market does next.

Finally, the market begins to recover during a market upturn. Economic conditions stabilise and confidence returns to the market, leading to increased activity. During this time, more buyers enter the market, snapping up stock and causing property prices to increase. From here, the property market continues to cycle through the different stages.

Over the past few years, the Australian property market experienced a significant boom brought on by the COVID-19 pandemic. Driven by government support payments and increased household savings, more buyers jumped into the property market causing prices to skyrocket over a short period of time.

The role of LVR in the Australian housing market

The role of LVR in the Australian housing market is multifaceted, affecting borrowers, lenders and the overall market dynamics. Here are some of the ways LVR shapes the landscape of homeownership and investment in Australia.

Regulatory changes

From time to time, the Australian Prudential Regulation Authority (APRA) has periodically adjusted LVR requirements to manage financial stability and housing market dynamics.

For example, APRA has imposed restrictions on high-LVR lending to mitigate the risks of rapid housing price increases and ensure that banks maintain prudent lending standards. These regulations help curb speculative investments and maintain a balanced housing market.

Impact on borrowers

LVR impacts home loans by determining how much a borrower can borrow and the interest rates they’re offered. Higher LVRs typically result in higher interest rates and more stringent lending conditions, as high LVR loans pose a greater risk to lenders. On the other hand, borrowers with lower LVRs often receive better loan terms and lower interest rates.

Ultimately, changing LVR requirements can influence borrowers' ability to enter the housing market, impacting first-time homebuyers and investors differently.

Influence on housing prices

LVR regulations can influence housing demand and prices. By tightening LVR requirements, regulators can cool down an overheated housing market, reducing speculative buying and stabilising prices.

On the flip side, relaxing LVR restrictions can stimulate demand, potentially leading to increased property prices. This balancing act is crucial for maintaining affordability and preventing housing bubbles.

Risk management for lenders

LVR is a critical metric for lenders to assess the risk of a loan. High-LVR loans are riskier because they leave lenders more exposed in the event of a borrower defaulting, especially if property values decline.

By managing the proportion of high-LVR loans in their portfolios, lenders can better control their risk exposure. With this in mind, changes in LVR policies often influence lenders' strategies and the overall stability of the financial system.

Market dynamics and economic conditions

Economic conditions, like interest rates, employment rates, and overall economic growth, interact with LVR policies. During periods of economic uncertainty or downturns, stricter LVR requirements may be implemented to protect the financial system and housing market. Conversely, in times of economic growth, more relaxed LVR policies can encourage borrowing and investment in the housing market.

First-time buyers and affordability

First-time home buyers in particular are often affected by LVR regulations, as they often have smaller deposits and higher LVRs. Changes in LVR policies can either facilitate or hinder their entry into the housing market. That said, the Australian Government has implemented a range of schemes and concessions aimed at supporting first-time buyers. From government grants to incentives for low LVR loans, these policies are designed to make homeownership more accessible for first-time buyers.

Please note that Unloan does not participate in the Home Guarantee Scheme, Victorian Homebuyer Fund or other government home-buyer assistance schemes. If you are eligible for the First Home Buyer Grant, these funds cannot contribute to your 20% deposit. Please speak to your conveyancer on how best to approach this.

Investor activity

Investor behaviour is also influenced by LVR requirements. Higher LVRs for investment properties can deter risky investments and stabilise the housing market and vice versa. Encouraging property investment can potentially lead to increased rental property supply, but also higher property prices.

LVR is more than just a figure that lenders use to assess the risk of your loan. As it turns out, the role of LVR also extends to the property market, from balancing the market to influencing property prices.

Please note that Unloan does not currently accept home loan applications with an LVR of more than 80%.

‍

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking independent taxation and financial advice before making any decision based on this information.