Chances are you’ve heard of the banks’ property ‘blacklists’ – the suburbs that the banks really don’t want to lend you money to purchase in. If you’re shopping for a loan to buy in a bank’s blacklisted suburb, you will find they will decrease the Loan to Value Ratio (LVR), therefore requiring an additional deposit of 20 or 30 per cent and reducing the perceived risk to the bank. Or they simply won’t lend to you.
A quick Google search will give you results like an article in October 2017 that claimed 600 towns and suburbs were on NAB’s property lending blacklist. But how valid are these lists and how transparent is the information provided? What agenda is driving these suburbs to appear on the list one month and gone the next? How valid are these blacklists, and how they can affect people as purchasers, whether you are an occupier or an investor?
The central question here is how does a bank decide that a suburb is too high risk for their liking and should belong on their blacklist?
There are two reasons why a suburb might appear on blacklists.
Reason 1. The banks believe a certain suburb has too much supply, with an excess of development being carried out. This could apply to suburbs with high density housing or low density new house and land estates.
Reason 2. The banks have too much exposure in one particular suburb. For example, the bank may have lent too much money to investors and/or owner occupiers.
Looking at the first reason, a suburb being on a blacklist can be a good reason to dig deeper and look at the supply and demand in the area. For more on how to utilise supply and demand figures in real estate, take a look at our recent article ‘The danger of misunderstanding figures for supply and demand in property’. Don’t just accept that the suburb you’re interested in is on a bank’s blacklist and scratch it based on that fact alone, because it just isn’t enough — as is clear from reason two.
Reason number two is a crucial reminder that different banks may treat your lending needs differently based on their own interests. While one bank may be looking to limit their exposure in a certain suburb, another may not have that same overexposure.
The truth behind blacklists is that banks may very well choose to blacklist suburbs because of their personal, circumstantial risk assessments, not to protect potential lenders from a poor performing suburb as some may be lead to believe.
When property blacklists and results don’t align
Over the last 12 months the Sydney property market has declined 0.32%, however the suburbs NAB Blacklisted in Oct 2016 have performed very well.
This list shows Sydney suburbs that were on that NAB October 2016 Blacklist, demonstrating that while a 20 per cent deposit was required to gain a loan to purchase in these areas, they performed well.
Chatswood NSW: 12 Month Growth House 4.42%, Apartments 7.07% growth
Average 10 Year Capital Growth: House 9.91%, Apartments 7.58%
Putney NSW : 12 Month Growth House: 31.58%
Average 10 Year Capital Growth: House 8.99%
Newington NSW: 12 Month Growth House 5%, Unit 2.64%
Average 10 Year Capital Growth: House 7.78%, Apartment 6.29%
Auburn: 12 Month Growth: House 9.48%, Unit 5.66%
Average 10 Year Capital Growth: House 9.32%, Unit 8.04%
Baulkham Hills: 12 Month Growth: House 10.91%, Unit 14.04%
Average 10 Year Capital Growth: House 9.22%, Unit 7.65%
The Ponds: 12 Month Growth 7.14%
Average 10 Year Capital Growth: 14.15%
The impact of blacklists on selling
Blacklists aren’t just a buyer’s consideration — if you’re selling in a blacklisted suburb, you could be affected too. We frequently help clients through the process of selling property, and a blacklist is something we take into account when timing a sale.
Even if a suburb has been performing well, reluctance from banks to lend to buyers interested in your blacklisted suburb or requiring a larger-than-normal deposit means you could experience reduced interest or find your buyers require more time to secure finance.
The broader impact of blacklists
Understanding that blacklists are not always what they seem is essential because they are often referenced as a means of assessing the state of the property market.
Lending blacklists that keep coming up from banks seem to be the basis of many articles that feature in publications, such as the Financial Review as an example. These articles use these lending blacklists as an indicator of what’s happening in real estate more generally. However, as we’ve explored throughout this article, while a suburb appearing on bank blacklists could encourage you to explore its potential risks, there are many bank-centric reasons why blacklists feature the suburbs that they do from one month to the next.
Certainly major economic occurrences such as a downturn in the mining industry will trigger a bank to place suburbs on a blacklist, but only when the major industries are slowing down. In this instance, the property market would have already started to cool when banks announce the suburbs to go on the blacklist.
In summary, while you shouldn’t base property decisions solely on blacklists, they are still something to add to your research arsenal. Never let a bank’s property blacklist deter you from a purchase without doing the research yourself.
Better yet, enlist our help in assessing the optimal property investment choices to reach your goals. We take a three-tiered approach to property research and our experienced team of property investment experts can use our proven strategies to help you discover advantageous property opportunities. Contact us here or call 1300 25 25 50.
Written by Lynton Stevenson, Managing Director at Providence Property Group