High Risk Postcodes Called Out by NAB

National Australia Bank (NAB) just highlighted 83 postcodes across Australia where the credit risk is now too great to justify high-LVR lending.

Homebuyers will now have to cough up a 30 percent deposit in 40 “Group A Restricted Postcodes” where NAB says there has been a “significant deterioration in credit risk.” Most of these are in Western Australia and Queensland mining towns.

NAB also noted 43 “Group B Restricted Postcodes” where homebuyers can only qualify for an 80 percent lend. According to NAB, these areas “are exhibiting characteristics which may indicate future deterioration in credit risk.”

The vast majority of these “B” list postcodes are in Sydney, but inner Melbourne is also in the mix, as is Perth, Adelaide and Brisbane CBD’s.
The common thread of these areas is the glut of high-rise apartment dwellings.

Here’s a complete list of NAB’s Restricted Postcodes:

What Can We Make of NAB’s New Restrictions?

It doesn’t take a genius to see that NAB’s move is a bearish signal for real estate values in these areas. Banks make money by lending money, so when they want to decrease their risk exposure in a particular postcode, it doesn’t bode well for investors speculating on property prices.

Here are three specific insights we can gather from NAB’s credit tightening:

1. There’s Still a Downside Risk in Mining Towns

Since the downturn in the resources sector, mining companies have shed jobs and moved to a fly-in/fly-out model rather than promoting on-site living. As a result, housing supply has outstripped demand, causing prices to fall. Property values in some areas have been hit as hard as 30 to 40 percent.

After such a significant correction, the tendency is to see the cheaper prices as a buying opportunity, but calling the bottom of a market is not easy.

There may also be many investors in these areas who are continuing to hold after huge losses, betting that the market has bottomed out, so there’s no more to lose. I’ve mentored, and at times counseled, several mining town investors who struggled with the thought of selling and realising a loss. Psychologically, the admission of failure is often too emotionally painful.

NAB’s move could be seen as evidence there is still more downside to prices ahead. If the banks aren’t calling the bottom yet, perhaps you shouldn’t, either.

2. Your CBD Apartment Just Got Harder to Sell

The central business districts of our five largest capital cities have been the hotbed for new apartment construction. Steve McKnight was warning of an oversupply in apartments 18 months ago. Now NAB has taken focused measures to cover its shareholders from the inevitable outcome of this oversupply.

If other banks follow suit, we’ll see demand diminish further, as would-be homebuyers find it increasingly difficult to scrape together cash for deposits.

3. Sydney Isn’t Bulletproof After All

The “B” group overwhelmingly consisted of Sydney suburbs, accounting for 34 of the 43 postcodes listed as “exhibiting characteristics which may indicate future deterioration in credit risk.” In case you’re wondering, that’s economist speak for “we are relatively confident that these areas will decrease in value.”

Here’s another way to say it: NAB believes these are the suburbs where homeowners are most at risk of defaulting on mortgages in the future. It isn’t hard to imagine a scenario a few years from now where interest rates are on the rise and homeowners can no longer afford to service their million-dollar debt.

If NAB is concerned about lending in Sydney, perhaps you should be concerned about buying there.

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.