Finance Property ‘Absolute unaffordability’ for first home buyers
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‘Absolute unaffordability’ for first home buyers

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First home buyers — an endangered species

First home buyers now make up the smallest proportion of the housing market on record, Australian Bureau of Statistics figures that go back 22 years now show.

The bureau’s data show the proportion of first home buyers dipped to 12.5 per cent in September, the lowest level since it started collecting the figures in July 1991 — the previous low was 12.8 per cent in March 2004.

The actual number of first home buyers (6,363) was only the lowest since February this year, but they were swamped by an influx in upgraders and investors.

First home owners aren’t seeing relative affordability, they’re seeing absolute unaffordability.

The value of investment lending leapt 5.2 per cent in September, while the number of loans to owner-occupiers rose 4.4 per cent.

UBS Australia’s chief economist Scott Haslem said relative affordability was driving demand from investors and upgraders, leaving first home buyers unable to compete.

“Housing in Australia still remains pretty expensive, but it has become cheaper than it has been for the last ten years given the fall in interest rates and, up until recently, pretty low prices,” he said.

“In contrast though, first home owners aren’t seeing relative affordability, they’re seeing absolute unaffordability, so I think for first home owners housing in Australia still looks pretty expensive.”

Westpac’s senior economist Matthew Hassan said high home prices were one factor, but there were a few other reasons that first-time buyers were steering clear of the housing market.

“Previous state government incentives for first home buyers, which have become less generous over the last year or so,” he explained.

“Also, in some cases, we’re seeing some strains appearing on labour markets which may be more of an effect on a first home buyer.”

Bigger loans granted

The fall in lending to first-home buyers came despite research that showed banks were willing to lend more of the purchase price than they were a few years ago.

Martin North, the principal of Digital Finance Analytics, said lenders were competing strongly to win business in a lower credit growth environment, and that meant lower lending standards.

“There has been a slight acceleration of higher loan-to-value ratio loans being written. From the lows back in 2009-10 they’ve pretty much doubled what they were,” he observed.

“That is explained partly by some first time buyers essentially trying to access the market and the banks being willing to lend a little bit more than they were previously.

“And we’re also seeing a very sharp rise in the number of investor loans and some of those investor loans are interest only loans and deliberately high loan to value ratios because obviously what they want to do is to get the tax benefits.”

The major lenders strenuously denied they were lowering standards.

However, Mr North’s figures showed they were now lending an average of 80.8 per cent of the purchase price to first home buyers, up from 72.5 per cent just under three years ago.

Non-bank lender ‘even less cautious’

He said non-bank lenders were probably being even less cautious in how much deposit they required from home loan borrowers.

“Those non-banks are also happy to provide higher loan to value ratio loans, but those do not appear in the official statistics because they’re measured differently,” he said.

“I think we have to watch this quite closely. We could be laying some traps for the future if we’re not careful.”

The trap was that financial institutions would lend too much of a property’s value, exposing them to losses if the home owner defaulted in an environment in which real estate prices had fallen.

Mr North says property price falls were unlikely in the short-term, but Australia’s market was vulnerable in the longer-term.

“I’m still worried about the absolute level of house prices, they are still very high by any international comparisons,” he warned.

“So it’s not a bubble, it’s a longer term issue that we’ve got a systemic issue in Australia.”

Mr North said he was worried that Australian banks were already forgetting the lessons of the global financial crisis.

“I’m not sure that all of the lessons from 2007 onwards have been really lodged in the back of the brain and we’re seeing perhaps some revert to type,” he added.

The Reserve Bank has already publicly warned banks to be careful about low-deposit loans and Mr North said more regulation was likely if banks did not heed that warning.

“Overseas, for example in New Zealand, there have been some direct regulatory intervention to cap the proportion of high loan-to-value loans,” he observed.

“I think in Australia we are early in that cycle, but the trends are now a little more concerning and I would not be surprised to see some further action.”