The housing industry is attempting to attract new home owners and customers by raising LVRs and reducing savings requirements, but experts warn the market has shifted significantly from last year and affordability has declined.
The warnings come as new data from the Housing Industry Association shows sales of new homes fell by 7% in July, prompting calls for a boost in housing supply to ease pressure on prices.
“There needs to be some caution about the capacity to make repayments,” Housing Industry Association chief executive Graham Wolfe told SmartCompany.
A number of lenders moved to make finance more attractive to first-time buyers yesterday, introducing new products and easing savings requirements. Yellow Brick Road, founded by Wizard Home Loans founder Mark Bouris, has introduced a new product designed to “get first home buyers into their home sooner”.
“It basically means that FHB no longer have to show genuine savings – if the parents would like to gift their children money for a deposit, or if you receive a tax return or simply sell something and have an amount large enough for a deposit, we can help,” he says in a statement.
“This product will help first home buyers get into the market sooner.”
Bouris points to the official Australian Bureau of Statistics data which reveals first home buyer commitments as a percentage of total owner occupied housing finance fell by 11.1% in the year to June – representing 60,000 fewer first home buyers.
In their place are investors, looking to capitalise on bargains in the second half of the year as demand falls away and a flood of listings causes sellers to reduce their prices to more realistic levels.
Meanwhile, Westpac moved its LVR ratios upwards yesterday, in another sign the banking industry is becoming more accustomed to the state of the housing market. For new customers, the LVR increased from 87% to 92%, while its LVR for existing customer remains at 97%.
Westpac spokesperson David Lording says the move isn’t necessarily designed to attract first home buyers, but says “we do like to support the first home buyer market”. He says defaults are at historic lows, and the bank feels comfortable making such a move.
BankWest also introduced a new product, designed specifically to help home buyers escape low affordability woes. The “Rate Cutter Home Loan” is designed to “get better with age”, with a discount that increases over time.
“The mortgage will start with a 0.40% p.a. discount off the Bankwest standard variable rate, and then increase by 0.10% p.a. each year for the next four years – to a maximum discount of 0.80% p.a. – which will apply for the remaining life of the loan,” the bank said in a statement.
“If you are looking for a lower interest rate, buying your first or second home, or even investing in property, this home loan will be the perfect choice,” head of mortgages Dean Gillespie said in a statement.
However, there are fears first home buyers will struggle to maintain their mortgages as interest rates rise, especially following a year of massive growth in which Melbourne prices grew by over 25%, according to some metrics.
ANZ property research analyst Dylan Eades says the first home buyer market has been weak for quite some time, and will stay that way moving into 2011.
“The first home buyer’s grant has disappeared now, and the hub of activity formed from that has disappeared. We had interest rate rises this year, and we’re expecting another 25 basis points early next year, which will make affordability a lot tougher for first home buyers.”
Westpac senior economist Matthew Hassan says affordability is much more difficult than last year, and first home buyers will find it harder to stay afloat given more interest rate rises are coming.
“You do have a diminished affordability proposition. Not only are interest rates higher, but prices have ratcheted significantly higher as well.”
“Although we don’t see aggressive interest rate rises of price growth going forward, I think by the same token we aren’t going to see affordability propositions improve much as well. We’re going to see another few interest rate moves over the next year or so, and that will affect affordability as well.”
For the Housing Industry Association, it all comes down to supply. Their latest data, released yesterday, revealed new home sales fell by 7% during July – the third consecutive fall. Sales were down by 2% compared to the same point in 2009.
Wolfe says more needs to be done to increase supply, which will in turn ease pressures on affordability and push more first home buyers into the market.
“Supply is falling but population growth is increasing. The demand is certainly there, and only getting greater. We are seeing rental increases as a consequence, and then property prices simply keep going upwards. The answer to all these things is a good supply of affordable homes.”
Australian Property Monitors general manager Anthony Ishac says while banks need to be careful and accommodate the risks in lending to first home buyers with higher LVRs, there is still a lot of capacity to lend.
“A lot of the second tier lenders like BankWest are all fighting for market share, and one of the ways to do that is to make the lending process easier for the customer. It’s difficult to say whether the market is necessarily ripe, but there is always demand for finance.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
