First-time homebuyers would be hardest hit if loans were limited: experts

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First-time homebuyers could be among the hardest hit if Australia’s banking regulator responds to calls to limit home lending, experts say.

Almost every corner of the Australian real estate market has taken off since the end of last year, with home values ​​rising to their level. fastest past in 32 years in March, according to CoreLogic figures released Thursday.

Some big banks have started forecast revision, forecasting a rise in Australian house prices of nearly 20 percent by the end of the year.

Soaring prices and expectations that they will continue to rise for some time this year have become a cause for concern as the market risks pushing many homeowners down, especially potential first-time buyers. .

As a result, there has been increasing pressure on the banking regulator – the Australian Prudential Regulation Authority – to step in and curb bank lending to buyers who are stretching to their limits.

But Alison Pennington, senior economist at the Australian Institute’s Center for Future Work, said first-time homebuyers would be the biggest losers if that happened.

“It would have uneven and unfair consequences for people trying to enter the market if they increased the size of the deposit to the size of the loan,” Ms. Pennington said.

So far, banks have pushed back, insisting that they have yet to see an increase in subprime lending and will continue to track loans with loan-to-value ratios and debt-to-value ratios. high income, which are ticking.

In the past, the regulator has put the brakes on. When there was an investor-led boom between 2015 and 2017, it succeeded in putting a damper on interest-only lending and the number of investor mortgages on banks’ mortgage books, according to senior economist at Westpac, Matthew Hassan.

Since those two measures were removed in 2018, investor loans and interest-only loans have remained well below these ceilings at “low” levels, Hassan said.

This time around, however, those caps may not be necessary at all, as the current boom has so far been led by homeowners and fueled by extremely low interest rates, he said.

It all depends on how the recovery in the housing cycle unfolds from here, Mr Hassan said, which would determine the tools the regulator would use to slow lending.

APRA President Wayne Byres said last week he would “think carefully about the tools that might work” to curb excessive risk-taking in the housing market. The Reserve Bank said in its monthly statement on Tuesday that it would “closely monitor trends in mortgage lending” and stressed the importance of maintaining lending standards.

If macroprudential rules were put in place – such as limits on large loans with small deposits or increases in the repayment buffer – this would have negative consequences for borrowers in general but especially for first-time homebuyers. according to Brendan Coates, the Grattan Institute’s household finance program director.

“It’s fair to say that first-time homebuyers are generally disproportionately affected by macroprudential rules, as they tend to have smaller deposits and take out larger loans relative to their income,” he said. Mr Coates said.

“These tools are not free. This is why APRA is reluctant to use them unless they are concerned about financial stability. “

But the value of new homeowner loan commitments fell 1.8% in February, the first drop since May 2020 when it remained 55.2% from a year ago, figures show. released Thursday by the Australian Bureau of Statistics.

The number of home loans to first-time buyers also fell 3.3% in February, the first drop since May 2020, although it remains at historically high levels.

At the same time, the value of mortgage loans to investors rose 4.5% to 31.6% compared to February 2020.

With the increase in lending to investors, charging higher interest rates or putting a cap on lending was a better way to fix the problem, Ms. Pennington said.

“If APRA targeted its credit policy to limit the granting of credit to investors, that is, to people who buy investment properties, this would open up homes in city centers and suburbs to first-time buyers. . “

The loan reform targeting investors in 2017 was a good example of limiting credit growth that did not affect first-time homebuyers, according to Eliza Owen, head of residential research at CoreLogic in Australia.

“I don’t know if first-time homebuyers would be completely spared from, say, a limitation on the debt-to-income ratio,” Ms. Owen said. “It could slow down activity between multiple real estate buyers to low-income first-time home buyers.”

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