An economist claims that many buyers have been prevented from entering the housing market by Australia’s desire to establish a strong financial system.
Tim Reardon is the chief economist of the Housing Industry Association. He stated that first-home buyers have been leaving the market due to the decade-long reforms following the global financial crisis. This has resulted in a decrease of homeownership. Reardon said that Australia needed to revise its banking regulatory environment after the GFC when financial institutions failed.
He stated that the Treasury and other regulatory agencies had been working to lower the risk of residential loans within banks, in order to avoid being required to take over banks’ risk.
What are some of the changes?
Regulators and the government used the “belt and braces” approach to ensure that the bank sector was “unquestionably strong.” Because residential mortgages are now more risky than ever before, mortgage lending has become more capital-intensive.
In addition, financial institutions started charging higher borrowing costs to cover additional costs. These charges are applicable to higher-risk loans, such as loans with high loan-to-value ratios and investors’ interest-only loans.
The Australian Prudential Regulation Authority reviewed the guidelines regarding residential mortgage lending. Since 2014, APRA conducted this review three times. Reardon stated that the 2019 guidelines are stricter than those of 2014.
“Banks have to be more cautious about the incomes and living expenses of applicants.” Reardon said that there are stricter criteria to determine loan serviceability buffers. When assessing an applicant’s income, lenders must not consider non-salary earnings. “Individuals who are applying for interest-only loans must meet stricter criteria. Additionally, guidelines have been created to assist those who wish to lend to super funds that are self-managed.
When the housing market was hot, regulators couldn’t tolerate the rate at which interest-only and investor loans grew. The result was tightening, which included a 10% limit on investor-credit growth as well as interest-only borrowing. These restrictions were finally removed.
Banks are looking for high-quality borrower
Reardon believes banks can be open for business. However, they have reduced the criteria borrowers must meet to qualify for “high quality” housing finance.
Reardon explained that the problem lies in the fact that the bank sector had to eliminate much of the flexibility in the mortgage market in an effort to make homeownership affordable for households that have variable credit quality. This was in pursuit to an ‘unquestionably stable’ financial system.
LVRs of greater than 90% are the only source for home buyer loans. They only account for 7%. They accounted for 20% in all new lending in 2009
The GFC stimulus caused the first-home buyer boom to peak in 2009. Reardon stated that the ability to get finance at a high LVR was a major benefit for first-home buyers.
The federal government has launched several initiatives in an effort to increase market participation. The First Home Loan Deposit Scheme (FHLDS), for instance, aims to help eligible borrowers break into the market with as little as 5% deposit.
“Ensuring that homeownership remains an attainable aspiration for Australian households is an equally important objective,” Reardon said.