The dearth of first home buyers is a cyclical problem rather than a structural one, Reserve Bank head of financial stability Luci Ellis has said.
“It's fair to say that serviceability calculations are binding for first home buyers and less binding for trade-up buyers and investors. So it's no surprise that as interest rates have fallen, it's the trade-up buyers and investors whose demand has increased. Meanwhile first home buyers will feel squeezed out,” Ellis said, speaking at a housing industry conference yesterday.
“This is probably more a cyclical phenomenon than a structural one. It is still probably quite disheartening for potential first home buyers. As such, it would not be a good outcome if they responded by overstretching themselves to try to get into the market during upswings.
“As well as being against first home buyers' own long-run interests, that would increase risk in the financial system. As experience overseas has shown, you do nobody a favour by trying to solve an affordability issue by making it easier for people to borrow more than they can reasonably service.”
The Reserve Bank and the Australian Prudential Regulation Authority have been emphasising loan serviceability so much lately because they are worried about the household sector being overstretched, Ellis said.
“Lenders have become more sophisticated in the ways they assess households' capacity to repay mortgage loans. Most of them have moved beyond a crude approach of applying a blanket repayment-to-income test.”
Instead, lenders are more likely to take people's actual living expenses into account, she said.
“Importantly, lenders are now more likely to apply an add-on to current interest rates when calculating the repayment they use in their serviceability tests. So as interest rates fall, the maximum size of loan that borrowers are offered does not increase as much, if at all. This is a prudent practice and, at the margin, it has probably reduced the risk in the mortgage book.”