First home buyers pose the biggest risk to banks

Economic downturn increases first home buyers’ chance of non-settlement



Following the adjustments made to its housing market models based on the higher levels of underemployment and consumer debt, Fitch Ratings managing director Ben McCarthy has indicated that new property buyers are a big risk for banks. According to due to the the Australian Financial Review this is due to increases in property prices and an expected hike in interest rates.

“The borrower who takes out a loan today has to save a bigger deposit than they ever had just to get started, they are also potentially buying at the peak of the market, they are buying in a market where incomes are projected to be stagnant in the near future, while interest rates are at their lows and potentially going up," McCarthy said at the Australian Securitisation Forum (ASF) held on Tuesday.

According to the Australian Bureau of Statistics (ABS), the average loan size for a first home buyer in NSW is $376,000, which is an increase of 14% in just the past two years. In Victoria, the figure is at $325,000, a 10% increase.

In an interview with The Age, Westpac’s consumer bank head George Frazis spoke of the financial pressure on house hunters, stating that first home buyers now need almost five times their income to make a deposit.

As a result, young buyers are now turning to their parents for loan guarantees and cash transfers -  a trend described as the “bank of mum and dad”. This is particularly rampant in Sydney and Melbourne where prices are increasing at an exponential rate.

At the ASF, Tally Dewan, senior fixed income strategist of Commonwealth Bank of Australia, referenced the financial report of mortgage insurer Genworth, which indicated that loans written before the global financial crisis had higher delinquency rates, as opposed to ones written after the GFC, when interest rates were lowered and borrowers were able to repay their loans more easily.

In response to bankers’ concerns on the continuing hike of delinquency rates of the more recent loans, Dewan said: “My hunch is going forward, we might see them still increasing given the softer economic and unemployment rate conditions and slowdown in the mining sector.”

Corelogic managing director Lisa Claes also pointed to the unit sector, which faces growing risk of non-settlement.

“As the unit pipeline progresses and a large number of off-the-plan move through to the construction phase, there is a possibility that the low valuations relative to the contract price could create some form of financial shock for buyers where they need to top up the deposit in order to meet the banks LVR ratios”, she said.

Nevertheless, Claes is confident that the housing affair remains positive overall, as it indicates household wealth and broader economic growth. McCarthy echoed this sentiment by suggesting that though all parties should continue to think about how to address rising levels of household debt, the economy may still maintain its relatively stable condition in the meantime.

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