Alarm over first-home buyer 'time bomb'
April 13, 2009
THE rush of first-home buyers is emerging as a bad-debt time bomb for banks with government cash incentives for new homeowners driving about a quarter of all new mortgage applications for banks.
Analysts have warned that the new customers are inherently risky for banks, particularly given the likelihood of unemployment rates rising over the next year. "The confluence of artificially high housing prices, lack of a savings track record and higher unemployment risk makes the first-home buyer segment the high-risk segment within the banks portfolio," said an RBS Equities analyst, Jarrod Martin.
Tough prudential rules meant the Australian banking system largely avoided extensive subprime lending losses that occurred elsewhere. However, first-home buyer losses could drive hundreds of millions of dollars in additional losses for banks.
Major banks, including the Commonwealth Bank and the National Australia Bank, have said that while missed payments across their mortgage portfolio are starting to rise, losses remain well contained. The surge in lending losses among the big banks has been driven by corporate loans turning bad.
New loans issued to first-home buyers rose by 15.9 per cent during February compared with the same month a year ago, to reach a record 14,484, according to figures released last week by the Bureau of Statistics.
The number of loans to owner-occupiers rose 0.4 per cent in February - the fifth consecutive increase in lending activity. First-home buyers were driving the growth.
Outside the first-home buyer category, interest rate cuts have done little to spur growth. Since August, the number of loans to existing owner-occupiers has risen just 1.2 per cent compared with the 65.4 per cent surge in first-home buyer loans. In October, the first-home owners grant was doubled to $14,000 for existing homes or $21,000 for new dwellings.
At $21,000 this represents about 6 per cent of the median first-home buyer dwelling price.
Banks insist the the boom in first-home buyers grants do not represent an elevation in risk.
Banks do not count the first-home buyers' grant as part of the deposit while loan-to-valuation ratios - which measure the level of debt compared against the asset - are being reduced.
"Standards are being maintained. If anything we are being a little tougher," said an executive of a big four bank. "No one wants a situation where both the customer and the bank loses out of this."
A JPMorgan analyst, Scott Manning, said first-home buyers were borrowing too much at high initial loan-to-valuation ratios at artificially low interest rates.
"[This] will ensure that Australian households remain highly geared and highly sensitive to any future increase in interest rates," he said.
Mr Manning said despite house prices remaining relatively flat over the last year, the first-home buyers' average loan size had increased 14 per cent to $283,000.
