Things should really be looking up for first home buyers.
After years of galloping price rises that went up faster than virtually anybody could save, they are finally experiencing prices that are static if not falling.
And instead of competing with hordes of older and wealthier property investors working on expanding their property portfolios, the property investment market has soured significantly, with cash flow problems caused by the replacement of interest-only loans with principal and interest loans.
Royal Commission shrinks loan amounts
The problem facing first home buyers now has indirectly been caused by the Royal Commission in the big banks – so talk about unintended consequences!
Rather than wait for the recommendations of the Royal Commission to hit, all of the banks have flicked the switch from Santa Claus to Scrooge.
Rather than lending as much as they can, the banks are now forcing first home buyers to have a bigger deposit and are keeping loan to valuation rations (LVRs) as low as they possibly can.
Indeed, Domain recently found that it would take a two income family five years of saving to break into even the cheapest houses in Melbourne.
The result is a whole lot of angry and frustrated potential buyers who are being handed pre-approved loan limits that are much lower than they were hoping for and in many cases lower than they have been offered before.
That means they are still missing out at auctions, even though sellers are also walking away by passing in around half of the properties that are put up for sale because they are not being offered prices high enough for them to agree to.
So, can this problem be easily solved?
It is hard to see that happening.
Much of the evidence against the banks in the Royal Commission was that they didn’t know their customers well enough and allowed them to get into financial trouble as a result by handing out loans that are too big.
So their response now is to demand much more information from borrowers and to greatly restrict the amount to be borrowed to ensure the borrower really can repay the loan.
That is good news in the longer term because it should improve the quality of the bank’s loan books and also reduce the number of disastrous loans that end in foreclosure or bankruptcy.
It is also probably quite important in an environment in which wages growth is so slow and inflation is so low – two factors that mean repayments don’t get progressively easier over time like they traditionally do.
Tougher than ever for first home buyers
None of that is much consolation to the beleaguered hopeful first home buyer who in some cases has been working on this project for years, scanning advertisements, filling out forms, inspecting properties and being outbid at auctions.
A good mortgage broker might make a difference because they know which lenders might be prepared to go the extra mile and lend a higher amount.
Then there are the usual ingredients for a successful loan application – a solid deposit, strong savings record and a good job.
If there is one more silver lining for first home buyers it is the possibility that prices could keep falling, with ANZ downgrading its prediction for Melbourne to a further fall of 10%.
Moodys doesn’t agree and thinks the “worst is over’’ and predicts most capital city property prices will rise modestly this year and pick up growth in 2019.
They can’t both be right, but like any other openly traded commodity, property prices are a function of supply and demand.
If banks keep up playing Scrooge to borrowers, prices are more likely to fall further than rise.