First home buyer LVRs jump
First home buyers are taking on significantly higher debt loads so that they can take advantage of generous government grants. According to the latest Fujitsu JP Morgan mortgage industry report, released yesterday, the average loan to valuation ratio on home loans for first home buyers has jumped from around 63 per cent in early 2008 to the current level of 73 per cent.
Financial services consulting director at Fujitsu, Martin North, said 30 per cent of first home buyers had LVRs between 95 and 100 per cent and another 27 per cent had LVRs between 90 and 95 per cent.
JP Morgan senior banking analyst Scott Manning said these figures were an indication that the stimuli directed at first home buyers - lower interest rates and higher grants - were sending out some false signals to the market.
Manning said: "People are taking the opportunity to get into the housing market but they are doing it in uncertain times. Are they taking on too much risk?"
The report shows a strong swing in sentiment. In June last year only 20 per cent of respondents to a Fujitsu Consulting survey said they could afford to buy a first home. In a survey conducted last month that number had risen to more than 50 per cent.
More than 70 per cent of respondents said the first home owner grant was "vital" to their decision.
Manning said: "The problem we have is that underlying gearing is still high. Rates have come down and payments are lower but gearing is still high.
"We still have credit growth in housing that is in excess of income growth. We are going to see rates go back up and we are going to see higher unemployment. First home buyers are getting false signals."
According to the report many home owners are vulnerable if rising unemployment depresses the housing market and causes a fall in prices. A 10 per cent fall in house prices would result in 300,000 home owners having negative equity.
JP Morgan is forecasting that the unemployment rate will rise to seven per cent by the end of the year and nine per cent by the end of 2010.
North said banks had reduced their maximum LVRs, some to 95 and others to 90 per cent, and an increasing number were demanding that borrowers show evidence of genuine savings when they apply for a loan (genuine means no grant money).
He said that was probably not enough. The United Kingdom Financial Services Authority's Turner Review, published last month, has raised the prospect of imposing restrictions on mortgage LVRs or loan to income ratios.
The review says that if restrictions were to be imposed, equity or a deposit of 15 per cent would be a prudent level.
North said: "I think 15 per cent is right. The borrower must have some equity if the bank is going to be prepared to capitalise interest and help them out of hardship. Having a cushion of that size also has the effect of imposing some financial discipline on borrowers."