Sector report: First Home Buyers

The Reserve Bank of Australia had cut the official cash rate three times in the year 2019 – with the first reduction (in June 2019) marking the first time the cash rate had moved for nearly three years. With two further rate cuts in the year, lenders had slashed their home loan rates to new record lows and adjusted their serviceability requirements, which all contributed to borrowers accessing an increased loan capacity.

Couple this attractive borrowing environment with the fact that property prices had been cooling off in Sydney and Melbourne, and conditions were ripe for those looking to break into the housing market for the first time.

Flocking to market

Indeed, starting in December 2019, the number of home loan commitments for first home buyers (FHBs) began rising following several months of decline.

According to the Australian Bureau of Statistics (ABS), there was a 6.2 per cent (seasonally adjusted) rise in the number of home loan commitments from FHBs in the final month of 2019 – or 9,606 mortgages – contributing to a 3.6 per cent rise in the number of FHB commitments in the quarter ending December 2019.

Owner-occupier FHBs made up 30.2 per cent of all owner-occupier loan commitments in December, increasing from 29.7 per cent in November.

At the beginning of this year, FHBs were still coming out in force. Despite January typically being a fairly quiet month for purchasing activity, the number of FHBs who jumped on the property ladder in January was up 25.5 per cent when compared with January 2019 and marked the highest point for January FHB activity in 10 years.

More than 8,500 FHB loans were written in January 2020, accounting for 30.9 per cent of all owner-occupier commitments that month.

Then, in February 2020, while there was an overall decline in activity, FHB volumes increased once again, with the number of owner-occupier FHB loans approved rising by 0.4 per cent, following the 0.5 per cent increase in January. This accounted for 31.2 per cent of all owner-occupier commitments (excluding refinancing).

Again, the number of owner-occupier FHB loan commitments were markedly up on the same period the year before (up 19.4 per cent on February 2019).

According to Steve Kane, NAB general manager, broker distribution, there were a number of contributing factors to the swell in FHBs.

“Firstly, we had a relaxation of the regulatory environment, in particular to the buffer rates for serviceability,” he told The Adviser.

“With that change, that meant those that were borrowing higher amounts were able to service larger borrowings. So, that helped in the first home buyer market considerably.”

Mr Kane also noted that the period continued to see softer house prices and lower interest rates.

“So, we saw affordability improve because of servicing; we saw property prices drop, which provided access, and there was more stock coming back – particularly in that period leading up through Christmas and into the new year.

“Combine that with the impetus of the First Home Loan Deposit Scheme, I think that’s what drove more first home buyers into the market,” he told The Adviser.

The surge into market

Indeed, the government’s First Home Loan Deposit Scheme (FHLDS) has been particularly popular. First announced in May 2019, the FHLDS aims to provide up to 10,000 FHBs per year with access to housing finance

Available to FHBs earning up to $125,000 annually (or $200,000 for couples), the scheme can reportedly help FHBs save around $10,000 by not having to pay lender’s mortgage insurance (LMI).

As part of the scheme, which is administered by the National Housing Finance and Investment Corporation (NHFIC), the government is guaranteeing the difference between the borrower’s deposit (a minimum of 5 per cent) and the standard 20 per cent deposit required to take out a home loan without paying LMI.

Announcing the new loan scheme last year, Prime Minister Scott Morrison said: “It can take nine to 10 years for an average household to save a deposit. We want to help Australians realise the goal of buying their first home by cutting years off the time it takes to save up.

“Our plan for a stronger economy means we can help secure the future of tens of thousands of first home buyers…

“Getting into the housing market is a point of pride for Australians and a rite of passage. It requires hard work and even harder saving, but we want to make it that bit easier.”

A total of 27 lenders were appointed to the FHLDS lender panel, including two major banks: NAB and CBA.

Mr Kane commented: “There are 10,000 places available each calendar year, and in the first tranche, the year was actually running from 1 January to 30 June 2020.

“Five thousand places were made available to the two major banks that were selected to participate – the NAB, who was selected first, and then Commonwealth Bank. Three thousand of these places were released on 1 January, and all were reserved within a week,” he revealed.

“The [remaining] 2,000 places were released on 1 February, and those were reserved within hours,” Mr Kane revealed, adding: “It has been very popular indeed.”

The 25 non-major lenders and non-bank lenders that were selected for the FHLDS panel also released their 5,000 places on 1 February. Uptake for these has also been strong. However, Mr Kane suggested that it was “certainly much slower than the demand for the two major banks”, (and places were still available from these lenders at the time of writing).

The GM for broker distribution noted that 60 per cent of the FHLDS positions were secured by the direct channel, with around 40 per cent secured by the broker channel (generally reflecting NAB’s overall channel flows). However, he highlighted that, once the scheme was announced, the proportion of broker-introduced loans for FHBs increased.

“It normally sits around 15 per cent [of broker loans written], but it got up to around 20 per cent. So, there was a substantial increase of the overall flow because of the scheme,” he said.

Looking forward

While the ABS has noted that there was no notable impact of the COVID-19 virus on new lending commitments for February 2020, this is largely because the data collected was at a point in time where there was only a relatively low number of confirmed COVID-19 cases within Australia and before it was declared a global pandemic (on 11 March).

It is expected that the March figures (expected for release in early May) will show a dampening in FHB numbers given the ongoing coronavirus pandemic and its flow-on effects on the economy and job security – let alone the impediments of social distancing, including the ban on public auctions and open houses.

Mr Kane commented: “First and foremost, you’ve got things like auctions and home opens not being available. So, the access to the stock is going to be an issue if this continues through to June or July [before the second tranche of FHLDS opens in July].

“We already have a shortage of stock on the market, which is why auction clearance rates have been strong, because there simply isn’t sufficient stock on the market as yet. If we see that stock continue to erode because of the impacts of the coronavirus, that will have a direct impact on this. And if there are no auctions – save digital auctions or boardroom style auctions where people are using digital technology to get to the auction – I think that will also play a part in it.

“Clearly, the coronavirus is going to have an impact on people making [borrowing] decisions, but we still really don’t know the impact of the coronavirus and what impact it will have on the overall property market and, of course, on mortgages.

“So, it’s very difficult to make any commentary because we’re in such uncharted waters,” he said.

However, allowances for the impacts of COVID-19 are already being made. For example, while the FHLDS initially required borrowers to find a property and enter a contract of sale within 90 days from the date they were first pre-approved under the scheme, the NHFIC has now said that participating lenders would be given the ability to extend successful applicants’ places by a further 90 days, provided they were still eligible and satisfied the lender’s credit criteria.

Many lenders have also released coronavirus support packages for borrowers that are facing financial hardship due to the virus. They are offering reduced rates on variable and fixed-term loans for first home buyers, too, given the current environment.

Mr Kane commented that NAB was helping FHBs with affordability with fixed rates as low as 2.29 per cent and was also ramping up for the second FHLDS tranche being released in July.

“For brokers, we will be doing a number of enhancements for the second tranche when it comes around in July. There will be things like automatic credit decisions, which will provide a really fast outcome for brokers. It’ll be fully integrated with the FHLDS security into the credit contract generated for customers, so there will be an ‘accept one document’ environment.

“We’ll also be tracking and analysing the types of loans that are coming in through the broker channel and feed that information back to brokers.

“So, we will once again reinvigorate the market with all the necessary information to make sure brokers can assist their customers that are going to be applying for the scheme so that the process will be much smoother and more digitised, with more information being made available to brokers as we go through to the second tranche,” Mr Kane said.

While NAB’s GM for broker distribution added that the impact of COVID-19 on FHBs was still uncertain, the elements of support for borrowers that can be controlled are being controlled.

He explained: “I think that there’s an environment where customers will have a smooth process to apply for the FHLDs, there will be good products on offer in terms of pricing, and the service to the broker channel will be very, very slick. So, I do think there will still be strong demand, and I’m pretty sure that the further 10,000 places that become available on the first of July will be taken up very quickly.”