Bolstering home buyers

The government introduced the First Home Loan Deposit Scheme (see the May edition of The Adviser for more), while lenders had begun softening their serviceability requirements, and cut their home loan rates to new record lows, which increased borrowers’ loan capacity.

Once COVID-19 came to this country, resources were mustered. After the federal government announced stimulus packages and support, lenders began offering mortgage repayment holidays to those whose hip pockets were hit by the COVID-19 pandemic.

The central bank pulled the emergency lever on 19 March and reduced the official cash rate to 0.25 per cent to support the economy in response to the coronavirus outbreak, taking mortgage rates to even lower levels. Then, the government launched its $688-million HomeBuilder package to provide grants to those building or renovating homes.

While lenders have tightened their risk appetites for segments of the market badly impacted by the pandemic (such as the aviation and tourism industries), the housing market has proved resilient, thus far.

In the following pages, we take a look at how home buyers are being supported.

A retreat in the market

A quick glance at the figures show that while the Great Australian Dream of home ownership is alive and well, new home loan commitments began decreasing in the months after the pandemic struck Australia.

New home loan commitments were still in positive territory in March, when the Australian Bureau of Statistics (ABS) had just commenced monitoring for potential impacts of COVID-19. It had reported at that time that there were no obvious impacts on housing loan commitments figures yet.

Commitments had risen by 0.2 per cent to $19.45 billion, with owner-occupier lending increasing by 1.2 per cent to $14.34 billion.

But, according to the most recent lending figures from the ABS, the number of owner-occupier loan commitments have been falling since the pandemic hit.

In April 2020, the number of new first home buyer (FHB) loans fell by 3.8 per cent in April 2020 and dropped by a further 9.3 per cent in May 2020.

The value of home loan approvals also fell – dropping by 4.8 per cent in April to $18.5 billion (seasonally adjusted terms), which was the steepest decline since May 2015.

This was driven by a 5 per cent decline in owner-occupier lending to $13.7 billion, while investor lending fell 4.2 per cent to $4.8 billion.

However, the May figures painted a bleaker story, with the value of new loan commitments for owner-occupiers falling 10.2 per cent (seasonally adjusted) and the value of all new loan commitments for housing falling by 11.6 per cent – the largest fall in the history of the series.

This was driven by sizeable falls in the value of loan commitments for housing in NSW and Victoria.

ABS chief economist, Bruce Hockman, said lending institutions had reported that the impacts of COVID-19 were evident in both reduced borrower demand and tighter lending criteria – but warned that the full effect hasn’t been fully realised yet.

“COVID-19 operational impacts experienced by some lending institutions resulted in a backlog of March housing loan applications being processed in April, which moderated the April fall in loan commitments,” he said.

“While reduced transactions in the housing market stifled new loan activity in May, the value of existing owner-occupier loans refinanced with a different bank was by far the highest on record as borrowers responded to reduced interest rates and refinancing offers,” Mr Hockman added.

A buzz of activity

While April and May ABS figures show a decline in loan commitments, the housing market is still abuzz with activity.

The lifting of restrictions for on-site auctions and property inspections certainly helped with transaction activity levels.

CoreLogic estimated that sales activity dropped by 33 per cent in April but rebounded by 18.5 per cent in May. Auction clearance rates had also been strong week-on-week, sitting at well over 65 per cent – and vendors were also starting to feel more confident, with additional stock coming onto market.

House prices had also been reasonably well protected thus far, CoreLogic suggested.

“Considering the weak economic conditions associated with the pandemic, a fall of less than half a percent in housing values over the month shows the market has remained resilient to a material correction,” CoreLogic head of research Tim Lawless said. 

“With restrictive policies being progressively lifted or relaxed, the downwards trajectory of housing values could be milder than first expected.”

According to REA Group chief economist Nerida Conisbee, data released in May showed that it was “largely business as usual”.

Speaking on an episode of The Adviser’s In Focus, Ms Conisbee said she had not witnessed a significant drop-off in mortgages, which she thought was an encouraging sign.

“We don’t know for sure exactly what will happen with these very high levels of unemployment, but I think what’s helping with the stress amongst home owners is the six-month mortgage freezes, very low interest rates, and stimulus [packages],” she said.

“There’s all these things that are really helping people at the moment, which isn’t leading to the catastrophic conditions in the property market that we otherwise would’ve seen if all those things weren’t available,” Ms Conisbee said.

While the Australian Banking Association announced that its members would suspend principal and interest loan repayments for customers and reduce interest rates, this was largely for three-month terms, with the option to review and extend for a further three months, if needed. By June, more than $170 billion worth of mortgages had been deferred – and the government was coming under increasing pressure to support the hard-hit construction industry, new home buyers, as well as those looking for work.

The HomeBuilder package

In early June, the federal government launched its $688-million housing stimulus package, aimed at assisting the residential construction market by encouraging the commencement of new home builds and reinvigorating property market activity. 

HomeBuilder provides eligible owner-occupiers (including first home buyers) with a grant of $25,000 to build a new home or substantially renovate an existing home. It comes with a national price cap of $750,000 for new home builds, while a price range of $150,000 to $750,000 applies for home renovations (as long as the current value of the property
is no more than $1.5 million).

The grants are means tested, with the government setting income caps of $125,000 for singles and $200,000 for couples. The government then announced refinements to the scheme after the industry expressed concerns around some of the time frames to commence work on new homes and renovations.

Among other tweaks, the government announced that it would allow the necessary time for home buyers to arrange their finance approvals and building approvals and meet other legal requirements before work is required to commence. This is a modification of the initial fixed three-month time frame.

The stimulus was largely welcomed by the property industry, which had been calling for fiscal support. Housing Industry Association managing director Graham Wolfe said the package would support the delivery of tens of thousands of new home and renovation projects and hundreds of thousands of jobs.

Similarly, the Real Estate Institute of Australia (REIA) president, Adrian Kelly, voiced his support for the package, particularly the fact that the owner-occupier has the power to decide whether the extra money would be spent on a new build or a renovation to their existing property. This assuaged the body’s concerns that it would only support new dwellings.

Aussie Home Loans CEO James Symond also welcomed the program, highlighting the role that brokers could play in guiding borrowers in understanding their options while reaping the benefits of lower loan repayments and fiscal support from the government. However, he cautioned applicants against rushing into the scheme before considering their financial options.

“Those eligible will need to carefully assess how to finance their build or renovation to take advantage of the HomeBuilder scheme,” he said.

Builders Finders director Lynette Manciameli took a more precautionary approach, warning that it would be “vulnerable to exploitation” from “unscrupulous builders”.

“What we are likely to see off the back of the HomeBuilder scheme is dodgy builders coming out of the woodwork. This is bad news for the consumer and bad news for the many reputable builders who are doing the right thing.”

Who benefits – and who doesn’t?

But how far will the HomeBuilder scheme really go? Given the  eligibility criteria for the renovation portion of the package, CoreLogic’s head of research Australia, Eliza Owen, recently compiled a list of the top 10 and bottom 10 regions that have owner-occupied properties worth less than $1.5 million, which could most and least benefit, respectively, from HomeBuilder.

The data suggests that the highest number of eligible owner-occupied properties is in the Melbourne’s south-east region, while there are four Melbourne regions that have over 100,000 owner-occupied properties estimated to be valued under $1.5 million.

“These regions represent the fringe of the metropolitan area and include some relatively low-income areas compared with the inner-city regions of Melbourne,” Ms Owen said.

On the flipside, the bottom 10 regions (by count of owner-occupied properties worth less than $1.5 million) are in Sydney’s northern beaches and eastern suburbs, as well as outback Australia. These areas have more properties that surpass the $1.5 million property value cap to qualify for a renovation grant, while parts of outback and regional Australia have a low number of dwellings.

“Even where dwellings fall well below the $1.5 million threshold for a renovation grant, many of these owner-occupiers will not take up the HomeBuilder incentive for renovations,” Ms Owen suggested.

“In fact, CoreLogic estimates there are about 4.4 million owner-occupied properties across Australia with a high confidence valuation below $1.5 million, but the federal government estimates the scheme may only support about 7,000 renovations.”

While she partly attributed this to the income cap put on the scheme, Ms Owen also said it is due to the high value of renovations that is set in the eligibility criteria.

“For areas where dwelling prices and incomes are relatively low, this may lead to owners overcapitalising on renovations, where they cannot recoup the cost of upgrades to the property,” she said.

FHB leg-up boosts activity

According to the property industry and brokers, one of the biggest beneficiaries of the HomeBuilder package could be FHBs.

REIA’s Mr Kelly believes this is because “first home buyers can benefit by buying a property at the lower end of the market in a location they prefer and upgrade immediately”.

Given the various grants and concessions available to FHBs, it is perhaps not surprising that FHBs remain enthusiastic about entering the property market.

According to ABS figures, in March 2020, owner-occupier FHB loan commitments accounted for 32.0 per cent of all owner-occupier commitments, excluding refinancing – holding strong in April, when they accounted for 31.8 per cent. Brokers believe that the HomeBuilder package – along with stamp duty concessions, the second tranche of the First Home Loan Deposit Scheme (FHLDS) and the FHB grant – has created a hive of activity in the FHB market.

Zac Goodman, director of Brisbane-based brokerage Mortar Finance, told The Adviser that an FHB in Queensland could save anywhere between $66,000 to $70,000 on a property worth under $500,000 from all of the grants and concessions available to them.

“It has really powered through the FHB market and stimulated the market,” Mr Goodman said.

After the HomeBuilder package was announced, Mr Goodman estimated that he saw interest from 10 FHBs compared with one existing home owner or renovator.

“This might change in the coming months when existing home buyers or renovators have a chance to understand what their employment position or their equity looks like. But at the moment, it would be a significant sway towards FHBs.”

Loan Market mortgage broker Kelvin Mason said FHBs who might consider taking advantage of the HomeBuilder package and the FHLDS to build a new home would have to bear in mind that while the former comes with a $750,000 price cap on new builds, the latter comes with a $700,000 price cap in Sydney and NSW regional areas.

“In Sydney, you would have to go further out because of the price caps on property,” he told The Adviser. “It doesn’t give you a lot of property in Sydney that fall within those caps.”

Moreover, lenders were slow to announced whether they would accept loan applications from borrowers relying on the HomeBuilder grant to fund a project.

Adelaide Bank was the first lender to outline its stance on HomeBuilder grants for mortgage applications, telling brokers that, until further notice, it would not consider applications for borrowers depending on the federal government’s $25,000 HomeBuilder grant to complete a renovation or construction project.

The lender added that if the HomeBuilder grant has been disclosed but will not form part of the funds needed to complete a project, then conditional or formal approval would exclude considerations of the $25,000 grant. Adelaide Bank told brokers that customers relying on the grant should consider “alternative providers that are willing to offer a conditional approval on the build” to support the land loan.

“Once all the states and territories have advised how they will administer the grant, the bank will then consider and work on an appropriate policy and process to support these applications and will naturally advise accordingly,” the bank added.

Preparing for FHLDS – round 2

The FHLDS has struck a chord with FHBs. First announced in May 2019, it aims to provide up to 10,000 FHBs per year with access to housing finance, with the potential to save around $10,000 in costs.

Administered by the National Housing Finance and Investment Corporation, it is available to FHBs earning up to $125,000 annually, or $200,000 for couples.

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 the lender’s mortgage insurance.

The first tranche was released on 1 January 2020, while the second tranche of 10,000 scheme places was released on 1 July. Participating lenders for both tranches include the Commonwealth Bank, NAB and 25 other non-major lenders.

The scheme’s popularity is evident among broker clients, too, with June figures showing that brokers facilitated 50 per cent of all places in the scheme from 1 February 2020 (when the non-major lenders and NAB began accepting applications through the third-party channel).

Industry associations have urged brokers to be proactive with their FHB clients for the second tranche, reminding them that places filled up very quickly during the first tranche.

As it seemed in May, so too does it seem now, while COVID-19 and its associated recession wreak havoc on employment and travel, home buyers – particularly first home buyers – are yet to feel the full effects.

For brokers, this is an opportune segment of the market to market to and ensure that whenever a home buyer first thinks about buying a property, the broker channel is their channel of choice.