The Australian banks, led by the Commonwealth, are about to end the first home buyers’ party, in a move that could also kick the chocks away from the only support for the weakening Australian economy. 

From next Monday, the CBA will not recognise the first home buyers grant of $14,000 for an existing home and $21,000 for a new home as proof of savings.

It will demand 3% savings over three months; In other words, it will require all first home buyers to have saved the 3% of the purchase price over three months leading up to the application.

The Commonwealth won’t accept gifts or other forms of financial assistance from parents or relatives as proof of savings of 3%, if it hasn’t been in an account for at least three months.

The bank revealed the change last month but home loan brokers and real estate agents said today that the condition that first home buyers had to save 3% for at least three months represented a significant tightening of the bank’s criteria.  

Given the comments from the Reserve Bank yesterday about the impact of the first home buyers surge on home building and real estate, the CBA’s move appears not to have been fully appreciated by Canberra.

The maximum for a graduated saving on stamp duty in NSW is $600,000 (above that full stamp duty is paid). That means first home buyers must have 3% of that or $18,000 saved in an account for at least three months prior to the application being made.

The cut-off will be homes where the loan to valuation ratio is above 85%.

Unless intending buyers have that level of savings, all first home buyer lending will cease from the Commonwealth.

The Commonwealth is introducing this to slow the pace of applications: it has been swamped by the surge in first home buying interest. In the past month it has hired 110 new staff to help process the applications.

As it’s the biggest home lender, housing finance will slow sharply, especially if other banks follow suit. They are waiting to see what happens. All banks are taking a tougher stand on credit checks and making sure the valuation of the house or land is OK. That is delaying transactions.

The CBA has already advised its various lending channels of the changes that will apply from next Monday, 23 March.

The move comes a day after the bank big noted itself by saying that it will offer repayment holidays for six to 12 months for people who lose their jobs: but interest would continue to accrue.

The CBA’s attempt to put a cork on the boom in home lending won’t go down well in Canberra with the Rudd Government where it has already guaranteed (for a fee) all loans and deposits, especially offshore funding, for three years.

At the same time, the credit crunch has destroyed the non bank lending sector: Aussie Home Loans is now 33% owned by the CBA, the NAB bought Wizard cheaply from GE and Rams is owned by Westpac and its rump is a poorly thought of shadow of itself.

Among the other banks, the ANZ hasn’t gone after first home buyers in a big way: it has been refusing to do home loans above LVRs of 90%, and has lost market share. St George is still doing 100% home loans, but the applications and credit records have to be completely spotless. The NAB and Westpac are understood to be still accepting the home buyers grant as savings for new home loans.

And real estate agents and conveyancers say there’s a slow rise in the level of second and third home buyers now in the market.

But all the growth and the rebound is coming from first home buyers, thanks to the boosts to the grants in the December stimulus package.

So great was the boost that in January, the share of first home buyers in housing finance approvals was the highest on record at 26.5%.

In the minutes of the March Reserve Bank Board meeting it was noted:

In a sign of increased demand for housing, patterns of housing finance indicated an increase in housing loan approvals of about 10 per cent over the past few months, partly spurred by the increased incentives for first home buyers to enter the market.

However, credit growth had remained low as borrowers had evidently taken advantage of the extra cash flows created by lower lending interest rates to increase debt repayments.

Further signs of an increased level of activity in the secondary housing market were significant rises in auction clearance rates in both Sydney and Melbourne in February, and a component of the Westpac-Melbourne Institute consumer sentiment survey indicated that current conditions were conducive to buying a dwelling.

The move by the CBA, especially if followed by the other banks, will take away one of the few growth options in the wider economy, especially for the strained building sector where thousands of people have already lost their jobs as commercial development has stopped.

Peter Fray

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