Banks Are Knocking Back More Home Loan Applications

There is one thing more Australian property buyers now need than ever — a bigger deposit. Australia has been blessed with a white hot property market. Some homeowners have seen the net value of their homes double in as little as three years.

But because of tremendous growth, inner city homes are no longer affordable for first home buyers. This will push more first home owners and investors into the suburbs. Yet even 30 minutes outside the city limits might soon become unaffordable.

It’s got nothing to do with rising property prices, either. The blame might fall directly on lenders. Listed broker Mortgage Choice [ASX:MOC] has stated that lenders might impose tougher borrowing conditions in the months to come. According to an article in the Australian Financial Review, many buyers who once qualified for a loan are being pushed out of the market.

How are lenders throwing out buyers who once fit the bill? Through stress testing. When applying for a home loan, a lender will usually put your situation through a stress test. This test will determine if you’re able to pay back your mortgage in that event that your life circumstance changes. These changeable variables will most likely relate to interest rates.

Right now, we are in a period of historically low interest rates. But lenders will assume nothing lasts for ever. What happens if interest rates increase to 7%? It’s unlikely to take place in a short space of time.

But, then again, a mortgage is a long term obligation. Lenders want to be sure borrowers have the ability to repay in all types of situations.

You might think of this as unfair, and it very well could be. But lenders are just responding to the cries of the masses. If the public is scared of a real estate bubble popping in Australia, then buyers need to be pushed out of the market.

Borrowers who sought preapproval just six months ago are now being denied. Lenders are telling them that their home loan applications have expired, and that they no longer qualify.

But is squeezing buyers out of the market a good thing?

In order to decide whether it’s a good, or bad, move we need to determine if rising prices are good or bad in the first place. For first home buyers, it might seem like rising property prices are bad. Yet if they’re able to buy into a rising market, then they’re already that much richer. Richer on paper, that is.

Once the home is purchased and prices continue to rise, their net value immediately goes up. Let’s say, for example, John and Pam bought a $350,000 house. This is not an unreasonably low price either. Once buying into an upwards-trending market, their house is valued at $370,000 within a year of buying the property.

Now John and Pam are paying down a mortgage only worth $350,000 for a house that’s worth $370,000. If you think this is unreasonable growth, remember it’s only a 5.7% increase. Melbourne property prices have experienced five years of 15% growth.

By using this logic, it should be easy to see why buying into a declining market is bad for first home buyers. Getting into the market will be easy but, once you’re in, you’re losing money. First home buyers will be paying down a mortgage that is worth more than their home.

We could use this line of logic for various types of property investors, but let’s stick with first home buyers. OK, so we’ve talked about how buying into a rising market for first home buyers can be good in the short term. Now let’s return to the original question.

Are less buyers in the market a good thing?

Fewer buyers in the market, for the short term, don’t benefit first home buyers — provided they can get into the market that is. However, I feel that, once the masses drum hard enough, lenders will relax their mortgage screening procedures.

Härje Ronngard,

Junior Analyst, Money Morning

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