Some 2009 first-home buyers struggling to refinance mortgages due to declining values: JP Morgan

First-home buyers who bought their first homes at the top of the last housing market cycle in 2009, when state government grants were most generous, are now struggling to refinance their loans due to weak equity positions,  according latest Australian Mortgage Industry report prepared by JP Morgan and Digital Finance Analytics.

As interest rates fall and households continue to deleverage, the report says that around 30% of first-time buyers are seeking to refinance their loans, which is "twice the amount, if not more, than other borrowers".

“Secondly, and more worryingly, of those that apply, 15% are being declined – substantially above other categories of borrowers, who are all well below 5%.

“First time buyers bought at the ‘top of the cycle’, with insufficient time between 2009 and now to generate equity in their home, particularly in light of declining house prices relative to the 2009 peak.”

“The end result is that first time buyers not only have a higher proportion of existing loans looking to refinance, but also have a higher proportion of those re-financing applications rejected," says the report.

Many of these buyers took advantage of boosted first-home buyer grants (which tripled to $21,000 for those buying new homes) introduced in the wake of the GFC, which the report says “buoyed housing prices throughout 2009”.

They also bought with small deposits, with the report highlighting that the proportion of first-h0me buyers who bought with loan-to-value (LVR) ratios of more than 90% was higher than the average for other owner-occupiers groups.

In the interim banks have lifted LVR requirements in line with tougher global banking rules, and first-home buyers have been caught out.

According to JP Morgan, the two main reasons why loan applications are rejected now are an inadequate LVR (34% of rejected applications) or insufficient income (34%).

Over late 2008 and early 2009 the report says there was a surge in the volume of first-time buyers in the six months between the announcement of incentives in November 2008 and the reduction of first-time buyer LVRs by banks in April 2009.

“This simply pulled forward demand and left a substantial equivalent hole over the following year." 

The report also forecasts the current slow pace of mortgage growth to continue, noting that “growth in the average value of each form of owner-occupied approval is now in negative territory” – the first time this has occurred since data became available in the early 1990s.

The report says not only are the volume of approvals weak, but the average value of approvals is declining.

“While this may simplistically be dismissed as a broader indication of stalled house prices, we conclude that a degree of tightness for refinancings is evident – particularly for first-time buyers.

"Housing credit growth has continued to soften since breaking below double-digit growth rates in mid-2008. In fact, the most recent three-month annualised growth rate of 3.6% for housing credit in August 2012 is the lowest level since the RBA started disclosing credit aggregates in 1976.

"Given the current outlook, we expect low rates of credit growth to continue –with risk to the downside – as opposed to watching out for a quick rebound off the back of lower interest rates."