Sunday, August 16, 2009

Stimulus causing Australian real estate boom



Just as Cash for Clunkers and other direct cash to the consumer stimulus packages, Australia's stimulus to help first time buyers into the real estate market has fueled a boom.


SIX of Australia's nine main banks have tightened the amount of money they will lend to first home buyers in response to claims the Federal Government's cash handouts to the housing market are causing a bubble in prices.

The lower limits came into effect four months ago and cover the period in which the first home buyers' grants for new and existing properties - amounting to $21,000 and $14,000 respectively - were providing a major boost to sales.

Most domestic banks and some overseas lenders such as HSBC have been the major beneficiaries of the additional lending, which has been fuelled by the substantial cut in interest rates since last October.

That has enticed tens of thousands of first-time buyers into the market in the hope that borrowing costs will remain low as the Reserve Bank seeks to keep the economy out of recession.

The banks have sought to encourage that with discounted offers on their standard variable mortgage rates - the most popular form of mortgage borrowing - while at the same time taking some of the sting out of their exposure to the size of loans being requested.

According to research by Deutsche Bank, major lenders such as ANZ, National Australia Bank, Westpac, St George, BankWest and Bendigo and Adelaide Bank reduced their maximum borrowing limits significantly between last November, when the stimulus from the grants started to flow, and April.

Deutsche adopted a ''mystery shopper approach'' and cold-called the banks about their mortgage offerings, claiming to be a would-be buyer with an annual income of $70,000 with a full-time job, no dependants and a good credit history.

Its banking researchers discovered that the biggest cut had been imposed by St George, which had lowered its maximum by $55,000 to $400,000. Its new parent, Westpac, lopped $33,000 off its $479,000 total, while ANZ dropped its limit by $46,000 from $485,000 to $439,000.

BankWest was next in cash terms, dropping its maximum by $28,000 to $442,000, while Bendigo had lowered its lending limit to $420,000 from $430,000.

As for NAB, it has largely stayed out of the first home buyer lending race, given its previous imposed maximum of $310,000. It cut that to $290,000 in April.

But the market leader and biggest lender, Commonwealth Bank, kept its limit at $420,000, as did Suncorp at $450,000. Bank of Queensland was the only bank to raise its maximum, by $7000 to $425,000.

There were few changes to the minimum deposits required to be put down by buyers - typically 5 per cent to 10 per cent of the total price of the property. Loan-to-value ratios were also hardly altered, with the average ranging from 90 to 95 per cent.

But lenders continued to respond to demand for new lending by offering discounts of between 0.5 per cent and 0.7 per cent on their standard variable mortgages, which currently range from 5.74 per cent (Commonwealth) and 5.9 per cent (Bendigo).

However, BankWest, now owned by Commonwealth, is still offering a 4.8 per cent rate, while the other majors are hovering around 5.8 per cent.

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