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Lending Restrains Housing Recovery

26 Oct 2012 - Chris Zappone from http://news.domain.com.au

 TIGHTER lending criteria and persistently high house prices are holding back a stronger recovery in the housing market, while more houses are worth less than their mortgages, a new report has found.

The JPMorgan Australian mortgage industry report shows nearly 70 per cent of home refinance loan applications are being declined on the basis of insufficient income or inadequate loan-to-value ratios, as regulators push for stricter standards from lenders.

''We are tipping a barrier in terms of people's ability to refinance because of income and LVR issues,'' said Martin North, the principal of Digital Finance Analytics, who contributed to the report.

He said that in previous years the most common reason for refusal was a change in personal circumstances.

The sobering view on the state of the mortgage market comes as the housing market shows some signs of life, with the impact of a series of rate reductions by the Reserve Bank filtering through the household sector, supporting auction clearance rates and the most recent month of lending.

In the present market, would-be buyers or first home buyers seeking to refinance have been confronted with home prices that remain ''very high compared to incomes'' and strain lending ratios.

At the same time, regulators have warned banks hungry for mortgage business to maintain higher loan-to-value ratios. The regulators are worried that looser lending standards could set the stage for a home price bubble.

Mr North said the stricter lending criteria had turned off specific mortgage segments and deals that banks may have welcomed before the financial crisis. ''So we have a proportion of the market that is locked out and cannot potentially refinance,'' he said.

As the average loan duration for a first home loan extends, more than 30 per cent of first home owners are seeking to refinance to lower their monthly costs and about half of those are being denied. That compares with about 12.5 per cent of non-first home owners, of which only a few are denied, the report shows.

''If you go back pre-GFC, insufficient income was not a very significant factor at all,'' Mr North said.

The motive for the crackdown by regulators can be seen in data provided to JPMorgan from house price research group RP Data, which shows the share of homes worth less than their mortgages has increased fourfold since the global financial crisis, rising from 2.9 per cent before 2008 to 12.5 per cent.

The share of homes with only a 0-10 per cent price rise has increased, from 3 per cent before 2008 to 23.1 per cent.

The JPMorgan banking analyst Scott Manning said the figures showed that those who ''entered the market as house prices rose again through 2009, as first home owner stimulus got capitalised in better expectations for home prices'', had not really benefited from rising home prices.