House prices rise, but concerns grow over defaults for first home owners

Signs of a recovery in the property market continue to appear, with new data from Residex showing prices have increased 1.15% nationally in the year ending in June.

The new data shows that prices increased to a median value of $405,000, while units gained 3.9% over the same time period to reach a median value of $364,000.

In Melbourne, where auctions are booming after a 10-week run of clearance rates above 80%, housing prices gained 2.7% over the year and 3% over the June quarter to a median value of $492,500.

Sydney prices gained 0.8% for the year to a median value of $577,500, with the number of sales up 2.3%.

But despite the good news, concerns have been raised regarding the extended grants, with the head of the country’s largest mortgage insurance agency saying the increased number of first home owners in the market will not mix well with rising unemployment.

According to the Australian Bureau of Statistics, the number of first home owners in the market has jumped from 19% in October 2008 to 30% in May 2009, while the average loan size increased by over 6% during the same period.

Meanwhile, unemployment is forecasted by the Government to peak at 8.5%, while a recent report from Access Economics predicts the jobless rate will reach 7.5%.

Genworth Financial chief executive Martin Barter told the Australian Financial Review that the company is already beginning to see the effects of unemployment in its 90-day arrears rates from self-employed borrowers.

Additionally, he said the use of the company’s hardship program, which helps struggling borrowers, has increased during the past 18 months.

He has also noted that the company’s delinquency rate has jumped by 25% between January 2008 and May 2009. Genworth has released data that shows 53% of those borrowers experiencing problems are suffering mainly from unemployment.

“We have worked with banks around a lot of the credit policy tightening,” he said. “There will certainly be more tweaks on the tightening side rather than any loosening, but we are happy with banks’ risk settings.”

“[While] consumer sentiment is responding to falling mortgage costs, the effects of rising unemployment and underemployment remains unknown.”

Adir Shiffman, founder and chief executive of mortgage service aggregator HelpMeChoose.com.au, agrees that unemployment will be the main factor when it comes to mortgage defaults.

“The real underlying issue is, do people have jobs? That is where the risk is. Whatever the unemployment rate will reach, it’s safe to assume a proportion of those will be first home owners and that is where we will start seeing defaults. It’s going to be up to the banks to see how they’ll handle it.”

Shiffman also says that the number of first home owners entering the market is beginning to drop, as investors become set to pounce on the market when the extended grants die out from September.

“We get tens of thousands of people going through our site, and we see trends early because of that. What we’ve seen is a slow deflation in the number of first home owners looking for finance, with this replaced by refinancers and investors.”

But Phil Naylor, chief executive of the Mortgage and Finance Association of Australia, says while some defaults may occur, lenders have only granted mortgages under “strict conditions”.

“There will always be people who get into difficulty, and you will see some defaults, but I think we are looking at a lower level of mortgage delinquencies. Any first home buyers in the next few months or so have been granted loans under pretty strict lending criteria.”

“Of course, if unemployment does get out of control then higher default rates are a possibility, but the latest projections indicate unemployment may not be as bad as first thought.”