First homebuyers are being "punished" by onerous lending requirements that benefit investors and further entrench inequity in Australia's housing market.
Financial regulations are making it harder for borrowers to access mortgages, giving people who already have sufficient wealth an advantage, a parliamentary committee heard on Wednesday.
In order to protect the financial system from a GFC-style crash, lenders are required to carry excess capital, while borrowers must meet a three per cent serviceability buffer to ensure they would still be able to make payments if interest rates rise unexpectedly.
Housing Industry Association chief economist Tim Reardon said Australia's onerous lending system saw it through the 2007/08 financial crisis largely unscathed, whereas the US housing market had a massive jump in delinquencies.
Regulators had since continued to increase restrictions with no evidence it would reduce the risk of a financial meltdown, he said.
"Public servants, who are inherently risk-averse, who have a career in assessing risk, identifying it and mitigating it, have continued a cycle of increasing regulation without demonstrated benefit in terms of access to housing supply," Mr Reardon said.
"This has led to first homebuyers, in particular, bearing a very high cost."
As banks have been required to hold more collateral for every dollar they lend out to a first homebuyer, they inevitably pass on that cost.
"So we've now arrived at a situation where banks aren't competing with each other to pursue first homebuyers," Mr Reardon said.
"They are competing for investors, and investors therefore get a far more competitive interest rate than first homebuyers or owner-occupiers.
"So that inherent inequity we have in our system, where those that are renting incur a disproportionately high cost from the shortage of supply, is made worse by these restrictions. And we are increasingly lending to those that already own a home and punishing those that do not."
University of Wollongong financial law expert Associate Professor Andy Schmulow said the Reserve Bank had "fiddled while Rome has slowly smouldered" for the past 20 years.
"(The Australian Prudential Regulation Authority) has poured fuel onto the fire," he said.
"I think that there are opportunities to rebalance the extent to which first time homebuyers can enter the market. That can be rebalanced through a more proportional approach to regulation."
Property Council of Australia chief executive Mike Zorbas said boosting supply was the most important way to improve housing affordability for first homebuyers.
He wants a holistic review of the entire purchasing process, from deposit requirements to taxation and exempting HECS debt from serviceability calculations.
"We do need to ensure that home loans are not just for the wealthy, and our position is here that giving first homebuyers a realistic chance at accessing credit for housing is critical," Mr Zorbas said.
