Relaxing lending rules and improving access to finance are necessary to encourage more first-home buyers and kickstart the economy amid the COVID-19 outbreak, experts from the Housing Industry Association (HIA) said.

A recent HIA study shows that along with the weak population growth, strict access to finance to build a new home is the major drag on housing and economic recovery.

Tim Reardon, chief economist at HIA, said in the years since the Global Financial Crisis (GFC), the financial landscape of Australia has tightened, making it harder for first-home buyers nowadays to access finance than it was in 2009.

"If we were to return to previous lending practices, the Australian economy would recover faster from the COVID-19 recession," he said.

The federal government recently announced that it would simplify bank lending rules to stimulate the economy. Federal Treasurer Josh Frydenberg said while credit has become cheaper due to the low interest rates, many would-be borrowers are still prevented from accessing finance due to tight regulations.

"The flow of credit will be absolutely critical to our economic recovery. But our current regulatory framework, with respect to lending, is not fit for the purpose. It has become overly prescriptive, and responsible lending has become restrictive lending," Frydenberg said in a statement to the media.

Even the Reserve Bank of Australia flagged the tight regulatory regime as a factor that has been holding back credit growth, said Denita Wawn, CEO of Master Builders Australia.

“It is good to see that the federal government is giving banks flexibility to deal with applications on a case by case basis which should result in lenders providing mortgage finance to more people,” she said.

A separate survey by HIA showed that for many builders in Australia, access to finance and lending practices are the biggest problems in the current market setting, not the impacts of the COVID-19 outbreak.

Graham Wolfe, managing director of HIA, said the government's plan to improve access to finance is necessary and commendable, and would allow millions of dollars to be injected into the economy at a time when Australia needs it most.

"It’s a pity that it has taken a recession for these rules to change. This plan does not solve all the problems around access to finance and credit; however, HIA believes it is a move in right direction," he said.

Furthermore, Wolfe said the announcement will complement the existing support schemes to spur buyer activity, including the HomeBuilder and the First Home Loan Deposit Schemes.

"Banks will still have to maintain appropriate application procedures and there is a mutual responsibility on the customer to supply accurate and truthful information when applying for a loan," he said.

Adrian Kelly, president of the Real Estate Institute of Australia (REIA), said the announcement is also a big win for home sellers as demand for houses improves.

“This will allow sellers to list their properties knowing the buyers will be out there. By improving demand, the government is giving prices less chance to fall, meaning the doomsday forecasts can be archived,” he said.