Home ownership, the great Australian dream, is more than simply shelter—it’s character defining, providing security of tenure and a stabilising influence over life’s decisions; it’s a store of value and source of wealth; and, it’s a driver of business activity across the economy. Many factors influence an individual’s decision to enter the market; the capacity to finance, life’s station and preferences, and the rent vs buy trade-off.
First Home Buyers (FHB)
First home buyers (FHB)—along with investors—underpin the market’s momentum of transactions. By introducing new capital into the market, they enable up-graders to transact. Since June 2000, FHBs have averaged around 19% of purchasers—from a low of 13% (March 2004) to a high of 31% (May 2009). The recent decline in FHB numbers is the result of a variety of factors—demographic, social, economic, and price related—but the overall outlook is strong and encouraging.
Nationally, FHB numbers are trending upwards from 5,812 at the beginning of the year to 7,977 (July 2013) while over this time FHB have averaged around 15% of the market. The number is still below the longer term 10 year average of 18% of the total market.
Each State has differing FHG incentives, resulting in contrasts between them. It’s a trade-off; the low interest rate environment and improving confidence will further entice some FHB to enter the market, but the level of incentive will depend upon where they reside.
State governments have generally adopted a supply side approach to tackle the national dwelling shortage. The trend has been for each State to increase the quantum of cash grant offered in addition to the Stamp Duty exemption, while extending this to new or off-the-plan dwellings.
Property Sector in Upswing
The recovering residential property sector will be a key growth driver through the next phase of the economic cycle as the economy transitions itself away from the resources boom. Housing plays a pivotal role in the economy, with strong spending multipliers through construction, retail and business sectors.
A national dwelling shortage and growing population have seen significant increases to the levels of pent-up housing demand. Interest rates have been easing since November 2011, with the benefits filtering through to property markets, as demonstrated by a pick-up in home loan commitments.
Housing Affordability Peaks
The current historic low interest rate environment and recent subdued house price growth have seen some of the best levels of housing affordability in over a decade. The HIA-CBA Housing Affordability Index continued to improve in the June 2013 quarter. Across the capital cities, housing affordability improved by 4.5% while regional affordability improved by 6.3%. This is a good news story for FHB, affordability is around one of its best levels in the last decade.
A potential new wave of FHB demand is poised to significantly impact market. Nationally, the birth rate increased in the 1980’s. Children born at this time represent the next phase of FHBs—aged about 26 and below.
Typically, these FHBs are well educated, tech-savvy, market informed, with a taste for better quality housing. Some will be stay-at-home-investors (i.e. their parents’ home) who plan to build equity prior to moving out. Others will be professional couples who will pay a premium for CBD accessibility and eclectic neighbourhoods. There is a real likelihood that these Gen-Y buyers will leapfrog preceding generations in wealth terms—property’s inherent compounding quality benefits most those who enter the market from an early age.
In this environment, we expect FHB numbers to increase over the next 12 months to around 110,000 but remain below the longer term average for this market segment. This is based on the expected increase to total market transaction volumes while maintaining the level of national FHBs to the current sub-18%, or thereabouts.
This modest outlook is the result of the challenges facing the FHBs in the current marketplace; lingering tight credit markets and State governments varying grant eligibility.
Challenges Facing FHBs
The combination of varying of the grants and the tight credit markets have contributed to recent declines to FHB numbers and most likely are holding back potential FHB numbers. While FHB numbers have been low, we note that investor numbers have risen; some of these investors are FHBs.
The State Governments’ supply-side focus has impacted FHB affordability—established dwellings incur Stamp Duty and are not eligible for the grants. New dwellings are priced at a premium to the established market, often pricing in the cost of the infrastructure and other charges incurred during the development process. Typically, new dwellings are an upgraders and investors purchase. Clearly, it will come down to individual circumstances as to whether the purchase decision “stacks-up”.
From a lender’s perspective, FHBs are an unknown risk quantity and a variety of strategies are adopted to reduce this perceived risk. Potential borrowers may need to evidence a history of savings, face higher deposit rates, provide parental guarantees, and/or pay lenders mortgage insurance. Ultimately, banks pick and choose who their borrowers will be.
Stay-at-home-investor FHBs are capitalising upon the tax and wealth benefits of property investment along with their good fortune of birth—being the children of the shadow Baby Boomers (1946-64) who are more accepting of stay-at-home adult children than the earlier members of the cohort. Such parents potentially may also act as guarantors, facilitating the loan process to the FHBs.
The way migration plays out in the FHB market is significant. Australia’s skilled migration policy ensures migrant FHBs are established career professionals, often bringing deposit-ready capital. For some, the Government incentives are an effective motivation for citizenship, delaying their market entry. While for others, the market’s robust fundamentals will outweigh the benefit of waiting. Some migrant FHBs are comfortable with raising families in the context of apartments, particularly if there is an amenity trade-off. This may not necessarily imply beaches, but closer to established centres—which coincidently is where a large number of new apartment projects are occurring.
The Significant Investor Visa is most likely to drive the premium priced end of the market; location, again, being the significant driver of choice—premium properties are an exemplar of wealth and community standing. For some cultures, this is an important and compelling motivation to conspicuously acquire and the auction may be the preferred pathway to home ownership.
Property is far more than simply shelter. It is a store of value and a creator of wealth. The great Australian dream of home ownership plays out in the economy in a myriad of ways—providing employment, encouraging opportunity and enabling growth. A healthy property sector is the outcome of a healthy economy. FHBs set the foundation of a stable society, since their livelihoods and their lives are invested in place and people. For most, buying the first home represents their single most significant purchase—a grounding, character building experience, worthy of the effort.
MacroPlan’s experienced and qualified economists align their understanding of macro-economic forces with micro-economic variables such as geographic and industrial characteristics, demographics, labour market shifts, resource demand and commercial realities. Contact Jason Anderson, Chief Economist today to discuss your property research requirements.