Real estate Australia: First homebuyers poised to survive interest rate crisis

One group of homeowners are in the best position to survive the interest rate crisis, thanks to their savvy approach to paying off their loans.

Over recent years, there has been a build-up of risks surrounding rising levels of household indebtedness from home ownership. These risks threaten the ability of homeowners to withstand economic shocks.

First home buyers (FHB) might appear more vulnerable than other owner-occupiers when it comes to keeping their homes during the high interest rate-induced, price downturn cycle.

Especially as FHBs increased sharply during 2020, supported by government programs, as well as low interest rates. In 2021 FHB commitments declined a little but were still above 20 per cent of the value of total housing loan commitments.

There’s caution now as the most recent ABS monthly data sits 48 per cent below the January 2021 high of 16,330 FHB loans. There were 8600 borrowers in September, of which 1800 were in NSW.

First-home buyers Joanna and Ryan Petersen outside their Ormeau home.

Typically FHBs start with higher Loan to Valuation Ratios and lower liquidity buffers than other borrowers.

However a recent study suggests FHBs may not necessarily be more likely to experience financial stress than others.

The research was undertaken within the Reserve Bank by Maia Alfonzetti at the bank’s financial stability department. The report pointed out that FHBs have historically experienced “favourable labour market outcomes, including higher levels of job security and income growth.”

There’s no doubt that many first timers have been enticed by government incentives

But what has been encouraging is that more than 1400 households have quickly moved out of the federal government’s First Home Loan Deposit Scheme by refinancing into standard mortgages, benefiting from the equity they had accrued.

This transition through the scheme suggests the success of the Morrison government initiative to support Australians getting into home ownership sooner than they otherwise would. The ongoing scheme allows buyers to purchase homes with a 5 per cent deposit with the remaining 15 per cent guaranteed by the government.

First homebuyers are better positioned to ride out the interest rate storm than most other homeowners. Picture: Jeremy Piper

Of the remaining 40,000 plus guarantees, close to 40 per cent are sitting ahead on their repayments. Fewer than 0.04 per cent are in arrears – considerably less than the broader 0.13 per cent Lenders Mortgage Insurance (LMI) market.

The current batch of intending first timers in the NSW market will be keen to take up the option to swap stamp duty for an annual property tax after the NSW Government passed the First HomeBuyer Choice legislation last month.

The break-even period between the expensive upfront stamp duty and an annual tax will be 36 years for an $800,000 apartment and 26 years for a $1.25 million house.

It’s a no-brainer for buyers, excepting the timing of their securing a purchase at a nicely discounted price which is of course highly subjective.

However there is the backdrop that a change in government next March could see the scheme and savings concluded as Labor don’t support it, given their view of the scheme being a Trojan horse for a wider land tax.

Originally published as Real estate Australia: First homebuyers poised to survive interest rate crisis