Australian property market: Why the first-home buyer wave won’t last

First-home buyers have been flooding the market as the property planets align, but the tide could quickly turn according to industry insiders.

First-home buyers have been flooding the market as the property planets align, but the tide could quickly turn according to industry insiders.

Despite a significant uptake in first-home buyers getting onto the property ladder Tim Lawless, research director of CoreLogic, said in the November edition of Property Pulse that the influx is likely to subside as housing affordability deteriorates and investors get back in the game.

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ABS housing finance data for August 2019 showed first-home buyers represented the largest proportion of owner occupier mortgage activity in the country since early 2012.

First timers comprised 29.8 per cent of the national market for owner occupier home loans – almost five percentage points above the decade average of 25 per cent.

First home buyers Emily and Owen recently purchased apartment in Sydney’s south. Picture: Damian Shaw

What fuelled the first-home buyer wave

The reason first-home buyers have been flying high this year is down to improved housing affordability as a result of the recent fall in property prices, a dramatic drop in interest rates and changes to lending practices making it easier to borrow money.

Also, some states have introduced additional incentives for first timers in the shape of stamp duty exemptions or discounts.

Then there has been the absence of their biggest rival – the investor.

After a decade of fierce competition at auction and the private treaty negotiating table, where first-home buyers and investors largely went after the same stock, namely inner city apartments and townhouses, investor activity fell away sharply.

That’s because, as Mr Lawless points out, August ABS data showed investors comprised only 26 per cent of mortgage demand, which is well below the decade average of 34 per cent.

Auctioneer Michael Carolan during spring auctions in Sydney’s inner west. Picture: Chris Pavlich

What will rein first-home buyers in?

“Looking forward, it’s likely first-home buyers will reduce as a proportion of overall market activity.

“Housing prices are once again rising across most regions of the country while growth in household incomes remain sluggish, which will create renewed housing affordability pressures in markets where home values are rising faster than incomes,” Mr Lawless said.

“Additionally, investor activity is likely to ramp up as the prospects for capital gain start to become more widespread and the spread between rental yields and mortgage rates remains around record lows,” he added.

Investors returning to the market could spell bad news for potential first home buyers. Picture: John Appleyard

Mr Lawless said even the Federal Government’s First Home Loan Deposit Scheme, which launches on January 1, 2020, is unlikely to make a substantial difference to overall first-home buyer participation rates because the scheme is capped at 10,000 buyers, which equates to less than 10 per cent of first-home buyers numbers over the past year.

What will happen to housing affordability?

His first-home buyer predictions coincide with data from Moody’s Investors Service which showed that although housing affordability for new mortgage borrowers improved over the year to September 2019, the scene was set to “deteriorate over 2020 as housing prices rebound,” said Alena Chen, Vice President of Moody’s.

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“The share of household income that mortgage borrowers need to meet repayments on new loans declined to 24.6 per cent in September 2019 from 26.7 per cent a year earlier.

“Housing affordability improved because housing prices fell an average 1.6 per cent over the year while mortgage interest rates declined an average 0.4 percentage point.”

However, the report pointed out that property prices are creeping back up, particularly in Sydney and Melbourne, which will reduce affordability in 2020.

The first-home buyer wave may flatten out as more buyers flood back.

“There was a clear improvement across the board, with Sydney, Melbourne, Brisbane, Perth and Adelaide all recording improved housing affordability in September 2019 compared to September 2018,” said Alena Chen, a Moody’s vice president and senior analyst.

“However, we expect rebounding house prices will weaken affordability over 2020, and in turn increase the risk of loan delinquencies and defaults,” she said.

Originally published as Australian property market: Why the first-home buyer wave won’t last