Investor activity has dominated the Australian property market over the last 12 months, which is no surprise: banks are “bidding” for buyers in a highly competitive market, reducing interest rates principally on fixed-term loans outside of the Reserve Bank’s cash rate cycle, and if the right property is sourced current rental yields are also offering attractive returns.
But first-home buyers have seen their savings eroded, and as the latest ABS finance data outlines, intermittent first-home buyer “cash injections” — or the oft-quoted myth that rising yields are pushing greater numbers into the market — are having scant effect. Saving a deposit and sourcing a suitably affordable property is no easy task.
It’s not being sensationalist to emphasise that despite all our statements regarding improved housing “affordability”, and half-hearted attempts from both state and federal governments to inflate the market with incentives that fail to offer long-term solutions, the results for initial buyers are overwhelmingly clear and will consequently bear an effect on the future of both our real estate market and economy as a whole.
The latest figures from the Australian Bureau of Statistics show the number of first-home buyer loans in December 2012 fell to 14.9%. It’s the fourth consecutive month that this segment of the market has been in decline. Further information from RP Data’s latest media release indicates housing finance activity by first-time buyers is 17% below the average figures recorded over the previous 11 years leading to 2012.
A further drop in variable rates currently being offered by a proportion of lenders may inspire a bit of latent activity — however they are all short-term fixes, and you have to wonder what effect will result when rates eventually rise, especially if wage growth doesn’t match pace.
According the RP Data’s calculation of annual price changes (which is based on six months of statistics), house prices are already rising “”aster than wages and disposable household income growth”. Any help first-home buyers get on the borrowing side they’ll inevitably lose on the other.
We’re losing a valuable demographic of property buyer, which will have a flow-on effect across the property chain as a whole. As the changes push through the generation gap, increasing numbers will retire while still factoring as short-term renters.
In lieu of first-home buyer participation, the predominant activity in the inner-city affordable sector of the apartment market is being fed by investors. Certainly most off-the-plan and new unit developments are sidelined for this demographic (usually via offshore funding); however, investors also dominate the established apartment market, which would otherwise be favoured by first-home.
The percentage of investor-owned apartments in both Darwin and Brisbane falls close to 70% — and in the other capitals, it comes in between 60 and 70%.
As we’re all aware, property to some extent connects together like a flowchart. Supply is fed in from the bottom to allow those upgrading (and then downsizing) a ready market to sell into in order to make the move. But when investors predominantly negatively gear into the asset class most favoured by first-home buyers — which results in inflated property values — and the state government fails to come to the party with feasible affordable alternatives, our property wheel of upgrading and downsizing becomes somewhat stagnated.
Investors tend to hold property for extended periods of time in order to build equity — many choose to invest as part of their self-managed super funds and subsequently do not sell until retirement. Therefore the ready supply which would usually come from initial home buyers selling and upgrading inevitably starts to slow.
It’s clear from the 2011 census data that greater numbers of first-home buyers are being forced onto the rental ladder and subsequently getting stuck in the yoyo of rising yields and a lack of affordable inner-city options until they either meet someone with whom to combine wages or gain access to the “mum and dad” equity pot.
Proportionally we’re growing older as a nation — census data tells us the number of 20-44-year-olds has expanded on average by 4.6% per year in the five-year period leading up to the last census — however by 2020 it’s expected to slow to 1.2% per annum (a trend clearly demonstrated by the United Nations World Population pyramid, which extrapolates the data out to 2050).
Considering the predominant home buying activity takes place within the ages of 22-44, it seems reasonable to assume there’ll eventually be proportionally greater demand from those downsizing as we progress through these buyer type changes. But if the flow-on home buyer effect doesn’t follow through, the mismatch of household size comparable to property type will continue to stagnate our property buying and selling terrain and further tie down supply in the areas most want and need to reside — areas within easy commutable distance to city suburbs, jobs and essential amenities (schools, hospitals, doctors, public transport systems and so forth).
Census data already demonstrates that most lone person households are tottering around in accommodation that’s far too big for their requirements. Building an abundance of one bedroom apartments won’t suffice — only 14% of the total single person households (of all ages) opt for one-bedroom units. We therefore need a wider diversity of options.
If we were building homes that were viable for first-home buyers to gain a foothold that would not only maintain consistent market demand in order to build equity for those wanting to upgrade after seven or so years, but also provide feasible accommodation for this demographic to settle for an adequate period of time — then having an investor-dominated inner-city terrain could perhaps be balanced somewhat so as not to affect the flow of our home buyer property chain.
However, as we all know, the new home options are either limited to outer-suburban estates lacking in infrastructure, which every Joe on the street recognises is an essential component needed at the start of each project if we’re to lure home buyers outwards, or alternatively, inner-city high-rise “rabbit hutches”.
The lack of feasible and affordable new alternatives and the consequential property stagnation is all producing a ripple effect of unfortunate consequences. The financial burden of fostering a rental nation in terms of tightening vacancy rates and competitive rising yields is obviously unwise in terms of our national wellbeing.
But there’ no one golden answer to solving the home buyer property crisis. A number options should be considered — including reserving a proportion of high-quality new inner-city accommodation for our home buyer demographic alone, reducing the heat in the investment sector by way of tightening negative gearing incentives on multiple purchases, and considering changes to stamp duty as outlined in the Henry tax review.
One thing we should not do is ignore the problem, or try and solve it by way of easy inflationary credit.
*This article was originally published at Property Observer