First home buyers struggle

Rising home prices and a lack of incentives hurt

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When the median house price in Sydney is a whopping $550,000, and $475,000 in Melbourne, you can understand why first home buyers are struggling to get into the market.

And that’s despite record low official cash rates, relatively low mortgage rates as well as incentives offered by government and developers alike.

Housing specialist RP Data-Rismark’s index shows home values have grown by 2.8% in the last three months and are up 4.7% since last year.

Real Estate Institute of Australia president Peter Busby has told the Australian Financial Review (AFR) that difficulties for first-home buyers had not eased, and suggested that they needed more than interest rate cuts to encourage them to enter the market. They are unlikely to get those either with markets increasingly forecasting the next interest rate move as upwards. The major banks including ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) have become dependent on higher cost deposits to fill the majority of their funding needs and as such are unlikely to cut their mortgage rates.

NSW dropped its first home loan grant on established properties in October 2012, which saw home loan approvals drop by 63%. Victoria withdrew its grant for new homes in the middle of last year, and faces a softening unit market, especially in Melbourne which has a looming glut of inner-city apartments, according to the RBA. More than 17,000 apartments in 30 towers in the centre of Melbourne have been approved since 2010, according to the AFR.

Rents in Perth have jumped by 13% in the past year, possibly forcing renters out and into their own homes, which has seen house prices in Perth rise by more than 9% since November 2011.

The number of first home buyers in NSW and Queensland has fallen, but risen in Western Australia. First home buyers remain stuck at around a 15% share of all new home loans, about half the level seen during the Federal government’s first home buyers scheme. To avoid paying lenders mortgage insurance (LMI), borrowers usually need to provide at least 20% of the price of the property as a deposit. For Sydney that means buyers need to come up with a deposit of at least $110,000 to buy the average house, well beyond the reach of most first home buyers.

Foolish takeaway

With first home owners skipping the market, investors have been jumping back in, taking advantage of the low interest rates and rising rents. The RBA has warned that it is watching for any signs that low interest rates are encouraging a property bubble – it may need to keep a closer eye on the housing market in the near future.

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