The Australian Bureau of Statistics has released figures that show Australia's first home owners now represent a record low 12.5% of the market. In September, the proportion of new home owners dropped to their lowest level since recording began, back in July 1991.
Although the total number of first home buyers (6,363) is not at its lowest point, a huge influx in the number of investors and owner occupiers wishing to upgrade has made their proportion smaller. As a result the value of investment lending leapt 5.2% in September according to the ABC. The result: rising house prices.
Investors who take advantage of negative gearing, tax benefits in SMSFs and capital gains tax incentives are making it near impossible for first home owners to compete. Couple that with foreign investors wanting to get in on the action and it's no wonder many younger Australians are finding property unaffordable.
Though low interest rates have been rejuvenating the property market, it seems only those who are already established owners are benefitting. UBS Australia's chief economist Scott Haslem said, "In contrast [to investors and upgraders] though, first home owners aren't seeing relative affordability, they're seeing absolute unaffordability, so I think for first home owners housing in Australia still looks pretty expensive."
It seems the dream of owning your own home is getting more expensive every day. However, for those willing to take on more risk, the banks are willing to help out. Both ANZ (ASX: ANZ) and Westpac (ASX: WBC) have increased their average loan-to-value ratios (LVRs) in the past 12 months, in a bid to cash in on increased lending and rising property prices. Despite all the banks denying they've relaxed standards, LVRs are now double what they were in 2009-10.
Although this may not be a problem in the near term, if house prices drop or employment rises it'll leave banks with a bigger burden and rising bad debts. Martin North, principal of Digital Finance Analytics, said "I think we have to watch this quite closely. We could be laying some traps for the future if we're not careful."
Mr North said that we're not in a bubble but that rising house prices are a real issue for Australia. "It's not a bubble it's a longer term issue that we've got a systemic issue in Australia… I'm not sure that all of the lessons from 2007 onwards have been really lodged in the back of the brain and we're seeing perhaps some revert to type."
Advice for first home owners
If you want to buy a $400,000 first home, you'll need to save at least $80,000 to make an LVR rate of 80% — which is likely what you'll have to achieve if there's a crackdown on lending like we've seen in New Zealand. In the meantime, you could invest the money you save in an interest account (probably paying 4% if you're lucky) or you could start buying shares that pay great dividends, sometimes up to 10%!
That advice is coming from someone who is also looking to purchase a first home in the near future and although it's more 'risk' than most young people are usually willing to accept, it's a viable alternative to start putting your money to work.
Foolish takeaway
Big banks' bad debts are near all-time lows and interest rates are making more Australians want to borrow so it's no wonder they're making 'risker' agreements with property investors.
Rising house prices are a serious issue and although many have downplayed it as simply a shortage in supply, new home owners should consider what they would be able to repay if the Australian economy slows because we aren't immune from recessions or house price collapses. In the past two decades Australia has experienced continual growth despite numerous setbacks in the world economy.
No one has said the dream of owning your own home can be a nightmare, but it can be. If you're young and looking to "set yourself up", property isn't the only investment. In fact, history has proven, it's not even the best. It can take a long time to save a deposit and there are numerous risks along the way.
