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FHB Strike: Australia's first home buyers - where have they gone?; Pull forward due to FHB grant changes will subdue FHB demand into 2014
Topic Started: 23 Aug 2013, 03:33 PM (8,180 Views)
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Australia's first home buyers: where have they gone?

'Shadow effect' of pull forwards due to state govt policy changes to keep sector subdued into 2014

FHBs have gone from being about 1 in every 6 buyers to closer to 1 in every 8 nationally, and just 1 in 10 in some states.

First home buyers (FHBs) have not engaged in the current housing recovery, particularly in NSW, Vic and Qld where activity in the segment is at very weak levels. This bulletin assesses some of the factors behind the recent weakness.

The dominant driver appears to be the 'shadow effect' of earlier pull-forwards in activity associated with changes in government assistance. Although these were not as largeas the 2009-10 pull-forward they have effectively depleted the pipeline of potential FHBs which could take over a year to rebuild.

Detail from the Westpac-Melbourne Institute Consumer survey suggest buyer perceptions have also been a restraining factor, most likely relating to affordability issues. Overly conservative assumptions around mortgage interest rates may be muting the response to what is otherwise a reasonably positive picture on affordability.

The 'shadow effect' on FHB demand in NSW, Vic and Qld is likely to last well into 2014. Beyond this weak period, prospects for FHB activity will depend on how much positive demographic drivers are undermined by affordability issues and lacklustre economic conditions.

The current upturn in Australia’s housing sector has several notable features, one of which is the weakness of FHB activity. Finance approvals to the segment are down 10%yr and running at extreme lows in NSW and Qld. This stands in stark contrast to‘upgrader’ and investor segments where new lending is up around20%. FHBs have gone from being about 1 in every 6 buyers to closer to 1 in every 8 nationally, and just 1 in 10 in some states.Here we assess some of the factors behind the decline in FHB activity and in particular the role that changes in government assistance have played.

Since the GST introduction in July 2000, Australians seeking to buy their first home have been eligible for a wide range of assistance from both Federal and state governments. This has varied in both dollar value and scope and, in the case of state government initiatives, has become increasingly complex. Across the big three eastern states – NSW, Vic and Qld – FHB assistance has usually included some mix of up-front grants and stamp duty concessions. Most states have also applied caps or a sliding scale for assistance based on purchase price, and differential rates for those purchasing new as opposed to established dwellings, and for those purchasing in regional areas. Adding to the complexity,there have also been frequent changes to programmes, rates,price caps and eligibility criteria.

Piecing this all together is by no means straightforward. However, our estimates suggest that since June 2000, FHB assistance has averaged about 4% of the purchase price of a property across the big three eastern states, or just over 5% for those purchasing newly built dwellings. There have been major fluctuations around this average though with assistance at the individual state level ranging from a low of zero (NSW currently) to a high of 8.2% (NSW and Qld in late 2008) for established dwellings and from 2.4% (NSW in 2005-06, Qld in 2006-07) to 11.7% for new (NSW in late 2008).

With most FHBs requiring a lump sum of 10-15% of the dwelling price to cover a deposit and other up-front costs, this assistance clearly helps many get across the line on a purchase. Perhaps more importantly though, temporary increases in FHB assistance strongly encourage those potential FHBs that are close to having sufficient funds to bring forward their purchase.

Surveys indicate that the average FHB spends two years accumulating a deposit. If we assume that the average up-front cost for FHBs is 15% of the purchase price, assistance equal to 4% of the purchase price would put those with six months of saving still ahead of them instantly across the line.

The resulting pull-forward has a corresponding drop-off as the ‘pipeline’ of FHBs is gradually replenished. Assuming a constant flow of new FHBs entering the pipeline, all else being equal, a six month pull-forward in FHB activity would leave a ‘shadow effect’ that lasts up to 2½ years…

Critically, during the phase in which the FHB ‘pipeline’ is being rebuilt, any additional policy-induced pull-forward has a diminished impact on activity due to the diminished pipeline of potential FHBs close to having the required lump sum. It also effectively resets the pipeline rebuilding process.

This seems to be, to varying degrees, the current situation in NSW, Vic and Qld where reductions in assistance for those purchasing established dwellings have generated ‘mini-pullforwards’ over the last 2yrs. In effect purchasers looking to buy established dwellings pulled forward their activity to take advantage of existing arrangements before reductions in assistance came into effect. Combined, FHB approvals are down 22%yr across these three states but up 30%yr across the rest of Australia, more in line with the gains in other segments.

Note that the effects of these state-specific ‘mini-pull-forwards’ are a little different because they are due to a reduction in assistance rather than an increase. Instead of assisting a group of FHBs in savings mode across the line for a purchase the main effect has been more marginal as those pulling forward their purchase decisions are effectively already in a position to buy (either with a sufficient lump sum or via some financial‘stretching’, e.g. tapping additional sources of funds such as parents or by lowering their intended purchase price and hence borrowing requirement).The upshot is that the pull-forward effect is less pronounced and so too the depletion of the pipeline of potential FHBs. That said,there is still clearly an effect that in NSW and Qld could take another year or more to work out, and a little longer in Vic, where weakness due to very recent changes in FHB assistance in July2013 is yet to emerge. We should also note that nearly all states have re-jigged FHB assistance to more heavily favour those purchasing newly built dwellings over those purchasing established. For NSW, Vic and Qld the difference in assistance now averages over 5% of the typical purchase price. That may provide some offset to the outright reduction in assistance for those purchasing established dwellings although evidence suggest FHBs heavily favour established over new dwellings (when incentives were similarly skewed in 2001-02 the take-up by FHBs was fairly muted with only 25-30% opting for new dwellings).

While state government policy changes have clearly been a factor, FHB activity is also heavily influenced by other factors. Amongst these, by far the most important is the vexed issue of ‘affordability’. As new entrants, FHBs are typically the most ‘marginal’ buyer in the sense that they are on the cusp of being able to purchase. Without the benefit of existing equity, they depend more heavily on debt finance and are hence more sensitive to shifts affecting the prospective cost of debt servicing. Although affordability is often viewed in terms of dwelling price to income relativities, for most buyers, and for lenders, the key metrics are around the ability to service debt, i.e. incorporating the interest rate on that debt. Judged on this basis affordability has improved dramatically since late 2010 as lower mortgage rates have combined with subdued price growth and continued growth in incomes. Affordability may not have returned to what now look to be the halcyon days of the 1990s, but the current mix of prices, interest rates and incomes is, outside of a brief period during the GFC, the most affordable Australia has seen since 2002. It should also be noted that since 2002, FHB activity has managed to stage a solid recovery under a less conducive affordability mix and unaided by changes in Federal or state assistance (in 2004-06). Of course, current readings on repayment-based measures of housing affordability are based on current low mortgage rates. And although Westpac and the market expects interest rates to remain low for an extended period, potential FHBs may take a different, more cautious view. This could in turn have a significant influence on their assessments of affordability. For example, re-calculating our repayment-based measure of affordability using a 3yr average mortgage rate (currently tracking at 7.05%vs the 5.95% prevailing rate) shows a more muted improvement particularly since late 2011. Indeed, extending the measure to include changes in FHB assistance, the picture is of a slight deterioration (1.7ppts on the measure).

While it is always advisable to build in a buffer on affordability assessments to allow for interest rate changes – lenders routinely do this as part of their loan assessment – potential FHBs may have become a little ‘over-cautious’ on this front. Surveys show this buyer segment has the most difficulty assessing affordability and tends to overestimate their debt servicing burden. Meanwhile actual data on mortgage arrears remain low in Australia and reportedly are even lower for recent FHBs (despite widespread fears that assistance measures would encourage many to over-extend themselves financially).

The Westpac-Melbourne Institute Consumer Sentiment survey provides some more colour around this. The survey detail provides measures by age group that allow us to create a ‘FHB composite’ measures based on the average age of FHBs. It also includes a breakdown by housing tenure with the ‘renter’ segment another rough proxy for sentiment amongst potential FHBs.What do these measures show? Consumer sentiment across these proxies for FHBs has been more upbeat than the national reading over the last year. Job loss fears look about the same,perhaps a touch better than the national reading in recent months. However, views on ‘time to buy a dwelling’, which have been at very positive levels nationally since late 2012, have been less positive. Some of this appears to be structural: renters in particular are usually 15pts below the national measure on this index. The gap does appear to have widened over 2012-13 though.

Conclusion

On the whole the sentiment survey detail suggests a less enthusiastic attitude towards house purchase amongst key FHB sub-groups but a reading that is still positive overall. That seems broadly consistent with the picture from affordability measures but at odds with the decline in FHB activity to over the last year. That in turn suggests that changes in FHB assistance and associated pull-forward effects have been the key driving force behind recent weakness.This implies both positives and negatives for the outlook. On the plus side, the post-assistance weakness is likely to be temporary rather than fundamental. On the down side, it could last for sometime yet. In NSW and Qld it could take another a year to workout, while in Vic, where weakness has yet to fully emerge, FHB activity looks set to decline in the months ahead and could stay in the doldrums through much of 2014.There are other forces at work as well. Aside from specific policy influences, the affordability backdrop and buyer perceptions, FHB activity is also heavily influenced by economic conditions and demographic drivers. With growth subdued and labour markets soft, the economy is a clear headwind to activity, with job-loss fears likely inhibiting many potential FHBs from entering the market. Demographic drivers on the other hand are more positive with Australia’s migration-led surge in population growth in recent years not only lifting this basic source of demand for housing but also leading to a significant pick-up in population growth across key FHB age-groups.Beyond near-term weakness associated with changes in FHB assistance, prospects for FHB activity will depend on how much positive demographic drivers are undermined by affordability issues and lack lustre economic conditions

Read more: http://www.scribd.com/doc/162401872/Westpac-Where-Have-the-FHBs-Gone-August-2013
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mel
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it's worth noting that the regional VIC total grant/benefit for new construction was $36,500 at its peak. Driving past display centers at the time was like visiting a circus. (many displays centers are now dead despite rate cuts though). The FHB incentives simply brought too much work forward IMHO.
Edited by mel, 23 Aug 2013, 03:55 PM.
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
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Shadow
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Although affordability is often viewed in terms of dwelling price to income relativities, for most buyers, and for lenders, the key metrics are around the ability to service debt, i.e. incorporating the interest rate on that debt. Judged on this basis affordability has improved dramatically since late 2010 as lower mortgage rates have combined with subdued price growth and continued growth in incomes. Affordability may not have returned to what now look to be the halcyon days of the 1990s, but the current mix of prices, interest rates and incomes is, outside of a brief period during the GFC, the most affordable Australia has seen since 2002.
A point the bulls have been making all year, but the bears just close their ears and don't want to hear it.

No wonder they are so shocked and dumbfounded when house prices rise instead of crashing 40% like Steve Keen promised.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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I love this bit.....

“While it is always advisable to build in a buffer on affordability assessments to allow for interest rate changes – lenders routinely do this as part of their loan assessment – potential FHBs may have become a little ‘over-cautious’ on this front. Surveys show this buyer segment has the most difficulty assessing affordability and tends to overestimate their debt servicing burden. Meanwhile actual data on mortgage arrears remain low in Australia and reportedly are even lower for recent FHBs (despite widespread fears that assistance measures would encourage many to over- extend themselves financially).”

Translation: FHBs should stop acting like a bunch of chickens and chow down on some juicy debt (30-40% sourced from overseas), what are you scared of? Grow a pair!
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Shadow
23 Aug 2013, 03:59 PM
A point the bulls have been making all year, but the bears just close their ears and don't want to hear it.

No wonder they are so shocked and dumbfounded when house prices rise instead of crashing 40% like Steve Keen promised.
Those who pushed prices up by outbidding each other and pricing out innocent FHBs deserve to be financially destroyed by the inevitable crash.

I’m glad first home buyers are AWOL and that it will be investors like you who take the hit when the collapse comes.
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Veritas
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Shadow
23 Aug 2013, 03:59 PM
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Although affordability is often viewed in terms of dwelling price to income relativities, for most buyers, and for lenders, the key metrics are around the ability to service debt, i.e. incorporating the interest rate on that debt. Judged on this basis affordability has improved dramatically since late 2010 as lower mortgage rates have combined with subdued price growth and continued growth in incomes. Affordability may not have returned to what now look to be the halcyon days of the 1990s, but the current mix of prices, interest rates and incomes is, outside of a brief period during the GFC, the most affordable Australia has seen since 2002.
A point the bulls have been making all year, but the bears just close their ears and don't want to hear it.

No wonder they are so shocked and dumbfounded when house prices rise instead of crashing 40% like Steve Keen promised.
Pity interest rates rise as well as fall over a 30 year mortgage.

Once again, the VIs deliberately equate loan servicing costs with affordability and ignore the size of the loan.

Stretch any loan term out far enough and it will become affordable to the debtor.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Shadow
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Veritas
23 Aug 2013, 04:27 PM
Once again, the VIs deliberately equate loan servicing costs with affordability and ignore the size of the loan.
Nothing to do with VIs... like it or not, it's how most buyers look at it... 'for most buyers ... the key metrics are around the ability to service debt'

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Stretch any loan term out far enough and it will become affordable to the debtor
Stretching the term out only influences the principal repayments - the ultimate stretch being an interest only loan (infinite term).

But the interest repayments stay the same regardless of term.

I'm guessing you've never actually had a mortgage?
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Veritas
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Shadow
23 Aug 2013, 04:31 PM
Nothing to do with VIs... like it or not, it's how most buyers look at it... 'for most buyers ... the key metrics are around the ability to service debt'

Stretching the term out only influences the principal repayments - the ultimate stretch being an interest only loan (infinite term).

But the interest repayments stay the same regardless of term.

I'm guessing you've never actually had a mortgage?
I'm guessing you don't know that when interest rates rise your repayments become more expensive?
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Sydneyite
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Veritas
23 Aug 2013, 04:27 PM
Pity interest rates rise as well as fall over a 30 year mortgage.
With comments like this, you miss the point that it's the first few years of a mortgage when interest rates matter the most. After a while, most people don't even notice if rates move up a bit, as they have paid down a chunk of principle by then, meaning a smaller proportion of the payments are interest anyway. Plus their income has usually risen as well.

The current environment is IMO a unique opportunity to get in and pay down a mortgage fast while interest rates are so low, and look to be staying this way for a couple of years at least. If in doubt, fixed term 3 year loans @ 4.8% now out there.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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willy_nilly
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Most FHB would ask themselves the questions that banks should ask like, "Are you planning to start a family?" Apparently according to Peter, that would be sexist. That is BS as it is the duty of the bank to establish the eligibility of the applicants.
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