All markets need a price floor, Australian housing is no different. Without entry level buyers the next level of the market struggles to move up the property ladder and as the churn rate of the market falls so do prices. In areas that are at the tail of the inelastic supply response house prices are under even more pressure due to the rush of new supply hitting the market. These dynamics are well understood by the housing industry which is why in 2008 we saw the government introduction of the first home buyers grant boost along with lowered interest rates to kick-start the bottom of the market and stimulate the broader economy. We all know the rest of that story.

Fast forward to 2011 and the housing market is once again struggling, however this time the RBA and the Federal government look to be staying out of the market. Some of the state governments have been independently attempting a little stimulation of their own, but seem to be failing to garner any interest without the help of the RBA. This from Victoria:

The state government’s bid to boost housing affordability by cutting stamp duty has failed to generate a new rush of first home buyers.

The number of first-time buyers entering the market has fallen to its lowest level in seven years despite the 20 per cent discount becoming available about five months ago.

New figures also show the savings on offer – amounting to $5800 on a house at the median price of $565,000 – have been cancelled out by price rises in the city’s more affordable areas over the past year.

But it isn’t just prices that are the problem for the market. A major difference between 2008 and 2011 is that first home buyers are now well aware of what stimulus actually does to the housing market:

James Champion, who has been looking for a first home for more than two years, believes his best option is to wait and see. The 34-year-old IT manager considers the stamp duty cuts and first home grants to be ”fool’s gold” that can whip up buyer interest but actually make housing even more unaffordable.

”I think housing in Australia is just excessively overpriced at the moment. I’d probably start to have a fairly good think about it if [price falls] got to 15 or 20 per cent,” Mr Champion said.

Slashing stamp duty for first home buyers is one of the cornerstones of the Baillieu government’s plans to improve housing affordability, with the cut set to increase from 20 per cent to 50 per cent by 2014.

The 20 per cent reduction applies to any first home purchased for up to $600,000 with a settlement date after July 1, which means buyers with a 90-day settlement term have been eligible for the cut since early April.

But only 8519 Victorian first home buyers have taken out loans over the four months to July, a decline of 10 per cent on the same period last year. The last time buyer numbers were lower was in 2004.

It is the same story in NSW:

Australian Bureau of Statistics data shows the number of first-home buyers remains low and decreased by 4.4 per cent during July. The proportion of first-time buyers in the market is now the lowest for more than six years.

More bad news for this group came in this week’s state budget, with the announcement of the end of the stamp duty concession for established-house purchases from January 1.

In Western Australia we have already seen some risky responses from the state government and the banking sector in an attempt to stimulate the lower end of the market. Since the initiation of that product the Western Australian market has fallen further. It is that sort of moral hazard laden behaviour that is a real concern because first home buyers are the least likely to understand the risks associated with using such products:

First homebuyers will be able to borrow 97 per cent of a loan under a new Bankwest mortgage product.

Bankwest managing director Jon Sutton announced the $500m loan strategy this morning, which will be available to 1300-1500 WA borrowers.

The loan undercuts the traditional 20 per cent deposit rate normally required of first homebuyers. The bank claimed it would cut the deposit saving time for first homebuyers from four years to six months.

Mr Sutton denied that it was irresponsible to lend first homebuyers such a large proportion of the value of a property, claiming the bank had put in place strict lending criteria that would ensure payments were sustainable. The criteria included a minimum annual income threshold of $80,000 for the borrower or at least one person in a borrowing couple.

Housing Minister Troy Buswell backed the product as a “new weapon in the housing affordability battle”.

Mr Buswell said the State Government’s Keystart program, which required a four per cent deposit, had a relatively small default rate compared to traditional products. He said low deposit loans from the private sector were more effective in helping first homebuyers into the market than a government grant.

With Queensland arguably the worst performing market in the country it shouldn’t really be a surprise to see similar products now appearing. But I seriously have to question how anyone at APRA or the RBA can claim that Australia has world leading prudent banking while these products are still available to the most financially vulnerable cohort.

What could possibly go wrong … again?


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  1. NSW is at least on the right track cutting the stamp duty discount for established houses. If they take a stick to local council NIMBYs and reduce further some of the up front charges (and have rates instead) we might seem some new housing built while prices adjust downwards.

    • +1 I agree…NSW Gov is at least trying to boost supply and this can only help house prices. The FHBG boost for established homes was the most damaging stimulus effort undertaken by Government, because it just inflated the price of established homes and did nothing for affordability

    • Cutting stamp duty?!! This won’t cut prices at all, but will merely be a gift to the seller. It’s the same as the First Home Owners’ Grant – right renamed the Vendors’ Price Boost.

      • Karl Willims…

        In its first budget, the coalition government announced that from January 1 stamp-duty exemptions for new home buyers will no longer apply for people who buy existing properties, saving the government more than $1 billion over four years.

        In a move designed to stimulate construction of new homes, first home buyers will have stamp duty payments waived only on purchases of new and off-the-plan properties for less than $500,000, with partial exemptions available for new properties valued between $500,000 and $600,000.

        Read more:

        How is this a “vendors boost”…its towards newly constructed houses?!?!?! Aimed at increasing supply and stop the trading of established houses for more and more money!

  2. James Champion is an interesting example.

    The politico-housing complex wants us to to focus on the FHB’s excluded by price, living their lives with their noses enviously pressed up against the window
    watching the Boomers relaxing in their large and comfortable homes.

    This is a narrative the boomers, the gearers and the sacrificers – those who bought at these crippling prices and expect everyone else to as well – draw great comfort from.

    James represents another cohort, a very very dangerous one. He has looked at rent V. buy, the powerful price run up in recent years and at global bubble bursts and concluded he is better off biding his time while building an even bigger deposit from the large difference
    between rent cost and mortgage repayments.

    He declines to play the property game by RE industry rules.

    This group is readily identified: just look at the halving of FHB’s in recent ABS Housing Finance stats. Some are excluded by price. But there are many Jameses too, and the more young adults who adopt his position, the faster land prices will return to trend and end our $2 trillion land bubble.

    • Good point David.

      As someone that falls into this category (A potential FHB that has done the numbers and happy to keep renting) I would add these people are less likely to follow the herd and read the newspapers – they will find alternative sources of info (macrobusiness blog) and make up their own mind!

      As long as we can resist our brainwashed parents and stay out of the market – the falls will come and then everyone will play the waiting game. Then comes the crash

      • Moved back home with mum and dad, they are happy for my fiancee and I to stay until we can buy at a reasonable price.

        In the mean time we are saving a massive deposit, but we do not intend to leverage that in to a large loan – instead a modest loan.

        Will work better for our entire family on the long run as we will be financially able to look after our parents in the future due to the smaller debt burdon.

        • I’ve got a touch of the James Champion myself and haven’t been able to get the rent v buy calculation in my favor since 2003. The scary thing is that we are the only family we know renting/saving waiting for the bubble to pass.

        • Good for you Chris. I’ve been advocating this approach for some time now. Move back with your parents and save a bigger deposit. In the mean time you’re reducing demand, not just for first homes, but in the rental market too. Lower rental demand translates to lower rental yield, thus making housing investment less attractive and further driving down purchase prices. You sir, are right on the money 🙂

          • Hey Guys,

            My girlfriend and I are living in what was once a dairy on my parents farm doing a 130k round trip commute to work each day. We are also potential FHB’s waiting for a decent correction. It’s good to know we are in good company. This blog keeps me patient.

    • Yep, but it’s not just FHB who are staying out of the market. Cashed up BB like myself who have returned to Oz after decades overseas, and recent skilled migrants are holding off buying in because we also recognise the housing stock is of very poor quality, energy inefficient, and overpriced. We do not need a mortgage at all, but baulk at paying such inflated prices, and we are comfortable with renting as we have lived many years in countries where renting was commonplace (no stigma attached), and we are earning more from our invested cash than we would save in rent. There is also a lot to be said for having easy liquidity. If (when) the price correction comes we will re evaluate.

      • Like us too. We travel in our motorhome while prices go down and our future house money earns interest.

        Grants only bring future demand forward and push prices up.

        Stamp Duty needs to be renamed. It should be called Rip Off The House Buyers Tax. There are no stamps involved. If there were they’re damned expensive for changing the names on a title deed. It’s just another bloody tax. Drop it for all and if changing the title deed is expensive to do, outsource it to India and sack a few thousand more paper shufflers.

    • “the boomers, the gearers and the sacrificers”. Good work identifying those groups David.
      Don’t forget the “shortage-deniers”. This is a fascinating group of people who cloud the issue of providing enough good housing for people to live in. They believe that price is the only problem and that huge numbers of immigrants are easily accommodated without building any more housing or infrastructure because THERE IS NO SHORTAGE OF HOUSING IN AUSTRALIA.

    • Good work Mr Collyer. I don’t know how many in the world have a Bloomberg phone App but they read about you today!

      >Prosper Australia’s Collyer says there’s actually an excess of 256,324 homes, equivalent to double the housing stock in the nation’s capital, Canberra. That’s because Australia has built one new dwelling for each 2.32 new people for the past 15 years, Collyer said, more than is needed for a nation with an average 2.66 people per home.

      “When residential property prices blow into a bubble, the tragic error often made is in attributing price rises to housing shortages,” Melbourne-based Collyer said. “The U.S. experience shows this conviction is shattered as soon as price declines begin.”More than 100,000 properties lie vacant across Australia, 46,220 in metropolitan Melbourne alone, according to Karl Fitzgerald, director of Earthsharing Australia, a subsidiary of Prosper. The group’s estimate is based on the number of homes that used less than 50 liters (13.2 gallons) of water a day between July 1 and Dec. 31.<

      • “Australia has built one new dwelling for each 2.32 new people for the past 15 years”
        I doubt that David Collyer misrepresented the situation in that fashion. He is far too smart for that.
        Imagine if last year there was only one new immigrant from Southern Outer Vulgaria and Australia built 200,000 extra houses, does this mean we built 200,000 extra houses for each extra person from Southern Outer Vulgaria? Of course not. The existing population is huge and is ageing. It is this segment of the population that got the extra houses – not the extra people.
        Unless the shortage-deniers are proposing a law that all extra houses MUST go to the extra people, then I wish they would stop parroting this nonsense.

  3. I know that the point of this post was around lending standards but the interesting bit for me is the lack of first home buyers. I’d say that although not an organised picket line the first home buyers are pretty well on strike. And although Prospers home buyers strike seems to have been written off in the msm I’d actually say that it’s effects are still very much with us therefore it is still very much active.

    A lot of people heard that message and they are on strike, and don’t need to announce it to anyone!!

  4. Nervous landlords are only signing 6month rental contracts in WA. A close friend of mine had to move 3 times in the last 2 years. Thats no way to live your life with a young family. Although he is fully aware of the imminent collapse he is now looking to buy.

    • That’s not my experience here in WA. We have been in the one location now for 3 years and the landlord is always relieved when we agree to a lease extension.

      • Same here, we haven’t had a rental increase in 4 years, and we keep getting pestered to sign a new fixed term lease.

        We’re happy to keep it a rolling lease.

        We are have been looking, and even mentioning ‘LULZ’ offers. looking to make another shortly, and the feedback is it will generate an agreed price that is a sizable discount from its peak listing price.

        Albeit its current listed price is a bit below that as well, but I’m looking to trim more.

    • In Sydney, I have 3 months to go on my current rental lease and my landlord offered to extend the lease for one more year at the current rental rate. I extended it for 6 more months.
      Just one anecdote – But I get the feeling that the landlords are decidedly nervous, even in Sydney.

      • Every time the issues of lease arises I offer about $20 dollars per week less and as units around the one I occupy have vacant gaps between tennents of up to 9 weeks they are alway ready to compromise. I will take even 5 – 10 dollar discounts and feel I am hastening the housing price correction, just that little bit


    • That seems to be one of the main things that makes people buy, the desire to gain some security of tenure after a crappy run in the rental market.

      Better tennancy laws would go a long way to fixing this.

      Like Russell I’ve had a good run (NSW) but I know plenty who haven’t, people with pets and kids seem to get a particulalrly hard time.

    • Buying a 500K house and watching 50K a year get wiped off it until you are in negative equity and then technically bankrupt for the duration of your working life is no way to treat a family.

      This doesn’t account for the dead money in interest rates.

      Even if you had 500K cash renting makes sense in a falling market. A 10% fall and there goes 50K.

      Put the 500K in a TD earning 20K after tax and pay 25K in rent for the same house, net loss 5K.

  5. My heart goes out to those young people -fortunately few in number now – who continue to struggle to get a deposit together, then take out a mortgage, not understanding what’s currently happening in the residential markets.

    In two to three years, they’ll likely be funding a mortgage 1.6 times the value of their (or should I say the bank’s) property.

  6. Surely its not just the FHB’s that have left the market. With zero interest at auctions recently – its the next wave of investors that are really holding back. Who can blame them? It may have taken much too long to realise, but the expected returns just aren’t exciting anymore. Housing at this point in time is a dud investment, even with the transfer system bonuses. If you want to lose a lot of money quickly, there are less intensive (time wise) ways of doing it. These can often be a lot more fun as well.

    The law of political economy is especially relevant in times like this. You will seek to gratify your desires with the least amount of effort…

    • With 1.7 million (~8% of the population) already investors I’d say that is a source of demand that is already pretty much tapped out, I don’t think there is a ‘next wave’ out there.

  7. Very bearish outlook. But what many people don’t understand is that the number 1 rule of investment I learn t is to “always bet with the house”.

    The government will not let house prices collapse for one of 2 things.

    1)People being good debt slaves to a large mortgage keeps them in line. They do their 9-5 every day, they pay their taxes and everyone is seemingly happy. Keeping this social harmony is paramount or the government will be ripped to shreds, well whats left of it.

    2)So many people, Baby Boomers, middle class the economy rely on real estate. Australia’s future prosperity unfortunately is not the mining boom but property.

    Eventual government stimulus, be it low interest rates or some other incentive will re inflate the market in the near future. Pushing the bubble into unprecedented levels. People sitting on the fence get tired and jump in. I mean everyone who is a bear now of property is a perma-bear. It will take nothing but a crash to change their perspective on property. But when the 30%-50% in price drop doesn’t come they will grow tired and jump in. Australia is built on real estate. The government will not let it fail.

    Unless another large economic catastrophe takes place then prices will not crash. They will continue to stagnate till the new wave of economic stimulus arrives. The only way the government will let the real estate market crash is if they have a scapegoat to put the blame on. “We have sound economic fundamentals” (how many times have you herd this line), if property prices crash on the current governments watch without a scapegoat its good game for labor, forever.

    So to sum it up,

    Prices won’t crash without some sort major economic overseas catastrophe.

    • So you’re basically saying that prices are going to crash possibly before Christmas, almost certainly by this time next year and without a doubt by 2014?

    • It does not need to crash , it can slow melt for another five years with equally disastrous effect but behind the facade of everything looking alright.

      • This is the best case scenario, property prices will stay stagnate as inflation and wage growth do most of the work. People in this case who bought pre 2008 stimulus or with 30%-40% deposit will not be effected as much by sliding house prices. They won’t gain anything but they won’t lose. It will just be an expensive lesson to the first time buyers.

        I just can’t see a crash the likes of USA, Ireland and other countries who’s bubble has popped happen in Australia.

        • A couple of things Georgie.

          1. If we lose 20-30% in real terms over the next 10 years, how does that not hurt people who bought in 2006? They have still have lost in real terms, even if their ignorance of inflation makes them somewhat unaware, they still won’t be able to upgrade to a nicer place after buying a dog-box in the rush, unless they take another >80% mortgage. Surely that’s got to hurt.

          2. I never fail to underestimate the extent to which the government will prop-up housing in Oz, but the recent experience around the world has been one of pop not fizz at the end of the bubble, and the US is not any less “the Dream is to own a home” than we are.

          3. As DE says, the market relies on churn from incoming FHBs. At the moment the numbers are low because those in a position to buy have already been brought into the market through the Rudd stimulus. If you look at the long term FHB numbers this lull is due to continue for another 12 months before we can return to normal FHB numbers, at which point, new FHBs are less likely to rush in if they have seen prices slowly dropping for the past 12 months which could have a dramatic impact on accelerating house price falls.

        • Why can’t Australia follow every previous credit fuelled bubble?

          I include the Australian house bubble of 1880s that ended in 1892 where it took 60 years to get the price back.

          Ireland and USA had LOWER unemployment at their house price peaks in 2006/2007.

        • “I just can’t see a crash the likes of USA, Ireland and other countries who’s bubble has popped happen in Australia.”

          They didn’t see it coming either Georgie!

    • “Prices won’t crash without some sort major economic overseas catastrophe”

      I guess it’s a good thing that an overseas catastrophe doesn’t look v likely then

    • I beg to differ with point no. 2 there.

      Hyperinflation in the cost of shelter does not benefit anyone, nor provide prosperity.

      • It does to the ones already in the market. Another MB article called them “The boomers, gearers & self-sacrifices”.

        These three groups benefit from high house prices a the cost of future generations.

        • “These three groups benefit from high house prices…..”

          Only if someone is willing and able to pay the high house prices.

          Otherwise, these three groups are stuck with a pile of illiqued bricks and concrete.

          Try paying your car rego, or buying some groceries at Woolies with that.

    • The talk of stagnation in prices to me is not plausable. Less ‘mug punters’ entering the ponzi means the scheme will colapse.

      In the bubble ponzi there are only 2 possibilities in my opinion, up and down, and up ain’t gunna happen for a long long time yet.

    • georgie,

      “Australia’s future prosperity unfortunately is not the mining boom but property.”

      You’re kidding, right?

      You are saying that a government-supported housing market equals “prosperity?”

      Boy, I betta get me another damn dictionary.

  8. I predict that once the ‘housing-is-grinding-down’ meme takes a firm hold in the next two years prices could slide dramatically.

    Remember in the world of common sense investment advice (aka boganomics), stocks go up and down where as property always goes up. We’ve had at least 20 years of these truisms. Retirees are jumping off the equity train in a big way, just talking to my folks’ friends, but a surprising number are still looking to buy property on the dip.

    I guess with negative gearing you’re laughing no which way prices go.

    • ‘I guess with negative gearing you’re laughing no which way prices go.’

      Maybe you are while you still have a taxable income that rises more or less in line with the CPI….in which case negative gearing is attractive. However, when you stop working, those negatively geared chickens come home to roost. The Boomers will start to flood the market with investment houses as they move into retirement, and at the same time reduce their spending levels to something that can be sustained by fixed incomes….both these trends will exert considerable pressure on house prices. If the current trend in unemployment is up…then that too must have an influence.

  9. Yeah my pezzas are always on the ear hole. parroting little predictions from MB every now and again are starting to give them a bit of cognitive dissonance though. eg. ‘Mum, I bet you they lose substantial money on ‘the block’.’

  10. All those screaming for a housing bust, be careful what you wish for. The accompanying collateral damage may wish you hadn’t. Any or all of the following may occur:

    High unemployment resulting from the collapse of many small businesses as their houses are used to either provide seed capital or operating capital. Banks will call in loans when security evaporates. No job, no loan. (no NIJA loans down under)

    You will actually have to save 20% deposit – pretty hard for some when they have a job – near impossible when you don’t have a job.

    Banks will be reluctant to loan for a house in a falling market. Required LVR may drop to 70%.

    The availability of LOC will decrease. Most SME rely on this to operate.

    Banks will be reluctant to lend to anyone without a secure “govt job” and any one in the private sector will be deemed to have limited job security.

    Banks will become reluctant to loan on a cash flow basis. This already exists hence a requirement to put your house as guarantee.

    We could be in a major recession / depression with all the accompanying fallout.

    State Govt relies heavily on property and payroll taxes. When housing and SME shrinks budget adjustments are made. What services will they dispense with or what areas will they tax. Anyone what to be taxed / charged for the water they have in their water tank or bore; or want more road traffic cameras (fund raisers) at every lights. Who’s for higher land taxes? How about land tax on your PPOR? How about diminishing health and welfare services? If you think roads and infrastructure is bad now, think again.

    For those counting on an inheritance – it may be considerably smaller than you think.

    I’m sure others could add to the unpleasant conditions.

    Before you laugh, talk to someone who tried to start a business or buy a house in the recession we had to have or prior to deregulation. Some of you may think that much of the above is a proper reversion to sensible lending standards which may be true. However for those seeking to get into the market it will become much more difficult than perhaps today.

    • All those screaming for a housing bust, be careful what you wish for.
      What is your wish then? That we keep kicking the can down the road?

    • It’s going to happen whether you wish for it or not. Better to be realistic and prepare for it than dive head-first into an empty pool.

      A 10% deposit today may well be a 20% deposit in a few years if you sit on it, but if you follow the ‘common wisdom’ it could be one hell of a black hole of debt.

      • Not applicable in all cases 10% of 300k is 30K; 20% of 200k is 40k and 30% of 100k is 30K.

        And the ability to save will be much harder?

        Though it will be better than the potential loss by leaping in now!

    • Unfortunately the housing “winners” of the past decade have without exception been poor winners. Rubbing the noses of those that “lost” in their success.

      So excuse me if I’m more than happy for the equation to change from

      WIN – LOSE


      LOSE – LOSE

      Although I’ll continue to bet on a return to the long term median. The Boomers will soon retire en-masse and every leveraged asset will be sold at roughly the same time. Sold to those with CASH.

  11. Australias housing market is rediculously overpriced. The houses are of the cheapest quality (compared to European standard), similar to houses in the US. The biggest difference is that houses in the U.S of the same size cost a third of what they cost here. Economists have already said many times that there is a housing bubble. Real Estate propaganda can’t change the theories of the economy.
    What I usually hear is …”well, but the prices are a reflection of supply and demand. RUBBISH. The theory might be true…but it is very important to understand where the demand is coming from. Foreign gambler and rich investors gobble up houses in Australia, leave them empty and they hope they can sell for more…that drives prices up. The average young Aussie family is not creating any demand (at least not without any fishy stimulous which is actually making everthing worse).

    In Denmark for example, foreigners can’t own property…they can build a house but the land underneath is still not owned by the individual home owner.

    And in New Mexico/USA, many banks only give out loans to people, who actually have to live in the house …which kills off that stupid house gambling which is so common in Australia. For god’s sake..if you want to gamble and become rich….go to the casino.


  12. Slightly off (but on) topic about FHB’s, Being one myself, it was interesting to see the comments on the bearish article published on the yahoo7 website, and the anti FHB comments that were made.

    It disgusts me that people are complaining that it is going it to make it more affordable to buy a house ‘being’ a gen y’er and saying that we should suffer the pain of inflated house prices. as well as patronizing stating that we would have to ‘work’ for it first!