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?