CoreLogic: Don’t be a first home buyer patsy

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By Leith van Onselen

With first home buyer (FHB) demand surging in Sydney and Melbourne on the back of large reductions in stamp duty following measures implemented in last year’s State Budgets:

And the Turnbull Government recently passing legislation to allow FHBs to use up to $30,000 of voluntary super contributions for a housing deposit.

CoreLogic’s Cameron Kusher has penned a timely blog post calling for FHBs in Sydney and Melbourne to “exercise caution” and avoid diving into the market to take advantage of these bribes:

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The volume of new loans to first home buyers in New South Wales and Victoria has climbed substantially over recent months as value growth has slowed and even begun to fall in Sydney and Melbourne. First home buyers must be vigilant about purchasing homes and not just be lured into buying at the peak of the market because of attractive incentives…

The removal of stamp duty has resulted in a substantial increase in first home buyer housing finance commitments…

Since the stamp duty changes, average loan sizes have increased by 1.3% in New South Wales compared to an increase of 1.1% over the previous six months. This seemingly suggests that the first home buyers entering the market are not using the removal of the stamp duty barrier to borrow more. In Victoria, it is a bit of a different story with average first home buyer loan sizes increasing 7.0% over the past six months compared to a 2.7% increase over the previous six months. This would seem to suggest in Victoria, the stamp duty concessions are leading to mortgagees borrowing more.

The most concerning thing for any potential first home buyer in the current New South Wales and Victoria markets should be the lure of entering a market which has been growing rapidly for many years. In fact, recent data for Sydney and Melbourne indicates that values are now declining. Across all of New South Wales, values have fallen -2.4% from their August 2017 peak to January 2018 with values -3.1% lower in Sydney and not yet declining in regional New South Wales. In Victoria, values are -0.1% lower than their November 2017 peak with declines of -0.4% in Melbourne and no declines as yet in regional Victoria. An important point to note is that the rate of value growth is slowing in regional areas of New South Wales and Victoria although the slowdown is greater in regional New South Wales to-date.

While those declines may sound quite minor, first home buyers are generally most sensitive to changes in interest rates. Although rates are currently expected to be on hold until early 2019, the combination of already falling dwelling values and potentially higher mortgage rates in the medium-term, these factors should raise some alarm bells for potential buyers. For first home buyers there may be a sense that the removal of stamp duty along with the falling share of investors in the market creates the opportunity for entry however, ideally you do not want to be buying into a market which has only recently entered a downturn.

The best bet for potential first home buyers may not be to jump at the incentives which are currently available. With values declining and investor demand continuing to trend lower a better option may be to remain on the sidelines somewhat longer as values potentially continue to slide. By doing this you potentially avoid going into negative equity immediately, you potentially buy at a lower price and you have time to save an even larger deposit for your mortgage. Furthermore, for well qualified borrowers with substantial deposits banks are competing heavily and offering substantial discounts for owner occupiers taking out principal and interest mortgages so if you take time and shop around you may be able to get a really good mortgage rate.

In short, don’t be a FHB patsy.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.