Property investors grind first home buyers into dirt

In the first half of the pandemic, first home buyer demand boomed following the cratering of mortgage rates to record lows.

At the beginning of 2021, first home buyer mortgages surged to a record high in dollar terms, with their share of mortgage commitments also hitting a 12-year high of 25%:

First home buyer mortgages

Since then, first home buyer demand has shrunk, crowded-out by record high investor mortgages:

Investor mortgage demand

First home buyer’s mortgage share has plunged to around 15% whereas investor’s mortgage share has soared to 35%:

Mortgage share by cohort

There are good reasons to believe that first home buyer’s mortgage share will collapse further.

First, as interest rates rise, the amount of money that first home buyers can borrow will be severely hampered. According to RateCity, a single person earning $100,000 before tax with no dependents and no debts would see the maximum amount they can borrow fall by around $20,000 on the back of last week’s 0.25% cash rate hike. And if the cash rate rises to 2.25%, this would lower their borrowing capacity by $123,400.

By contrast, investors and upgraders will be less impacted, since they generally have significant home equity to tap into.

Second, rents across Australia are soaring, rising 9.0% nationally in the year to April. These surging rents are especially detrimental to would-be first home buyers, since they impede their ability to save up a deposit. By contrast, rising rents are beneficial to investors and should help bolster demand in the face of rising mortgage rates.

Finally, rising mortgage rates more costly to first home buyers than investors for the simple fact that investors can offset part of the cost of rate rises from their tax via negative gearing.

The counter argument is that falling home prices should make it cheaper for first home buyers to enter the market. The federal government’s first home buyer subsidies, announced in the federal budget and during the election campaign, should also support demand.

However, these positives will be dwarfed by the headwinds outlined above, which should continue to see investors steal mortgage share from first home buyers.

Unconventional Economist
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Comments

  1. Hugh PavletichMEMBER

    United States …

    Average U.S. mortgage interest rate rises to 5.53%, applications up … Reuters / Yahoo Finance

    https://finance.yahoo.com/news/average-u-mortgage-interest-rate-112810823.html

    (Reuters) – The average interest rate on the most popular U.S. home loan rose to its highest level since 2009 last week and demand for mortgages jumped for a second straight week despite the rising costs, Mortgage Bankers Association data showed on Wednesday.

    The average contract rate on a 30-year fixed-rate mortgage increased to 5.53% in the week ended May 6 from 5.36% a week earlier, the MBA survey showed.

    It has now risen 242 basis points from 12 months ago, the sharpest rise in decades, as the U.S. Federal Reserve tightens financial conditions to try to dampen demand across the economy as it battles a 40-year-high inflation rate.

    The housing market, flashing signs of overheating over the past two years, is seen as a particularly rate-sensitive sector and Fed policymakers are keen to sap some of its current double digit annual price growth. … read more via hyperlink above …

    • ErmingtonPlumbingMEMBER

      Sure but how do you make politicians care?

      “Sri Lanka protesters burn politicians’ homes as country plunges further into chaos … CNN”

      If they really want to send a mess then they’ll have to burn their investment properties also.

      • The Travelling PhantomMEMBER

        We have a sick elitist PM look what he said
        “He has never forgotten where he has come from,” the PM mumbled, begrudgingly referencing Albo’s housing commission childhood.

        • Totes BeWokeMEMBER

          I almost hope Labor win, so Australia can be reminded how incompetent, elite, delusional and corrupt these idiots are.

          Remembering Labor opened housing to foreigners to buy, increased buyer grants, increased immigration, gave out $5m significant wealth visas, and when challenged, nobbled the FIRB.

          The workers, plebs, and environment party..lol… Labor aren’t the solution. The workers, plebs and environment party..lol… Labor are the problem.

          • Glad I’m not the only one who remembers 2009. At this point the fvkin GREENS might do a better job of keeping taxpayer largesse out of the housing market.

          • Totes BeWokeMEMBER

            Ermo.

            You don’t need LNP to win to know what they’re like. They’re exactly like the workers, plebs and environment party Labor.

            Anti worker, anti pleb, anti environment, pro elite, pro big business, pro globalisation, pro mass immigration.

            Tony. Australia’s now found a new solution. Open borders climate 200 Independent elites.

            MSM won’t let anyone interfere with mass immigration, big business and huge house prices.

            Australia has 2 core problems. MSM and a Labor party that’s the same as LNP on everything that matters.

          • When Labor under Shorted ran with a policy of getting rid of Negative Gearing etc., Australians voted against it and Labor has now abandoned the policy.
            Basically … never get between Aussies and a free lunch.
            If Labor under Albo wins, I hope they make an about-face and re-introduce the policy.
            Surely they could lower the claimable level of negative gearing by say 20% per year for five years to lessen the shock to investors.
            Even though I have personally benefitted from negative gearing, I consider it a stupid, outdated policy that needs to be scrapped.
            My biggest concern with Labor governments nowadays is their idiotic devling into Identity Politics and the sewer that is Wokeism.

          • drsmithyMEMBER

            The trouble with “negative gearing” is knowing exactly what any random person means when they say it (and consequently what they think needs to be changed).

            Is it the general principle of deducting rental property expenses against income ?
            Is it the deduction of rental property expenses against unrelated income (ie: salary) ?
            Is it engineering a systemic, long-term losses for the purposes of minimising tax on income ?

            These are all fairly different things.

            FWIW I think quarantining deductions to rental income, and not allowing long-term losses (eg: no more than 6 consecutive months ?) would do the trick.

          • Totes BeWokeMEMBER

            Prometheus69

            Labor lost the election because outside Syd and Melb, Australia hates them. Nothing shows what happened better than this map. Go and browse Labor’s election loss review and find what they refused to discuss as reasons they lost. Labor have moved to the extreme left to protect the seats of incumbent old Labor MP’s like Albanese and Plibersek from the Greens they won’t risk their seats to reform and win gov.

            https://upload.wikimedia.org/wikipedia/commons/thumb/6/6b/Australia_general_election_2019_-_Results_by_Division.svg/420px-Australia_general_election_2019_-_Results_by_Division.svg.png

          • Totes BeWokeMEMBER

            Prometheus69

            Mass immigration and foreign buying are the prime reasons prices and rents are high. Where is ANYONE’S opposition to these? Labor are full of sht.

  2. investors….. have significant home equity to tap into.

    So remove that?
    Let anyone who wants another property in excess of their home have to stump up the deposit on the next one in cash – not a spreadsheet revaluation of their existing holding – cash. NZ has a secondary LVR of 40%. Apply that as ‘40% cash’ for the next purchase, and let’s see how many people have $400k socked away to buy more than one more time.(NB: We don’t apply that yet either – but I’ll guess, it’s coming)
    That puts FHBers and secondary buyers on the same footing?

    • chuckmuscleMEMBER

      yep. end rehypothecation. if i were benevolent dictator, investors would have to turn to building society type lending arrangements, stop banks creating money to buy existing assets

    • Yes, yes, yes and yes! It’s currently teachers vs students à la Money Python’s Meaning of Life. Even the playing field. The other advantage of it is that it won’t just be turtles all the way down if we ever need to go looking for some spare change.

    • drsmithyMEMBER

      Leveraging the equity in increased property value should trigger a CGT event.

      There is no logical reason why it should not.

      I suspect there’d be a lot less “equity, mate” going around if this had been the rule from the start.

      • ErmingtonPlumbingMEMBER

        This seems a good policy to bang on about at party meetings .
        I’ll put it to the labs 🐕 and you put it to the Greens 🥬 Smithy

  3. All these savvy investors just blew up the market by 20% in the middle of a frigging pandemic by leveraging their equity into even bigger piles of debt at record low interest rates. It’s hilarious these morons are the main ones about to be wiped out. And the rent inflation feeds into CPI calculations and thus will push rates higher. These clowns are currently being supported by post covid domestic travel binge spending into overpriced AirB&B. Because that’s going to keep up in a recession.
    When investors get into negative equity the banks will force them to sell.

  4. Hugh PavletichMEMBER

    New Zealand: REINZ sales down by a third compared to April last year, national median price down by $45,000 from peak …

    The housing market could be in for a long cold winter as sales volumes and prices took a hammering in April … Greg Ninness … Interest Co NZ

    https://www.interest.co.nz/property/115773/housing-market-could-be-long-cold-winter-sales-volumes-and-prices-took-hammering

    Power shifts from sellers as housing market changes pace … Miriam Bell … Stuff New Zealand

    https://www.stuff.co.nz/life-style/homed/real-estate/128613580/power-shifts-from-sellers-as-housing-market-changes-pace

    April 2022 Report – Real Estate Institute Of New Zealand

    https://reinz.co.nz/residential-property-data-gallery

    … With of course the deadbeat Christchurch City Council … the worst in the country … performing as it always has since forced amalgamation eons ago …

    … There are two types of local government in this world … the small and the bad …

    … As usual … nothing is being learnt from the adjoining stellar performer Selwyn District Council (remarkably … Christchurch Council’s ungoverned planning bureaucrats have the time and ratepayers spare / excess money to disrupt Selwyn’s planning issues !) … …

    ‘Get your house in order’: Developers slam Christchurch council consent delays … Steven Walton … Stuff New Zealand

    https://www.stuff.co.nz/national/128608341/get-your-house-in-order-developers-slam-christchurch-council-consent-delays

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