The first home buyer bubble has all but burst in Australia, and the reasons why first home buyers are out of the market are many fold.
First home buyers have largely fallen victim to the rising property prices, which have made deposits harder to save for, and the end of the subsidy programs that had reduced the total amount that savers needed to raise.
On top of that, the return of investors to the market has pushed property prices up further and made those making their first steps on the property ladder increasingly unable to compete with those who have established equity and typically lower loan-to-value ratios.
One could see the retreat of first home buyers from the market as a signal that their particular part of the Australian property boom has runs its course. As a segment of the property market in Australia, they were most dependent on subsidies such as HomeBuilder and the First Home Owner Grant, so with the end of most of those government schemes, they were inevitably going to drop out.
Secondly, investors have returned to the market in force, which is one of the key reasons why first home buyers are out of the market at the moment. Investors are taking advantage of historically low interest rates, and while they are usually liable to pay higher rates than owner occupiers, they are generally buying with a lower loan-to-value ratio which can lower rates.
Furthermore, those buying a second home, particularly in regional Australia, are able to take advantage of incredibly low vacancy rates that almost guarantee tenants and return on investment. As prices rise, too, investors are better positioned to flip homes in the market and thus take advantage of opportunities than those without pre-existing equity and lending histories.
Bad news for prospective new home owners is that prices are only going in one direction. In truth, one of the key reasons that first home buyers have dropped out of the market is that prices have risen so much that it is hard to see a situation where, even if subsidies were upped, they could compete.
In popular areas such as Sydney’s Northern Beaches, prices are rising by as much as $10,000 per week, while in regional areas, the property market has become so crowded that vacancy rates are hovering at less than 1%. Unless something drastic happens with the cash rate and interest rates – spoiler alert: it won’t – then young people can expect to be on the outsider for a while longer.
Traditionally, one of the best ways to get onto the property ladder was to leave the expensive capital cities and resettle somewhere with more space. Typically, young people had this option available to them when they wanted to start families, and the cohort known as tree changers/sea changers, those who bought their first home in a lifestyle location rather than a city, was well established before the pandemic struck.
Now, with work from home firmly established as a feature of the labour market, that has gone into overdrive. More people than ever can work remotely and thus areas that once avoiding capital city prices, such as the Central Coast and Wollongong outside of Sydney, and the Macedon Ranges and Geelong outside of Melbourne, have been smashed with huge property price growth.
Thus, what was once one of the easiest ways to enter the housing market has been removed.
As Australian Broker has reported extensively, there are essentially two Australias as far as the property market is concerned. There are those who are already on, who can take advantage of rising house prices improving their equity and low interest rates that allow them to borrow more cheaply, and those who are permanently priced out of the housing market.
First home buyers are the ones tasked with bridging this divide, but as leading economist Saul Eslake told us a few weeks ago, home ownership rates are likely to fall to the lowest level they have been since 1941 when the 2021 census data is published.
No amount of home loan deposit scheme, savings plan or cutting down on avocado toast can overcome the perfect storm of low interest rates for borrowers, inbuilt equity and rising property prices. That’s why some are saying that housing affordability is ‘stretched’ and the worst that they have seen it. If you are looking for reasons why first home buyers are dropping out of the market, look no further.
