The first home buyers are back!

The number of first home buyers has shown some improvement after housing finance commitments for first time buyers fell to their lowest levels in six years during January 2011.

Housing finance data released last week by the Australian Bureau of Statistics (ABS) for May 2011 showed that as a proportion of all owner occupier finance commitments, first home buyers accounted for just 15.4% of the market. During the month there were 8,226 new home loan commitments by first home buyers, 17.2% higher than during the previous month.

Over the 12 months to May 2011 there was a total of 90,317 finance commitments for first home buyers compared to 149,469 at the same time last year. This result highlights the slowdown in first home buyer activity over the year; a fall of -39.6% over the past 12 months.

Although first home buyers only make up a small proportion of the overall market they are still a very important component of the market. First home buyers purchasing activity frees up rental accommodation for others and also enables existing home owners to upgrade out of their first home into a superior second home.

The volume of first home buyers in the market has historically been quite responsive to cuts in interest rates but not necessarily as responsive to increases in mortgage rates. As at May 2011, standard variable mortgage rates were recorded at 7.8%, slightly above the 10 year average level, and rates have been on hold at that level for seven months. As mortgage rates dived in late 2008 first home buyers rose from just 19% of all owner occupier finance commitments in October when mortgage rates peaked to a peak of 28.5% by May 2009. Clearly the First Home Owners Grant Boost provided further stimulus to the market and as mortgage rates started to rise and the Boost was wound back we saw first home buyer numbers fall back to a recent low of 14.9% in February 2011.

In comparison to other recent times at which standard variable mortgage rates were 7.8%, the volume of first home buyers is currently extremely low. In November 2008 standard variable mortgage rates were at 7.8% yet first home buyer finance commitments during that month were recorded at 11,775, indicating that current levels are -30.1% lower. October 2006 was the last of three months at which mortgage rates were 7.8% and during the month, first home buyers committed to 11,181 loans, indicating that current volumes are -26.4% lower than at that time.

With consumers extremely cautious of debt, confidence at low levels, households savings at higher levels than they have been since the mid 1980’s and retail trade extremely slow, the propensity of first home buyers to enter into the housing market at the current time is also likely to be low. The issue for the market is that at a time when first home buyer activity is low, so too is activity from investors.

The higher interest rate environment, cautious consumer mindset and relatively low rental returns from the housing market is doing little to encourage investors to become active in the current market. Although investors can negatively gear properties, they still have to find the cashflow to fund their day to day expenses and the gap in the mortgage payments. With such caution surrounding debt obviously the likelihood of investors taking on a negatively geared property investment which has such a high cost to purchase is fairly unlikely in the current environment.

This is the main reason that we believe that for as long as consumers remain cautious, property values are unlikely to show any real growth and first home buyers are likely to remain quiet. The one saving grace could be investor activity, specifically from those looking for positively geared properties. In stating this, rental growth will have to ramp up quite significantly for this to occur on a broad scale. Across the combined capital cities, gross rental yields for houses sit at 4.2% compared to 3.9% at the same time last year. Rental yields for units have increased from 4.7% in May 2010 to 5.0% in May 2011.

Although the uplift in rental returns is positive, they still have to improve substantially further to result in significant opportunities for positively geared rental properties. Two things would help improve yields: further falls or flatness in property values or strong growth in rental rates. We aren’t forecasting substantial falls but do anticipate a period of limited growth in property values which will assist. More importantly, we expect fairly robust rental growth in the coming few years as building approvals fall and sales volumes remain below average resulting in increased competition for rental stock and rental rate increases. Across most capital cities rental vacancy rates are quite tight, highlighting that competition for rental stock is significant.

Tim Lawless is research director at RP Data.