Drop in first home buyers keeps property prices under pressure, experts say

The number of first home buyers looking for properties has dropped dramatically over the past year, creating fewer prospective property owners that is producing a softening effect on prices, experts say.

Finance and mortgage analysts say higher interest rates and the lack of stimulus in the form of an extended first home owners grant is keeping new buyers from entering the market, creating a situation where there are fewer overall properties and an oversupply of stock.

“This has actually had an impact on the market already,” says SQM Research director Louis Christopher. “The number of first home buyers dropped in 2010 because of the drop of the first home owners boost. I don’t think we’ll see too many additional first home buyers this year.”

Loan Market chief operating officer Dean Rushton told the Australian Financial Review this morning that fewer than one in three new home loan enquiries are from first home buyers, which represents a decline from about one in two, from six months ago.

Australian Finance Group general manager Mark Hewitt also said the number of loan enquiries made from first-time buyers was just 11% during December – down from 18% in 2009.

“Higher interest rates definitely played a role in pulling the market back,” he said. “In our view, the Reserve Bank went a little too far.”

But the RBA is expected to go even further, with economists predicting another rate rise in April. Most expect the cash rate to rise above 5% by the end of the year, and these experts say that will keep first home buyers away for the rest of the year.

One would expect more activity among first home buyers given low prices and expectations for price declines through the year.

But Martin North, executive director industry group, Fujitsu Australia & New Zealand, says it’s interest rates that is putting the pressure on first home buyers.

“If you look at the RBA figures, first home buyers as a proportion are continuing to fall away, that is fairly clear from the statistics we’re seeing.”

Fujitsu has released figures in the past year showing first home buyers are currently under significant mortgage stress due to rising interest rates. North says while new figures are not available, it can be assumed that further rates in 2011 will contribute to even more mortgage stress that will keep prospective buyers out of the market.

“Although new data is not available, you would continue to see the same behaviour that has occurred over the last 12 months, where first home owners have extended themselves to get into the market. I would definitely say that’s the trend.”

And Christopher says this trend is keeping home prices down.

“We can safely say there will not be a resurgence this year because of elevated interest rates, so the overall number of first home buyers will remain subdued.”

“The effect of this is that there will be fewer buyers in the market place, broadly in line with what we see in late 2010. This means there is less demand of current pricing, and that has a softening effect.”

“This isn’t something that is going to happen sometime in the future – this is an event that is affecting the market right now, in the present.”

But that may change. Mortgage Choice senior corporate affairs manager Kristy Sheppard says while the overall application levels for first home buyers remains low, the level of enquiries seems to be growing.

“On our website I’ve seen the visitors for our first home buyer section increase during the month of December to the first week of January. So while there was a drop off in applications there has certainly been an increase on content consumption.”

“There could be an increase in demand, if interest rates remain steady for a long period, because we’ve seen such a drop in house prices. If rates stay steady, that could translate into more pre-approvals.”