First time buyers back in the driving seat

With less incentives being handed out by the Government, higher interest rates and higher home values, the number of first time buyers in the market has continued to trend lower throughout 2010.

Despite the slowdown, the number of first time buyers remains above the long-term average. Strong economic conditions, low unemployment and high levels of confidence may be enough to encourage more first time buyers back into the market.

Housing finance commitments are the best way of measuring activity across different segments of the housing market. Based on this data, which is published monthly by the Australian Bureau of Statistics, the annual number of first home buyers peaked during the 12 months to November 2009. Over that period, there were 193,247 finance commitments to first time buyers.

The most recent housing finance data shows that over the 12 months to July 2010, finance commitments for first home buyers were recorded at 129,842 which is -33% lower than the volume at the peak.

Although there has been a steep decline in annual volumes of first home buyers, the actual level of activity remains above the long-term average.

Between July 1992 and July 2010 the average number of annual first home buyer finance commitments has been recorded at 115,698, indicating that the current level of activity remains 12% above average. However, on a month by month basis the figures are nowhere near as strong.

The monthly figures show that during the month of July this year, finance commitments for first home buyers sat at 7,830. At their peak the monthly volume of first time buyer finance commitments was as high as 19,043 (during May 2009) which indicates that the current level of activity is -58.9% lower than the peak in activity. In comparison to July last year, the current volume of first home buyer finance commitments is -54% lower.

What is encouraging over recent months is the fact that although property values have increased, the actual average loan size for first home buyers has not been increasing at the same rate. Over the year to July 2010 capital city property values increased by 9.7%. Over the same period, the average loan size for first home buyers has increased by 4.7%, less than half the rate of capital city property value growth. This is an encouraging result and indicates that first time buyers are focusing on more modestly priced homes and as a result, loan sizes aren’t growing at the same rate as home values. In fact, since April the average first home buyer loan size is down by -2.8% which is greater than the -0.8% fall in property values over the same period.

Across each state, the prevalence of first home buyers has been quite varied during the last year. What is obvious is that in each state there are far fewer active first home buyers than there were 12 months ago. With the removal of the boost to the First Home Owners Grant and the return of interest rates to average levels, it is no surprise to have seen this occur. It is also clear that much of the first home buyer activity for this year was bought forward into last year due to these favourable conditions.

Based on the monthly housing finance commitments data, Western Australia has recorded the most significant fall in first time buyer volumes over the year, down -65%. Queensland, Western Australia and South Australia have both seen larger declines in first home buyer finance commitments than those reported nationally and it is probably no coincidence that Brisbane, Perth and (to a lesser extent) Adelaide have also recorded some of the weakest performing housing markets during the same 12 month period. On the other hand, the best performing capital city residential property markets of the last 12 months (Melbourne, Darwin and Canberra) have seen the smallest declines in first time buyer activity within each of these states over the last year.

Overall, the results show that first home buyer numbers have declined sharply over the last 12 months in line with the wind back of the First Home Owners Grant Boost, the continuing recovery of the property market and higher interest rate environment. The prospects for a strong rebound in first home buyer activity in the short term appears quite limited however, some potential shifts in the residential market may bring about increased first time buyer activity.

Interest rates are at average levels and it appears they are more likely to increase over the short term rather than fall, capital city property values have increased by 17.4% from the end of 2008 to July 2010 and the boost to the First Home Owners Grant has been removed. However, currently listings are at above average levels, property value growth is clearly slowing and lead indicators such as time on market and vendor discounting are increasing. In addition, the strong economic conditions, low level of unemployment and high level of consumer confidence will help prospective first time buyers to make the large commitment that is involved with buying a home. Given this, astute first time buyers who are able to bide their time and negotiate a good price could be well positioned over the coming months to secure a competitive price for a property.

Encouragingly, those first time buyers which have been active have been taking out smaller loans at a time when value growth has been slowing and over the last year, the average loan size for first home buyers has not been increasing at the same rate as the growth in property values. This result suggests that either the banks, the borrowers or both are being more prudent in what they are lending or borrowing. It would also tend to suggest that these purchasers are targeting product which is more affordable and they are not taking on excessive levels of debt at a time when it appears interest repayments are likely to increase.

Tim Lawless is the Director of Property Research at RP Data.