There’s no shortage of news about the residential market on the front page of newspapers, leading the nightly TV news bulletins and online. I’m suggesting that despite the alarmist nature of some of this commentary, the market will continue to function, it always does.
Buyers have not vanished, they have changed and evolved.
However, the composition of the market and the type of both buyers and sellers will and is already changing. We are also seeing far more emphasis placed on finances and far less a focus on supply and demand.
Supply levels have been the mantra of the industry and governments over the past 5 years or so but, now the focus has shifted almost entirely to finance, where and how much people can borrow and how loans are structured.
There’s been far less a focus on the how financial markets are impacting developers and builders although, the partial withdrawn of Chinese capital has been in the spotlight. I’ll return to this topic in another post, but for now I’m going to stay with personal finance and in particular two topics and buyer profiles.
The two topics being; how home loans might be structured and co-ownership, with the second point never really get that much attention. With so much attention given to first-time buyers, investors, down/right-size buyers and off-shore buyers perhaps that’s hardly surprising.
New Buyers – Different Finance Options
There’s some general agreement that with investors and foreign buyers are now much less active and with some prices falls we are seeing a new type of buyer entering the market along with first-time buyers. I’ve chosen to call these buyers ‘the wait and see buyer’ or WSB buyers.
WSB buyers along with first-time buyers have until recently been on the side lines waiting patiently for prices to cool. For this WSB group, the next few months will deliver opportunities as prices moderate and as developers add various incentives to help sell new and current stock.
WSB buyers will generally share some characteristics. They will have been watching the market closely, for some years and have a well-defined checklist of what they want in a home, aligned to location and the type of property they are after.
Financially conservative and with stable employment they will have be assiduous savers, which will be a point to their advantage when seeking finance. Those that are first-time buyers may also be able to access a range of direct government incentives further boosting their finances.
How they judge the best time to now step in and buy will be driven by many factors, some financial but often more personal circumstances will trigger their timing.
After years of planning WSB buyers will not wait forever and where they see the market as favourable they will act. When attracting these buyers, the other reality is that most, if not all will be highly market literate, they will drive a hard bargain realising they have the market’s advantage.
Given their preparation, it’s not very likely the WSB will suffer buyer’s remorse, they will still be demanding.
Finance for WSB buyers will still require careful planning and home loan structures are now highly individual and perhaps more than ever there’s a sensible role for a mortgage broker to pick through all of the varied finance options on offer.
One particular area will be how the various banks determine loan, cash and valuation ratios, it’s far from clear cut and can be confusing for buyers, impacting their purchasing power.
Interest only loans might be tough but there are lots of other options that have to be considered and even the most educated buyers shouldn’t underestimate how flexible home-loan terms can be, and some of the possible unexpected restrictions.
Buying as Co-Owners
The other area I’m looking at is the idea of buying a residential property (mainly to live in) as co-owners. With the market being far more competitive this can be an attractive option, but it’s still not popular.
The type of co-ownership I’m talking about here is either two or more people buying who are not partners, but family or friends who purchase together.
This is not a new topic and in August 2008 a paper titled; Innovative financing for home ownership: the potential for shared equity initiatives in Australia, was prepared for the Australian Housing and Urban Research Institute UNSW-UWS Research Centre Sydney Research Centre. However, post the GFC and the in the light of the recent change in house prices, it may well be time to more fully consider this idea.
According to the paper under the shared equity model the consumer shares the capital cost of purchasing a home with an equity partner, (these not be family or friends, just co-owners with a common goal of buying a home) which allows households to buy into a home with lower income or equity than would be required otherwise.
Compared to conventional mortgage arrangements, shared equity can enhance affordability for home buyers by reducing both individual deposit requirements and ongoing housing costs.
In the light of the Banking Royal Commission it’s also interesting to see that the paper also suggested this area of the market had potential for new finance products and so reduce the relatively high transaction costs.
Access and eligibility to super savings is also assessed on an individual basis. According to the ATO this means that couples, siblings or friends can each access their own eligible FHSS contributions to purchase the same property. If any of co-owners have previously owned a home, it will not stop anyone else who is eligible from applying.
However, beyond financial considerations and possibly helping with housing affordability the viability and attractiveness of shared equity also depend upon a range of more domestic issues like how household duties are shared, how on-going bills are paid and personal privacy.
Even with these hurdles, as we have ever more single-person and older households the current market might well be attractive enough to encourage more co-ownership buyers into a highly favourable buyers-market.