First time buyers are possibly the most important sector of the housing market. That’s a big statement and I think it’s worth considering why. It’s a view that most governments around the world appear to agree with as they go out of their way to support first time home buyers.
They do this in a number of direct and indirect ways and FHB policies are never out of the headlines, it’s a sensitive policy area as was seen during the last Federal Election, and this week the Government’s policy to help 10,000 first-time buyers will become law. From Jan 1 2020, the Scheme will help first home buyers enter the property market sooner, by providing a Government guarantee that will allow first-time buyers to purchase a home with a deposit of 5%.
For a variety of reasons, I think it’s realistic to say that the housing market would face a disaster if the number of first-time buyers entering the market was not sustained at a pretty healthy and robust level.
Over recent months as prices in many markets fell and as some investors stayed away, the return of FHBs was seen as a positive trend. The housing market was bolstered by this group of buyers however, a question remains as to how to best support and encourage this important sector.
First time buyers are important as they are usually coming in at entry level which means that people currently owning and livening in established entry level houses can sell, often moving to bigger family-homes or larger properties and so a fairly obvious cycle of activity is generated; more new homes, more furniture sales, more government revenue and so on.
If the first-time buyers aren’t there, people at this first stage of trading-up become stuck, and the market can slow down considerably as part of the knock-on effect. And the knock-on is not only confined to the direct parties to the sale and purchase, it goes onto impact many areas of the wider economy.
First-time buyers have become even more important to the housing market since investor numbers went into decline. In some markets the big increases associated with new investor stock coming onto the market as a result of previous off-the-plan purchases, can actually help FHBs. More stock available for rent is keeping a lid on rents and this can be a direct benefit for any FHB saving for a home.
That important because anyone buying a home, and that very much includes first-time buyers are now subject to more stringent affordability rules and tighter loan conditions.
First-time buyers are important for the overall health of the housing market, ensuring activity further up the chain can happen. This raises a question around is there enough innovation being employed to help first-time buyers looking to make their first purchase onto the property market?
Even with less pressure on some prices, the market is still not an easy one for first-time buyers, particularly as the current wave of new buyers are still battling a combination of previously high house prices, very low or restricted wage growth and a high cost of entry that’s usually well above the traditional 10% deposit.
Even in the most affordable markets, first-time buyers are still faced with very high income multiples. When you look at mortgage affordability it leaves the first-time buyer looking for added support from governments and parents, this suggests that a far more robust solution is required, even beyond the latest deposit assistance outline earlier.
Given the importance of the first-time buyer to the housing market and the wider economy it looks time for the Productivity Commission to have a new and wider Inquiry into First Home Ownership as a matter of national policy.
In its previous report (June 2004) The Productivity Commission found ‘that fluctuations in prices and affordability are inherent features of housing markets and that there is limited scope for governments to improve affordability for first (and other) home buyers in the short term.’
The Commission also made the observation that increased house prices had then significantly reduced housing affordability for first home buyers, however the Commission’s assessment was that affordability would improve over time, with the then evidence of a market cooling already beginning to emerge.
However, history has shown that this did not happen and in reality despite some market up and down, first-time buyers are still in a bind and it appears that fragmented policies have not worked. Even restricting off-shore buyers has had little or no direct impact, and I suggest that much the same result would result if negative gearing was ever to be restricted.
Demand will continue to drive prices
Demand for housing will continue to rise underpinned by low interest rates, strong employment growth and population growth.
In its previous report The Commission recognised that housing demand drivers have been overwhelmingly beneficial to the Australian community and economy.
However, the Commission did conclude at the time, that government policy should be directed towards addressing structural factors that impede the efficient operation of the housing market, and mainly directed to a big improvement to the supply side of the housing market and are therefore directed at state and local governments.
In particular by improving land release and planning approval processes and ensuring developer charges for infrastructure relate appropriately to the benefits provided to home buyers in new housing developments, that would then assist affordability pressures over time. Again, we can see that these ideas have not been a great success and in NSW a rush to add supply may have helped reduce building standards, which is now a big concern for the NSW government and the entire market.
The Commission also found that reducing stamp duties would help and improve the efficiency of the housing market over time. This is a policy that is very slowly shifting, and a revised policy is long overdue. However, current falling revenue from stamp duty may hasten the review process. The Government had also committed to conducting a review of the tax system with respect to housing or changing the capital gains tax provisions however, only some policies have since been implemented, and many remain to be addressed.
Where governments have provided stamp duty relief for first home buyers the policy has been welcomed however, there’s a need for continued reform of stamp duty across all States and Territories.
Alongside the Commission’s review the Government at the time stated that it considers as ‘inappropriate to change existing arrangements relating to capital gains or negative gearing.’
While there’s a varied range of different incentives currently in place for first-time buyers a wider national policy is well-overdue and the evidence for this has not really changed since the last review.
Today the reality is that buyers with less than 20% of the purchase price will often face a real battle to find and then afford a new home, and while it’s not essential, the 20% deposit was generally preferred.
First-time buyers with a 20% deposit generally have more options around the kind of mortgage they can access and so get easier entry into the housing market however, the stark reality is that more and co-ordinated help at every level of Government is needed and possibly well overdue.