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If you haven’t been living under a rock for the last few years, you will be aware that the first home buyer market is sluggish. No more so than in the first part of this year, despite improvements in other portions of the market.
First home buyer commitments fell to 12.5 per cent in February 2014 from 13.2 per cent in January, according to Australian Bureau of Statistics data.
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In Victoria, figures for the first home buyer market are at their lowest in 23 years, according to RP Data figures for April 2014.
The Real Estate Institute of Australia is blaming housing affordability and is pushing for a national response to address this issue.
But I would argue that affordability is not the only issue deterring Gen Y from purchasing their first home.
According to figures provided by Commsec in late March, affordability hasn’t changed much since 2002. They say for much of the 1990s the median price of a home was between 2.5 times to 3 times the average disposable income per household, and that currently the figure rests at around 4 times disposable income. But this drop in housing affordability happened in 2002, and has remained similar ever since.
So what are some other possible contributing factors? Let’s look at the other main areas banks use to assess credit.
Stability
A big factor in credit assessment. Gen Y could be called the ‘transient’ generation, travelling and moving like no other generation before. So they are probably less likely to have been in the same job for years on end. They are also less likely to have remained in the same address for a long period of time. A couple of crosses right there.
Savings
We have been told savings levels have increased. But with basics like rent, petrol and groceries soaring, the average young person may have to save for several years to afford a deposit on a home. So purchase could be delayed or less deposit could be put up, requiring heavier risk assessment under the lender’s terms.
Debt level
In the past, credit has been highly accessible amongst our Gen Y buyers. Credit cards are much more prevalent. And with the cost of living so high, credit has been considered a necessity more so than a luxury. So it is likely that this generation of first home buyers are carrying more debt than their predecessors, skewing the delicate balance of savings and debt level.
But whilst important, one other factor may play a bigger part than we know…
Credit history
Most brokers will know that a default is pretty much a deal breaker with mainstream lenders. Credit reporting agency Veda Advantage recently released some of their data from the last three years, which showed that Gen Y holds 60 per cent share of all credit defaults. Gen Y tops the list in every category, from telco defaults through to loan defaults. We know there are over 16.5 million credit files in Australia. But credit reporting agencies do not divulge actual default numbers, so there is no real indication of the figures involved here. But it bears thinking about when we look at why interest rate cuts have yet to make a significant impact amongst first home buyers.
As we know, someone with bad credit can be refused a home loan. But in addition to this, someone with bad credit may never even apply for a home loan. Some will wait until their listing ‘drops off’, so they will be delayed five or so years, but many others will in that time never get out of the bad credit cycle.
If high default numbers are indeed the missing piece of the first home buyer puzzle, what could we as finance professionals do about it?
Firstly, we could focus on education.
So many Gen Y people don’t have any clue why their history with credit matters or how to commit to spending reduction and consistent habits of repayment. That’s because they have a history of getting what they want when they want it, and worrying about it later. Unfortunately the ‘later’ is now. With our new credit laws, and repayment history information, it has never been a more important time to understand credit and to pay on time.
Second to that, and often overlooked, is the promotion of credit reporting accuracy. With defaults almost a dime a dozen in this age group, unlawful bad credit could slip through undetected.
Mistakes can happen on credit reports. Likewise, bad credit can be listed on credit files unknowingly. We have a responsibility to check our credit report, but according to Veda, 80 per cent of Australians havenever done this.
They probably also don’t know that a credit listing should be tested against the appropriate legislation for its validity and its accuracy. Australians should also know creditors have a legal obligation to remove a listing which was placed incorrectly.
With our first home buyers in crisis, and new credit laws making it even harder to get credit, education is key for every credit active individual to make best use of these changes, aware of the action they need to take to ensure their rights are upheld and their chances of home ownership are still within reach.
