First home buyers

“It made sense to buy together,” says Matthew, who by pooling funds with Kate was able to buy a semi-detached house in the inner suburbs.

The Fennessys highlight the plight of an embattled but increasingly creative first home buyer market. Caught between soaring rental prices and plummeting affordability many first home buyers now have to take a more lateral approach to achieving home ownership.

On the surface, 2007 appears to have been a flat year for the first home buyers’ market overall in terms of growth, with the number of first home buyer loans climbing cautiously from 126,379 in 2005-06 to 129,947 in 2006-07 according to the ABS.

Look back over previous years however, and the number of first home buyers is accelerating, up from 102,144 in 2004-2005 and 88,400 in 2003-2004.

Affordability, interest rates and a Federal election have all been cited as reasons for first home buyers hitting the pause button over the past year. Dig a little deeper though and it’s apparent that a new breed of buyer is starting to emerge – waiting on the sidelines for the market to gain traction.

According to Virgin Money’s director of Homeloans Andrew Russell, first home borrowers are reconciled to the cost of home ownership and so have “just learnt to be more cautious and strategic in their choices”.

“They’re taking the time to explore the market properly, and many have used this period of uncertainty to concentrate on saving, preparing to enter the market early this year,” says Russell.

What they’re up against

With strong economic growth forecast for 2008 and further upward pressure on interest rates expected as a result, affordability is set to remain the number one concern for would-be entrants to the market.

“Affordability is critical,” says PMI CEO Ian Graham – who says he has seen market interest in some capital cities contract as a result of the rising cost of living.

Graham believes demand from first home buyers is strong but concedes that economic pressures could push inflation and rates up, stunting the industry’s growth again in 2008.

“The economy is solid. High employment and continuous wage rises though are adding pressure to the economy that could see rates rise again,” says Graham.

Would-be buyers also have a secondary concern to contend with: availability. BIS Shrapnel has predicted that by mid 2008 the deficiency in new dwellings in Australia will have reached approximately 100,000.

The resulting pain caused will not just impact first home buyers. The extra strain on the rental market is also likely to increase inflationary pressures on the overall economy.

“New stock is desperately needed,” says RESI’s national manager Lisa Montgomery, who is concerned that activity in the residential property sector has been too low for too long.

“We’ve seen plenty of housing booms occur throughout the country, but these have mostly been price booms. If new stock doesn’t become available in the next 12 months, first home buyers will be extremely limited in their choices,” she says.

A new generation of buyers

Despite the challenges of ownership, Australians still love property. The percentage of Australians who own their own home has remained steady over the last four decades at 70 per cent, a figure that is unlikely to change dramatically.

But new trends are slowly emerging as first home buyers match their lifestyles to suit current market conditions.

As a demographic they are price, and increasingly more lifestyle, conscious. Like the Fennessys most first home buyers look for affordable living conditions but also want to be closer to work and city centres for their social lives – creating a distinct shift towards medium- and high-density housing.

First home buyers have also become increasingly wary of the burden a mortgage brings and are less likely to abandon a comfortable lifestyle to service hefty mortgage repayments. Rather than buying four-bedroom houses, flats, semi-detached houses, terraces and apartments accounted for 27 per cent of the first home buyers’ market in 2005-06, up from 15 per cent in 1995-96 according to the ABS.

“Everyone is getting more educated,” says Virgin Money’s Andrew Russell. “First home buyers are taking the time to understand and plan for the impact a mortgage will have on their lifestyle.”

The importance of maintaining a comfortable standard of living is a trend that RESI’s Lisa Montgomery believes is leading would-be borrowers to stay in the rental market for longer, with ABS figures putting the average age of first home owners at between 31 and 33 years old.

“Would-be borrowers are keeping an eye on the market – and most are content to hold off until conditions look more favourable,” she says.

Seeking opportunities

Despite the obvious road blocks, Australia’s would-be first home buyers remain resilient and determined. They have more access to information than ever before and are also aware that they can use current market conditions to their advantage.

They also understand that competition between lenders is tight. According to Russell, the result is higher expectations when it comes to service, with many borrowers looking for financial solutions personally tailored to their unique circumstances.

“First home borrowers are able to access more loan information and are far more confident about the loan process and the decisions they intend to make,” says Russell.

“Most first home borrowers are extremely time poor. They put their confidence in brands and expect individualised service as a result.”

Individually packaged products designed to minimise the impact of interest rate rises are highly sought after by first home buyers, says PMI’s Graham, who want to be protected from fluctuating rates without losing the benefits a good loan product offers.

“With a higher rate environment, borrowers will be looking out for products with good deals on fixed interest rates,” says Graham.

Products specifically aimed at the first home buyers’ market are also growing in popularity. These include first home owner packs, equity share, co-ownership and guarantor schemes.

Genworth Financial’s Martin Barter sees opportunities for lenders to capitalise on the first home buyers’ market through offering a range of product choices, “particularly for those with low deposits”.

“Lenders who are able to provide customer service combined with education about financial products will be in a good position to capitalise on the home ownership dreams of first home buyers,” he says.

Nets and hooks

Product choice aside, incentives such as the first home owner grant and recent stamp duty cuts have contributed to increased market activity.

Looking forward, the Rudd Government’s plans to tackle the affordability crisis by introducing a low tax, superannuation style first home saver account to help young people get a start in the market is also likely to help – as may a $500 million infrastructure fund offering financial incentives to local governments to cut charges related to new homes.

The Rudd government is also looking at introducing $603 million in tax cuts for investors who build rental units and let them at below market rents.

“For borrowers who have been waiting, the new incentives could give some enough motivation to pounce,” says RESI’s Montgomery.

Affordability has certainly put the squeeze on first home buyers, but they are not without hope.

A September 2007 report by market analyst Datamonitor estimated that by 2011 the first home buyers’ market will have grown from its current level of 17.6 per cent of the overall market to 20.5 per cent – encouraging numbers for mortgage lenders.

As Montgomery points out, “property ownership is ingrained in Australia’s values”.