First home buyers - Attracting the first timers

First home buyer commitments, as a percentage of total owner-occupier housing finance commitments, reached an all-time high of 28.5 per cent in May 2009.

In May 2011, the story is somewhat different.

FHBs at present account for just 15.2 per cent of all new home loans written.

In March this year, FHB activity slumped to its lowest level in six years.

All available data suggest this slump is unlikely to be turned around any time soon, as affordability constraints continue to plague buyers.

According to the Real Estate Institute of Australia’s latest Housing Affordability Report, it now costs an average Australian family approximately 35.3 per cent of its income to service a home loan – up from 34.8 per cent in September 2010.

The cost of living, which continues to rise, is only compounding the negative sentiments of first home buyers.

Genworth Financial’s Home Buyer Confidence Index found that 66 per cent of Australians believe the rising cost of living, rather than interest rate hikes, will stop them from meeting their mortgage repayments – up from 51 per cent in September 2010.

Consumer prices are being pressured by factors that include higher energy costs due to Middle East unrest and rising food prices resulting from the widespread flooding in Queensland. From July, increases to household electricity bills will also play a role.

Between September and December 2010, food costs went up by 2.2 per cent and the rise is having a noticeable impact both on households and on consumer confidence generally.

STILL THERE, STILL STRONG

Of course, it’s not all bad news.

While FHB activity remains subdued, rents are expected to increase by approximately five per cent in the coming year, forcing new buyers into the market sooner rather than later.

According to Australian Property Monitors’ (APM) latest rental price report, national unit rentals rose sharply by 2.3 per cent in the three months to April 2011.

APM senior economist Andrew Wilson says if rents continue to rise, first home buyers will look at getting their foot on the property ladder.

“Everything is cyclical,” he says. “We saw a great number of first home buyers race into the market off the back of the federal government’s boosted home owners’ grant.

“Those who otherwise would have purchased in 2010 or 2011 decided to take the plunge earlier, which is why activity is currently low. But everything changes.

“First home buyers will eventually come back into the market. Perhaps not to the extent we witnessed in 2009, but they will return.”

QBE LMI’s chief executive officer Ian Graham agrees and says FHB activity will eventually head back towards the long-term average of 18 per cent.

“All the first home buyers we surveyed as part of QBE LMI’s lmiBAROMETER Report said they are intending to make their purchase in the next five years,” Mr Graham says.

“Compared to other segments, first home buyers are significantly more eager to enter the market, with some 22 per cent looking at buying within the next six months and 50 per cent planning to purchase within the next 12 months.

“The results indicate there is still strong sentiment towards getting on the property ladder; however, borrowers are being cautious with [rises in] interest rates on the horizon and a number of survey respondents perceiving property to be currently overpriced.”

Eighty-three per cent of FHBs consider prices to be overvalued, 42 per cent of which consider properties to be “significantly” overvalued.

Nevertheless, 74 per cent of respondents say they intend to purchase in the next five years, with 29 per cent intent on making the move by the end of 2011.

“This could be due to a sense of urgency amongst respondents to get in and buy property before any potential price rises,” Mr Graham says.

CLIENT FOR LIFE

Despite the forces currently discouraging FHBs from entering the market, opportunities still exist for brokers who want to target this sector.

“First home buyers are quietly confident and brokers would be wise to capitalise on this sentiment,” says Ian Rakhit, Bankwest’s retail head of specialist banking.

According to Mr Rakhit, FHBs can potentially be very lucrative clients for brokers who play their cards right.

“Treat them right the first time they come through the door and they can become a client for life,” he says.

“First home buyers have not gone through the highs and lows associated with buying a property before, so they are happy to listen and learn from an expert.”

This would appear to be supported by the QBE LMI lmiBAROMETER Report, which found that 41 per cent of FHBs will use a mortgage broker to find them the best home loan deal.

“I love dealing with first home buyers,” says David Nord of Lookout Home Loans.

“They are, arguably, my favourite market to deal with. They have not been through the rigmarole of buying property before, so you can teach them and educate them along the way.

“They are like sponges – sucking up every last bit of information.”

Mr Nord adds that not only are FHBs easy to deal with and are happy to use the services of a professional, they also make excellent referral partners.

FHBs tend to mix with other FHBs so, for a broker, they can be the gateway to plenty of other opportunities.

Mr Nord says he has generated repeat and referral business from his FHB clients and today, that market accounts for almost 25 per cent of his new business.

“There is something especially satisfying about helping a first home buyer into their property,” he adds.

BUILDING AN FHB CLIENT BASE

Of course, not all brokers have dealt with first home buyers in the past, so how do they go about targeting this particular market segment?

“That’s simple,” says Mr Nord. “Use your existing database.” Brokers are bound to have helped investors or ‘mums and dads’ who know a potential first home buyer, he adds.

“Good brokers stay in touch with their clients on a regular basis, so why not use your monthly phone call to ask your client whether they know anyone that is looking to buy their first property?” he says.

This method has proven highly successful for him in the past – so much so that Mr Nord no longer advertises. Instead, he gets all of his business through word of mouth and from repeat clients.

“There have been many instances where I have helped mum and dad get a loan and then, five years later, they ask me to do the same for their son or daughter,” he says.

TAPPING INTO THE MARKET

Provided brokers treat their FHB clients with respect and are responsive to their financial needs, they can turn them into that holy grail of customer service: the client for life.

“Brokers who treat the client well initially will secure a long-lasting relationship, and will have further opportunities when the client makes future investment purchases,” Mr Nord says, adding that the best client for a broker is one they can secure for the long haul.

Finance Made Easy’s Tony Bice agrees, but cautions it takes a little more than just respect to secure a client for life. Brokers also need to be responsive to their clients’ needs and to stay in touch on a regular basis.

“First home buyers have never had any dealings with the property market before so understandably, they can sometimes be very nervous about the whole process,” he says.

It pays to call the client regularly just to let them know how their application is progressing.

Mr Nord tells his clients he is available 24/7: “If I say that, they tend to feel a lot more relaxed about the whole home buying process – which is exactly the effect you want to have.

“A relaxed client is a happy client and a happy client is a potential referral gem.”

A HIDDEN GEM

Some brokers may find their FHB clients offer a lot more than just repeat and referral business opportunities.

They can also be a potentially lucrative market for a diversified range of products and advisory services.

With first timers taking on a high level of debt, there’s frequently an opportunity to talk about loan protection and life insurance.

Brokers might also want to consider helping their new clients with credit cards, bank accounts and personal finance.

Not only does this generate extra revenue but more importantly, by adding value to their first home purchase, brokers have a stronger chance of securing the FHB’s repeat business.

Treating them with care throughout the life of their first home loan will increase the chances of forging a lifelong business relationship.