First Time Buyers Keep The Property Market Afloat – The Property Imperative Weekly – 9th Dec 2017

First Time Buyers are keeping the property ship afloat for now, but what are the consequences?

Welcome to the Property Imperative weekly to 9th December 2017. Watch the video, or read the transcript.

In our weekly digest of property and finance news, we start this week with the latest housing lending finance from the ABS. The monthly flows show that owner occupied lending fell $23m compared with the previous month, down 0.15%, while investment lending flows fell 0.5%, down $60m in trend terms. Refinanced loans slipped 0.13% down $7.5 million. The proportion of loans excluding refinanced loans for investment purposes slipped from a recent high of 53.4% in January 2015, down to 44.6% (so investment property lending is far from dead!)

While overall lending was pretty flat, first time buyers lifted in response to the increased incentives in some states, by 4.5% in original terms to 10,061 new loans nationally. At a state level, FTB’s accounted for a 19% per cent share in Victoria and 13.7% in New South Wales, where in both states, a more favourable stamp duty regime and enhanced grants were introduced this year. But, other states showed a higher FTB share, with NT at 24.8%, WA at 24.6%, ACT at 20.1% and QLD 19.7%. SA stood at 13% and TAS at 13.3%. There was an upward shift in the relative numbers of first time buyers compared with other buyers (17.6% compared with 17.4% last month), still small beer compared with the record 31.4% in 2009. These are original numbers, so they move around each month. The number of first time buyer property investors slipped a little, using data from our household surveys, down 0.8% this past month. Together with the OO lift, total first time buyer participation has helped support the market.

The APRA Quarterly data to September 2017 shows that bank profitability rose 29.5% on 2016 and the return on equity was 12.3% compared with 9.9% last year. Loans grew 4.1%, thanks to mortgage growth, provisions were down although past due items were $14.3 billion as at 30 September 2017. This is an increase of $1.5 billion (11.8 per cent) on 30 September 2016. The major banks remain highly leveraged.

The property statistics showed that third party origination rose with origination to foreign banks sitting at 70% of new loans, mutuals around 20% and other banks around the 50% mark. Investment loan volumes have fallen, though major banks still have the largest relative share, above 30%.  Mutuals are sitting around 10%.  Interest only loans have fallen from around 40% in total value to 35%, but this represents a fall from around 30% of the loan count, to 27%. This reflects the higher average loan values for IO borrowers. The average loan balance for interest only loans currently stands at $347,000 against the average balance of $264,000.  No surprise of course, as these loans do not contain any capital repayments (hence the inherent risks involved, especially in a falling market).

But there has been a spike in loans being approved outside serviceability, with major banks reporting 5% or so in September. This may well reflect a tightening of standard serviceability criteria and the wish to continue to grow their loan books. We discussed this on Perth 6PR Radio.  So overall, we see the impact of regulatory intervention. The net impact is to slow lending momentum. As lenders tighten their lending standards, new borrowers will find their ability to access larger loans will diminish. But the loose standards we have had for several years will take up to a decade to work through, and with low income growth, high living costs and the risk of an interest rate rise, the risks in the system remain.

On the economic front, GDP from the ABS National Accounts was 0.6%. This was below the 0.7% expected. This gives an annual read of 2.3%, in trend terms, well short of the hoped for 3%+. Seasonally adjusted, growth was 2.8%. Business investment apart, this is a weak and concerning result.  The terms of trade fell. GDP per capita and net disposable income per capita both fell, which highlights the basic problem the economy faces.  The dollar fell on the news. Households savings also fell. No surprise then that according to the ABS, retail turnover remained stagnant in October. The trend estimate for Australian retail turnover fell 0.1 per cent in October 2017 following a relatively unchanged estimate (0.0 per cent) in September 2017. Compared to October 2016 the trend estimate rose 1.8 per cent. Trend estimates smooth the statistical noise.

So no surprise the RBA held the cash rate once again for the 16th month in a row.

The latest BIS data on Debt Servicing ratios shows Australia is second highest after the Netherlands. We are above Norway and Denmark, and the trajectory continues higher. Further evidence that current regulatory settings in Australia are not correct. As the BIS said, such high debt is a significant structural risk to future prosperity. They published a special feature on household debt, in the December 2017 Quarterly Review. They call out the risks from high mortgage lending, high debt servicing ratios, and the risks to financial stability and economic growth.  All themes we have already explored on the DFA Blog, but it is a well-argued summary. Also note Australia figures as a higher risk case study.  They say Central banks are increasingly concerned that high household debt may pose a threat to macroeconomic and financial stability and highlighted some of the mechanisms through which household debt may threaten both. Australia is put in the “high and rising” category.  The debt ratio now exceeds 120% in both Australia and Switzerland.  Mortgages make up the lion’s share of debt.  In Australia mortgage debt has risen from 86% of household debt in 2007 to 92% in 2017.

Basel III was finally agreed this week by the Central Bankers Banker – the Bank for International Settlements – many months later than expected and somewhat watered down. Banks will have to 2022 to adopt the new more complex framework, though APRA said that in Australia, they will be releasing a paper in the new year, and banks here should be planning to become “unquestionably strong” by 1 January 2020.  We note that banks using standard capital weights will need to add different risk weights for loans depending on their loan to value ratio, advanced banks will have some floors raised, and investor category mortgages (now redefined as loans secured again income generating property) will need higher weights. Net, net, there will be two effects. Overall capital will probably lift a little, and the gap between banks on the standard and internal methods narrowed. Those caught transitioning from standard to advanced will need to think carefully about the impact. This if anything will put some upwards pressure on mortgage rates.

The Treasury issues a report “Analysis of Wages Growth” which paints a gloomy story. Wage growth, they say, is low, across all regions and sectors of the economy, subdued wage growth has been experienced by the majority of employees, regardless of income or occupation, and this mirrors similar developments in other developed western economies. Whilst the underlying causes are far from clear, it looks like a set of structural issues are driving this outcome, which means we probably cannot expect a return to “more normal” conditions anytime some. This despite Treasury forecasts of higher wage growth later (in line with many other countries). We think this has profound implications for economic growth, tax take, household finances and even mortgage underwriting standards, which all need to be adjusted to this low income growth world.

Mortgage Underwriting standards are very much in focus, and rightly, given flat income growth.  There was a good piece on this from Sam Richardson at Mortgage Professional Australia which featured DFA. He said that over four days in late September two major banks added extra checks to an already-extensive application process. ANZ introduced a Customer Interview Guide requiring brokers to ask questions about everything from a customer’s Netflix subscription to whether they were planning to start a family. Three days later CBA introduced a simulator that would show interest-only borrowers how their repayments would change and affect their lifestyle. Customers would be required to fill in an ‘acknowledgement form’ to proceed with an interest-only application.

Getting good information from customers is hard work, not least because as we point out, only half of households have formal budgeting. So, when complete the mortgage application, households may be stating their financial position to the best of their ability, or they may be elaborating to help get the loan. It is hard to know. Certainly banks are looking for more evidence now, which is a good thing, but this may make the loan underwriting processes longer and harder. Improvements in technology could improve underwriting standards for banks while pre-populating interactive application forms for consumers and offering time-saving solutions to brokers and Open Banking may help, but while Applications can be made easier, this does not necessarily mean shorter.

More data this week on households, with a survey showing Australians have become more cautious of interest only loans with online panel research revealing that 46 per cent of Australians are Adamant Decliners of interest-only home loans according to research from the  Gateway Credit Union. In addition, a further quarter of respondents are Resistant Approvers, acknowledging the benefits of interest-only loans yet choosing not to utilise them. Of the generations, Baby Boomers are most likely to be Adamant Decliners and therefore, less likely to use interest-only products. While Gen Y are most likely to be Enthusiastic Users.

Banks continue to offer attractive rates for new home loans, seeking to pull borrows from competitors. Westpac for example, announced a series of mortgage rate cuts to attract new borrowers, as it seeks to continue to grow its portfolio, leveraging lower funding costs, and the war chest it accumulated earlier in the year from back book repricing, following APRA’s tightening of underwriting standards and restrictions on interest only loans. Rates for both new fixed rate loans and variable rate loans were reduced.  For example, the bank has also increased the two-year offer discount on its flexi first option home for principal and interest repayments from 0.84% p.a. to 1.00% p.a. putting the current two-year introductory rate at 3.59% p.a.

The RBA released their latest Bulletin  and it contained an interesting section on Housing Accessibility For First Time Buyers.  They suggest that in many centers, new buyers are able to access the market, thanks to the current low interest rates. But the barriers are significantly higher in Melbourne, Sydney and Perth. They also highlight that FHBs (generally being the most financially constrained buyers) are not always able to increase their loan size in response to lower interest rates because of lenders’ policies. Indeed, the average FHB loan size has been little changed over recent years while the gap between repeat buyers and FHBs’ average loan sizes has widened. They also showed that in aggregate, rents have grown broadly in line with household incomes, although rent-to-income ratios suggest housing costs for lower-income households have increased over the past decade.

Housing affordability has improved somewhat  across all states and territories, allowing for a large increase in the number of loans to first-home buyers, according to the September quarter edition of the Adelaide Bank/REIA Housing Affordability Report. The report showed the proportion of median family income required to meet average loan repayments decreased by 1.2 percentage points over the quarter to 30.3 per cent. The result was decrease of 0.6 percentage points compared with the same quarter in 2016. However, Housing affordability is still a major issue in Sydney and Melbourne they said.  In addition, over the quarter, the proportion of median family income required to meet rent payments increased by 0.3 percentage points to 24.6 per cent.

Our own Financial Confidence Index for November fell to 96.1, which is below the 100 neutral metric, down from 96.9 in October 2017. This is the sixth month in succession the index has been below the neutral point. Owner Occupied households are the most positive, scoring 102, whilst those with investment property are at 94.3, as they react to higher mortgage repayments (rate rises and switching from interest only mortgages), while rental yields fall, and capital growth is stalling – especially in Sydney.  Households who are not holding property – our Property Inactive segment – will be renting or living with friends or family, and they scored 81.2. So those with property are still more positive overall. Looking at the FCI score card, job security is on the improve, reflecting rising employment participation, and the lower unemployment rate.  Around 20% of households feel less secure, especially those with multiple part time jobs. Savings are being depleted to fill the gap between income and expenditure – as we see in the falling savings ratio. As a result, nearly 40% of households are less comfortable with the amount they are saving. This is reinforced by the lower returns on deposit accounts as banks seek to protect margins. More households are uncomfortable with the amount of debt they hold with 40% of households concerned. The pressure of higher interest rates on loans, tighter lending conditions, and low income growth all adds to the discomfort. More households reported their real incomes had fallen in the past year, with 50% seeing a fall, while 40% see no change.  Only those on very high incomes reported real income growth.

Finally, we also released the November mortgage stress and default analysis update. You can watch our video counting down the most stressed postcodes in the country. But in summary, across Australia, more than 913,000 households are estimated to be now in mortgage stress (last month 910,000) and more than 21,000 of these in severe stress, the same as last month. Stress is sitting on a high plateau. This equates to 29.4% of households. We see continued default pressure building in Western Australia, as well as among more affluent household, beyond the traditional mortgage belts across the country. Stress eased a little in Queensland, thanks to better employment prospects. We estimate that more than 52,000 households risk 30-day default in the next 12 months, similar to last month. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA rising to 4.9 basis points.

So, the housing market is being supported by first time buyers seeking to gain a foothold in the market, but despite record low interest rates, and special offer attractor rates, many will be committing a large share of their income to repay the mortgage, at a time when income growth looks like it will remain static, costs of living are rising, and mortgage rates will rise at some point. All the recent data suggests that underwriting standards are still pretty loose, and household debt overall is still climbing. This still looks like a high risk recipe, and we think households should do their own financial assessments if they are considering buying at the moment – for home prices are likely to slide, and the affordability equation may well be worse than expected. Just because a lender is willing to offer a large mortgage, do not take this a confirmation of your ability to repay. The reality is much more complex than that. Getting mortgage underwriting standards calibrated right has perhaps never been more important than in the current environment!

And that’s the Property Imperative to 9th December 2017. If you found this useful, do leave a comment, sign up to receive future research and check back next week for the latest update. Many thanks for taking the time to watch.

The RBA On Housing Affordability

The RBA released their latest Bulletin today  and it contained an interesting section on Housing Accessibility For First Time Buyers.  They suggest that in many centers, new buyers are able to access the market, at the current low interest rates. But the barriers are significantly higher in Melbourne, Sydney and Perth.

They also highlight that FHBs (generally being the most financially constrained buyers) are not always able to increase their loan size in response to lower interest rates because of lenders’ policies. Indeed, the average FHB loan size has been little changed over recent years while the gap between repeat buyers and FHBs’ average loan sizes has widened.

The article starts with an analysis of housing price-to-income ratios.

In Australia, the housing price-to-income ratio has increased since the early 1990s, and has increased particularly rapidly over the past five years to reach its highest level on record. At face value, this suggests that housing affordability is at a record low. However, this masks significant differences across states. The recent trend increase in the housing price-to-income ratio is largely due to increases in the ratios in New South Wales and Victoria (Graph 2). The housing price-to-income ratios have increased by less in other states in recent years and suggest that housing affordability in those states is at a similar level to the mid 2000s.

This housing affordability measure accounts for changes in average housing prices and household income. However, it ignores the effect of changes in interest rates on borrowing costs and other financial factors that may affect a household’s purchasing capacity and therefore their ability to purchase a home.

If interest rates fall, households can afford to repay a larger mortgage, all other things being equal. This would be reflected in a lower mortgage debt-servicing ratio, and would imply greater affordability. There is no role for changes to the deposit burden in the mortgage debt-servicing ratio, as the LVR is considered to be fixed. Looking at the trends over time, the aggregate mortgage debt-servicing ratio has risen over the
past year or so and is currently above the average of the inflation-targeting period but below historical peaks

There are significant state variations.

A shortcoming of the conventional estimates of housing affordability is that, by focussing on the average home price and average household income, they measure affordability for the average household. But the typical FHB is not the same as the average household – they tend to be younger and less wealthy. Also, if most FHBs buy homes that are cheaper than the average, then measures that focus on the average home will provide a poor guide to the ability of FHBs to purchase their first home (i.e. housing accessibility). To address these shortcomings, we construct a housing accessibility index that specifically focuses on the purchasing capacity of potential FHBs

This measure combines information from household surveys with data on all housing sale transactions in Australia. It shows housing accessibility is around the long-run average in aggregate in Australia, with the median potential FHB being able to afford around one-third of all homes sold in 2016, although this share is significantly lower in Sydney, Melbourne and Perth. Moreover, the quality of homes that potential FHBs can afford has fallen over time, as measured by location and the number of bedrooms. This measure also shows accessibility is lower in capital cities, particularly in areas close to the CBD.

The cost of renting is also an important component of housing affordability and the number of households renting has trended up over the past few decades. In aggregate, rents have grown broadly in line with household incomes, although rent-to-income ratios suggest housing costs for lower-income households have increased over the past decade.

ABC Radio Does Housing

I had the chance to discuss at some length the latest dynamics of the housing and property markets with ABC’s Jules Schiller on ABC Radio last night.

You can listen to the discussion.

We discussed the concept of affordability to first-time house buyers and the latest Bankwest study which shows how budget-friendly the Australian housing market is today. North says that the country has an existing dilemma to repair in able for younger people to buy houses easily.

North says that giving incentives to first-time buyers will only lessen the interest of the house they are set to buy, adding that it might not help those people. He believes that reforms in the housing sector are needed to solve this issue of unaffordable housing among new buyers. He talks about the different housing prices in the East coast where Sydney resides and the West Coast where Perth is located. He gives advice to first-time buyers when is the right time to buy houses in capital cities in Australia.

He believes that there are several uncertainties concerning the current set-up of the housing market. He says that a Housing Royal Commission is more needed than a Banking one, though this inquiry can affect the housing industry but he is not sure whether first-time buyers will feel the effect once the inquiry is finished. He says that the inquiry should look into how banks are dealing with mortgage payments and other transactions.

He cannot say whether foreign ownership of some houses and lands in the country are largely affecting the first-time buyers but it is a factor. He says that there are many markets where first-time buyers can invest like Adelaide, Hobart and Brisbane.

UK’s reduction of stamp duty for first-time homebuyers will benefit RMBS

From Moody’s

On 22 November, the UK government announced a number of measures in its Autumn Budget, including a stamp duty reduction that will benefit 95% of first-time homebuyers, with a maximum saving of £5,000 per buyer. For purchases completed on or after 22 November 2017, first-time buyers do not have to pay stamp duty on properties worth up to £300,000, while for properties worth up to £500,000 they pay £5,000 less. The stamp duty for purchases above £500,000 is unchanged. Such measures will be credit positive for residential mortgage-backed securities (RMBS), allowing first-time buyers to amass the down payment they need to take out a loan faster or allow them to borrow a larger amount, strengthening both housing demand and property prices and lowering market-implied loan-to-value ratios on existing loans.

The stamp duty reduction will help alleviate some of the financial burden on first-time buyers amid stagnant wage growth, proportionally more household cost expenditures, and rising rents (rental price inflation in the UK has slowed recently, but was up 0.9% in October 2017 versus a year ago, according to HomeLet). Nevertheless, first-time buyers, especially in London and surrounding counties, still face relatively high equity layouts compared with other regions. Our recent RMBS pool analysis also showed that compared with non-first-time buyers, first-time buyers start with up to 15% less equity in the property (see exhibit).

The budget also confirmed additional funding under the help-to-buy equity loan scheme, another credit positive because it increases the availability of loans for borrowers, while supporting house prices, which overall we expect will remain flat in 2018. Under the scheme, borrowers can purchase a newly built property with just a 5% deposit. Since its launch, borrowers have purchased 120,864 properties, with 81% of the sales attributable to first-time buyers. In 2017, Halifax Ltd. estimated that first-time buyers accounted for almost half of all mortgage-financed house purchases, an important driver of housing demand.

First Time Buyers On The Up

As we continue our series based on our most recent household surveys, we look at first time buyers, who seem to be picking up at least some of the slack from property investors (which we covered yesterday).

We see that 27% want to buy to capture future capital growth, the same proportion seeking a place to live! 13% are seeking tax advantage and 8% greater security of tenure. But the most significant change is in access to the First Home Owner Grants (8%), thanks to recent initiatives in NSW and VIC, as well as running programmes across the country.

We see more are looking to buy units, at the expense of suburban houses.

The largest barriers are high home prices (44%), availability of finance (19% – and a growing barrier thanks to tighter underwriting standards), interest rate rises (9%) and costs of living (6%). Finding a place to buy is still an issue, but slightly less so now (18%).

So expect to see more first time buyers active, though there are not enough of them to offset the fall in interest from investors, so expect price weakness as we go into 2018.

First Time Buyers – The First Step is a Stretch – RBA

The RBA published a research discussion paper “The Property Ladder after the Financial Crisis: The First Step is a Stretch but Those Who Make It Are Doing OK”. Good on the RBA for looking at this important topic. But we do have some concerns about the relevance of their approach.

This paper investigates how things have changed since the GFC for those stepping onto the property ladder. Is ‘generation rent’ an important trend? Are people buying first homes taking on ‘too much’ debt? And what implications does this have for our understanding of the growing level of aggregate household debt?

They highlight the rise of those renting, and attribute this largely to rising home prices. As a piece of research, it is interesting, but as it stops in 2014, does not tell us that much about the current state of play! However, they conclude:

The results we find in this paper are very much bittersweet. On the one hand, we find that fewer people are making the transition from renters to home owners than prior to the crisis. Given research that links the rise in inequality to changes in home ownership patterns, this could have significant longer-term consequences for the distribution of wealth in Australia. On the other hand, those households that do make the transition are more financially secure than earlier cohorts. So the rise in aggregate and individual debt ratios do not appear to be associated with an increase in household financial vulnerability – at least as far as first home buyers are concerned.

We attribute much of this change to the increase in housing prices and the associated hurdle that deposit requirements represent. While saving a deposit is a stretch, it is also a sign of financial discipline that is associated with fewer subsequent difficulties. Thus, while the first step on the property ladder is more of a stretch than before the crisis, those who do make the step are, on average, better placed to pay off their loans than prior to the crisis.

A few points to note.

First, the RBA paper uses HILDA data to 2014, so it cannot take account of more recent developments in the market – since then, incomes have been compressed, mortgage rates have been cut, and home prices have risen strongly in most states, so the paper may be of academic interest, but it may not represent the current state of play.   Very recently, First Time Buyers appear to be more active.

More first time buyers are getting help from parent, and their loan to income ratios are extended, according to our own research.

Also, they had to impute those who are first time buyers from the data, as HILDA does not identify them specifically.  Tricky!

The past three wealth modules of the survey (2006, 2010 and 2014) have included a variable, ‘rpage’, which asks the household reference person whether they have ever owned residential property and, if so, the age at which they first acquired, or started buying, this property.

Another variable, ‘hspown’, available in the 2001 and 2002 surveys only, asks households whether they still live in their first home. This variable allows us to identify FHBs directly for these years.

We combine the information from ‘hspown’ and ‘rpage’ into the one variable identifying indebted FHBs. For 2001 and 2002 we use the ‘hspown’ variable and the ‘rpage’ variable is used thereafter.

The percentage of owner-occupier households identified as FHBs in any given year is, on average, between 1 and 2 per cent over the course of the survey, which is broadly in line with aggregate measures. This corresponds to between 50 and 100 households each year.

So a very small sample.

Next, the RBA cited the aggregate household Debt-to-income Ratios cross-country estimates. Rising trends are apparent in many countries.

They then proceeded to explain the drawbacks of this data set.

Notwithstanding this statistic’s frequent use, it has a number of drawbacks. First, it compares a stock of debt with a flow of income rather than, say, a stock of debt against a stock of assets or a flow of repayments against a flow of income. This mixing of concepts means that it is not clear what a reasonable benchmark for the level of debt to income might be. There are also important distributional considerations that affect what meaning can be attached to the aggregate values. At heart these issues stem from the fact that, while it is tempting to interpret higher aggregate debt-to-income ratios through a representative consumer lens, it is misleading. Of particular note is that the aggregate ratio places more weight on high-income households, which can be misleading. Higher-income households can support higher debt-to-income ratios than lower-income households. This is primarily because a smaller fraction of a higher-income household’s expenditure needs to be devoted to necessities leaving more available to spend on other things. There are also other dimensions in which borrowers may differ, such as their risk of unemployment and their ability to obtain funds in an emergency, that would affect the inherent riskiness of any given debt level.

Fourth, they show that first time buyers have a higher mean debt-to-income ratio compared with other borrowers.

Turning first to the aggregated data, we can see in Figure 6 that the debt-to-income ratio of FHBs is substantially higher than that of all other indebted owner-occupiers. This reflects the fact that FHBs are at the beginning of their loan life cycle. That is, before they have had the opportunity to pay down their loan. Comparing the pre- and post-GFC periods, we see that the median FHB debt-to-income ratio was around 330 per cent in 2014, up approximately 40 per cent from the ratio of 230 per cent in 2001. FHBs are taking on more debt than in the past.

Actually, more recent data shows that Debt-to-Incomes are even more extended, with some FTB’s in Sydney at a ratio of 7x income (according to our more recent surveys).

Finally, they show that “despite higher debt levels, households who became indebted FHBs post-2007 appear to be paying down their mortgages and reducing their debt-to-income ratios at the same rate, or slightly faster, than households who took on a mortgage before 2007”.

In the year after taking out a loan, the reduction in the debt-to-income ratio for FHBs in the post-2007 period was around 8 per cent, compared to 5 per cent for the pre-2007 cohort. After three years, the debt-to-income ratio for FHBs in the pre- and post-2007 periods has decreased by 14 and 18 per cent, respectively. Given that these rates of amortisation are significantly higher than those associated with required repayments or interest rate changes over this period, it seems that these are voluntary choices rather than the consequence of changes to required repayment schedules. The median loan-to-valuation ratio of FHBs in the post-financial crisis period also decreases by more than for the previous cohort, although this is likely due to the rise in housing prices increasing the denominator of this ratio over time.

So, while there are some general conclusions, we are not sure the work really adds much to the current debate on housing affordability, housing debt, and the current stresses which households, especially first time buyers are experiencing.

Weekend auctions litmus test of new first-home-buyer benefits

From The Real Estate Conversation.

The 1 July introduction of stamp duty concessions for first-home buyers in New South Wales and Victoria added some warmth to otherwise wintry auction market conditions on the weekend.

Across Australia’s seven capital cities, the clearance rate was 70.3 per cent. The final result for the previous week was 66.5 per cent, the lowest clearance rate since June 2016.

In Melbourne, 619 auctions were held on the weekend, with a preliminary clearance rate of 74 per cent recorded, according to REIV data.

Both figures were up on the same period last year, when 223 homes went to auction and a 70 per cent clearance rate was recorded.

Real Estate Institute of Victoria CEO, Gil King, told SCHWARTZWILLIAMS, “High auction volumes (in Melbourne) coincided with changes to government policy with new stamp duty concessions now available for first homebuyers purchasing under $750,000.”

From 1 July, stamp duty for first-home buyers purchasing properties worth less than $600,000 was abolished, and stamp duty concessions are available for first-home buyers purchasing property valued between $600,000 and $750,000. The exemptions and the concession will apply to both new and established homes.

The Victorian government also removed stamp duty concessions for off-the-plan investment properties, except for those who intend to live in the property or who are first-home buyers.

“This weekend saw a record number of homes go under the hammer for the first week of July with more than 615 auctions held – surpassing the previous 2010 record when 591 homes were auctioned,” said King.

Suburbs in Melbourne’s middle ring dominated, led by Reservoir with 14 auctions and 12 sales. Hoppers Crossing and Sunbury both recorded 100 per cent clearance rates from six auctions. The City of Darebin and Moreland recorded the highest volumes on the weekend, with 38 and 34 auctions respectively.

“Strong auction activity was also recorded in Greater Geelong, with 27 auctions held over the week,” said Gill.

John Cunningham, president of the Real Estate Institute of New South Wales, told SCHWARTZWILLIAMS, “Saturday 1 July was the first real test of the new first-home owners stamp duty concessions and the foreign investor stamp duty surcharge.”

In New South Wales, the government has scrapped stamp duty for first-home buyers for new and existing homes up to a value of $650,000, and delivered stamp duty concessions for first-home buyers for properties up to a value of $800,000.

The government has also doubled the stamp duty surcharge for foreign investors from 4 per cent to 8 per cent, and increased land tax for foreign buyers from 0.75 per cent to 2 per cent. Stamp duty discounts for foreign buyers purchasing off the plan have been removed.

Sydney’s initial clearance rate last week was 72.6 per cent.

Overall, said Cunningham, the market is cooling across NSW, where days on market is growing and price and reserve price discounting is very evident.

Cunningham said the auction reporting ratio of 63 per cent was one of the lowest he has seen. The auction reporting ratio was 74 per cent the previous week.

“Could it just be lazy agents, or is there more to hide than the 69 per cent recorded clearance rate?” asked Cunningham.

“We will have to wait until mid week to find the true result,” he said, referring to the release of the adjusted auction clearance rates.

Chris Wilkins, director of Ray White Drummoyne, told SCHWARTZWILLIAMS the Drummoyne market was “boring” last week.

“We’ve definitely noticed some lack of interest and intensity from buyers,” he said.

At one auction during the week, two buyers turned up, but neither registered to bid.

Wilkins said that rather than underquoting, which receives so much media attention, agents are sometimes overquoting in the current market. With inflated prices there is little buyer interest, and vendors are rushing to accept any offers they receive, rather than the more ideal situation where buyers are competing with each other for desirable properties.

Wilkins also said vendors are holding off selling during winter. “The good properties on the market just aren’t there,” he said.

CoreLogic data shows the stamp duty concessions for first-home buyers will have a bigger impact in regional areas of NSW than in Sydney.

Over the past twelve months, 45.4% of dwellings sold across NSW cost $650,000 or less, and 58% of dwellings were sold for $800,000 or less.

In Sydney, only 25.8% of real estate sales over the past twelve months were priced at $650,000 or less.

The proportions are also different between product types. In the past twelve months, 20.0% of Sydney houses sold for $650,000 or less, while unit sales were 33.5 per cent of all sales.

$6.8bn stamp duty bonanza – at the expense of FHBs

From Mortgage Professional Australia.

Huge NSW revenues from stamp duty have lifted state out of debt but prospective homebuyers are suffering

The New South Wales State Government received $6.8bn from stamp duties on residential property over the past year, the State’s 2017-18 Budget has revealed.

The NSW State Government is now free of debt, with a $4.5bn surplus expected for 2016-17 and a surplus of $2.0bn expected next year. Stamp duty makes up a huge proportion of the State’s income, with revenues jumping 10% over the past year and expected to grow 6% each year for the next three years.

As the State Government grows richer, NSW’s first home buyers are struggling. In a CoreLogic survey of Australians of all ages, 48% of those in NSW said stamp duty was the most significant obstacle to housing affordability. Three-quarters of respondents felt that removing or reducing stamp duty would be an effective way to improve housing affordability in New South Wales.

CoreLogic found that the average household in Sydney would take 1.7 years of no spending whatsoever to save a 20% deposit. Getting on the housing ladder in Sydney was far more expensive than any other city, including Melbourne.

Stamp duty concessions

Perhaps buoyed by its new found wealth, NSW is finally following the lead of other states such as Victoria by expanding stamp duty concessions.

From July 1 stamp duty for FHBs will be abolished for new homes up to $650,000 with discounts on properties of up to $800,000. Additionally, grants of $10,000 will be available for new homes of up to $600,000 and for FHBs who build their home. Stamp duty will no longer be charged on lenders mortgage insurance.

Over the past twelve months, 45.4% of dwellings sold across New South Wales had a price tag of $650,000 or less, notes CoreLogic director of research Tim Lawless. However, in the Sydney metropolitan area, just 25.8% of dwelling sales were at a price of $650,000 or less.

The State’s stamp duty concessions may push Sydney FHBs towards units, given 33.5% of units sold in the last 12 months went for under $650,000. On a $650,000 dwelling purchase, a FHB will save $25,000 by not paying stamp duty.

According to Lawless, “we can expect first home buyer sales to stall over the remainder of June and likely surge higher from the beginning of the new financial year.”

First-home buyers remain out in the cold, despite affordability improvements

From The Real Estate Conversation.

The March quarter edition of the Adelaide Bank/Real Estate Institute of Australia Housing Affordability Report shows housing affordability improved across  the country, but the number of first home buyers decreased in all states and territories.

The proportion of family income required to meet loan repayments decreased by 1.3 percentage points during the March quarter to 30.4 per cent. The result was 1.3 percentage points lower than for the corresponding quarter in 2016, showing affordability is improving.

REIA President Malcolm Gunning said first-home buyers make up only 13.4 per cent of total owner-occupied housing. The rate of first-home buyers has been on a downward trend for more than five years.

Damian Percy, general manager Adelaide Bank, said, “While the improvement in housing affordability for the March quarter is to be welcomed, we are still in the midst of a housing affordability crisis and we need to treat it as such. Recent measures by governments to assist first home buyers are similarly welcomed, but the reality is that it will take years for these policy measures to wash through the system and translate into meaningful price action.”

“The number of first-home buyers decreased to 20,677 over the March quarter – a drop of 11.2%,” said Percy.

Percy said the nation’s housing affordability crisis was having a “profound impact” on the “economic and social well-being of the nation.”

Gunning said, “It will be interesting to see the effects that stamp duty exemptions and concessions announced in Victoria and more recently in NSW have on first home buyers.”

“We anticipate that more first home buyers will be enticed to enter the market place. However, it will take time for any response to filter into our data as the changes do not come into effect until 1 July 2017,” Gunning said.

Over the March quarter, the proportion of median family income required to meet rent payments increased by 0.1 percentage points to 24.6 per cent. However, the results varied across the states and territories, with rental affordability improving slightly in New South Wales, South Australia, Western Australia, and the Northern Territory.

Fast facts from the Adelaide Bank/REIA Housing Affordability Report

The average loan size to Australian first home buyers is now $372,620 – a decrease of 4.3 per cent over the March quarter but an increase of 2.3% compared to last year.

Victoria is the state with the largest number of first-home buyers. First home buyers now make up 21.6% of the state’s owner-occupier market.

Median rents increased slightly, meaning that during the March, rental affordability declined slightly.  The proportion of family income required to meet median rents increased by 0.1 percentage points to 24.6 per cent.

Rental affordability declined for the quarter with an increase of 0.5% of income required to meet median rents.

In NSW, the proportion of family income required to meet loan repayments is 5.7% higher than the nation’s average. NSW remains the least affordable state or territory in which to buy a home. First home buyers now make up only 12.3% of the state’s owner-occupier market – the lowest level in the country.  Rental affordability declined for the quarter with an increase of 0.5% of income required to meet median rents.

In Queensland, the proportion of income required to meet home loan repayments decreased to 26.7%, a 1.3 percentage point drop over the quarter. The proportion of first home buyers in the state’s owner-occupier market was 23.9%.  Rental affordability declined slightly.

The proportion of first-home buyers in South Australia‘s owner-occupier market recorded an increase to 16.8%.  Rental affordability improved by 0.2 percentage points.

Western Australia recorded a 6.5% decrease in the number of first-home buyers over the quarter. The proportion of first home buyers in the state’s owner-occupier market was 31.5%. Rental affordability in Western Australia improved during the March quarter with the proportion of family income required to meet the median rent decreasing 0.5 percentage points to 18.6%.

The number of first-home buyers in Tasmania decreased by 7.5% for the March quarter or 11.1% compared to the same quarter of 2016.  The average home loan size to first home buyers increased by 5.6% to $240,333.  Rental affordability declined with an increase of 1.3% for the quarter.

The Australian Capital Territory recorded an 18.2% decrease in the number of loans to first home buyers. First home buyers made up 17.8% of the Territory’s owner-occupier market. Rental affordability declined for the quarter.  The National Capital remains the most affordable state or territory in which to buy a home or rent.

The number of loans to first-home buyers in the Northern Territory decreased by 15.8%. The proportion of first home buyers in the Territory’s owner-occupier market was 19.8%. Rental affordability improved with a decrease of 0.8%.

Are first home buyers locked out of housing?

According to UBS, first time buyers are pretty much locked out of the property market. ‘Typical’ first home buyers are facing ~11 years to save; and ~40 years in Sydney!

Housing affordability is extreme as house price-income surged to a record 6.5x

UBS already ‘called the top’ of housing, with a key reason being that affordability is stretched, as the house price-income ratio surged to a record high of 6.5x, up sharply from 4.5x in 2012 (& >doubling from 3x in 1996). While interest rates have fallen to a record low, the mortgage repayment share of income still lifted to a near decade high, & the key issue for first home buyers (FHBs) is the ‘deposit gap’ even before buying.

‘Typical’ first home buyers facing ~11 years to save; and ~40 years in Sydney

UBS have now created a new and dynamic interactive model to estimate how long it would take a FHB to save a deposit to buy a home (click here for the model). The findings are confronting. We estimate a ‘base case’ scenario for a ‘typical’ FHB would take ~11 years to save for a home based on assumptions including: 1) a 10% deposit is required; 2) individual income is AWOTE of ~$80k per year; 3) saving rate is 5% of gross income (i.e. $4k per year); 4) home price today is $400k (~average FHB price); 5) home prices grow in line with household income ahead at 3% per year. However, given recent macroprudential tightening including for high-LVR loans, if we instead assume a 20% deposit is now required, then the time to save more than doubles (due to compounding) to ~24 years. Alternatively, saving a 10% deposit to buy at the average Sydney house price of $1.2mn would take an incredible ~40 years to save.

If house price vs income growth repeats, FHBs likely never can save enough Importantly, the key driver of time to save is house price growth vs income.

In the last 5 years, house price growth averaged 7%, but income only 4%. If this were to be repeated ahead, a FHB would likely never be able to save a 10% deposit – unless they were given (at least part of) the deposit (i.e. from the ‘bank of mum and dad’). Note that due to the frequent changes of Government policy on housing incentives/taxes (& other costs), our model purposely excludes these factors. However, they can be input to the model directly by the user by adjusting the required deposit or purchase price. For instance, the recent FHB super saver scheme potentially reduces the required time by up to several years (contributions are capped at $15k/year and $30k in total).