First Time Buyers – Page 9 – Digital Finance Analytics (DFA) Blog

First Time Buyers Still Want Property

Continuing with data from the latest edition of the Property Imperative, today we look at first time buyers. Our latest survey identified about 319,000 households who are first time buyers. The majority are seeking to purchase, or have recently purchased an owner occupied property (80%), the remainder preferring an investment property. Only 9% of these households expect to transact within the next 12 months, despite 67% believing house prices are set to rise in the same term.

The biggest barrier to purchase include high house prices (52%), fear of unemployment (11%), finding the right property (22%) and rising costs of living (6%). In terms of financing 61% of households will need to borrow more than they can currently obtain to transact, whilst 62% of households will consider using a mortgage broker to assist with the finance arrangements.

The barriers do vary by state. In NSW, first time buyers were finding it more difficult to find a suitable place to buy (28%), whereas costs of living were less significant here. In WA, fear of unemployment (22%) and high prices (54%) were the most significant barriers.

First time buyers are split between looking for a house or a unit (in Sydney more are looking for a unit). A greater proportion (21%) this time were simply not sure what to buy, or where to buy, a rise from 4% in 2013. A greater proportion of first time buyers in Sydney are likely to buy, or have bought a unit, rather than a house. In the other states, the preference for a house is stronger, though in Melbourne and Brisbane, it continues to drop. In Perth, house preferences are stronger.

When we compared the elements which influence a buying decision, we see a stronger focus on price in 2015. Schools are important, then access to transport. We see consideration of absolute commute times to be less important now than in 2010. However, almost all elements are traded away because of high prices.

Whilst the ABS tweaked their estimates of first time buyers taking a mortgage to adjust for the decline in first owner grants, they still give an incomplete picture.

The traditional wisdom is that first time buyers are sitting out of the property markets, because prices are high, loans harder to get, and confidence is falling. However one of the most significant developments surrounding first time buyers is that many more are now going direct to the investment sector.

The original data from the ABS, shows a small fall in the month to 15.4% in July 2015 from 15.8% in June 2015. The DFA data for investor FTB also fell. The number of first time buyers are still sitting at around 12,000 a month in total, still well below the peaks in 2009. Our surveys indicate strong FTB investor appetite. The changed underwriting requirements however are having an impact.

There are a number of drivers to this trend. First, most first time buyers were unable to afford to purchase a property to occupy, in an area that made sense to them and were being priced out of the market. Next, many were anxious they were missing out on recent property gains, so decided to buy a less expensive property (often a unit) as an investment, thanks to negative gearing, they could afford it. They often continue to live at home meantime, hoping that the growth in capital could later be converted into a deposit for their own home – in other words, the investment property is an interim hedge into property, not a long term play. Some are also teaming up with friends to jointly purchase an investment, so spreading the costs. In fact about one third who purchased were assisted by the Bank of Mum and Dad, and would consider an investment property by accessing their superannuation for property investment purposes, a bad idea in our view.

Given the heady state of property prices at the moment, this growth in investment property by prospective first time buyers is on one hand logical, on the other quite concerning. We would also warn against increasing first time buyer incentive.

Remember, also the data refers to loans, not property transfers, and we know from our surveys that additional purchases were made without the need for a mortgage by overseas investors, and local purchases cashed up thanks to the Bank of Mum and Dad.

Turning to the reasons why first time buyers are going down this track, our analysis of buyer motivations draws some striking observations. We see that the prospect of potential capital gains is now the highest rated driver at 30%, whilst the desire for somewhere to live is just 27%. We see the prospect of gaining tax advantage is growing, now up to 10%, whilst the advantage of a First Home Owner Grant (FHOG) is falling away as these grants become less accessible (6%). Fewer buyers now expect to pay less than renting, whilst the prospect of greater security remains about the same.

So putting this together, we conclude that first time buyers are reacting to the current house price boom in logical ways. They are however being infected by the notion that property is about wealth building, rather than somewhere to live. This notion, which served previous generations quite well (once they were on the property escalator), may be tested if interest rates rise later, or property prices fall from their current illogical stratospheric levels. The overriding result from the survey is the first time buyers are very fearful of missing out, and that delaying potential entry into the market will simply make it less affordable later. Recent changes to underwriting standards may cramp their style, but we still expect to see a continued rise in the number of first time investor buyers.

FHBs Flocking to Investment Properties

According to Mortgage Choice, a growing number of first home buyers are choosing to purchase an investment property before they purchase an owner occupied dwelling. This is consistent with DFA’s previously reported analysis.

According to Mortgage Choice’s latest Investor Survey, 36.6% of investors were first time buyers – significantly higher than the 21.1% recorded this time last year.

Mortgage Choice chief executive officer John Flavell said the results weren’t surprising given that property prices continue to rise substantially across Australia’s capital cities where “most people want to live”.

“Australians increasingly want to live close to work and where the action is, which is why most people like to live as close to the capital city centres as possible. Of course, with prices rising across most capital cities, purchasing property near or close to the city is becoming increasingly difficult for buyers – especially first home buyers,” he said.

“As such, we are seeing an increasing number of first time buyers purchasing investment properties before an owner occupied property as this allows them to buy where they can afford and still live where they want to.”

Mr Flavell’s comments were echoed by the data, with one in every four first time buyers admitting that they had purchased an investment property before an owner occupied property because it was more affordable.

When asked why they had purchased an investment property first, 26.6% of respondents said they could more “easily afford it”, while 26.5% said it allowed them to “get their foot onto the property ladder”, and 18.9% said it allowed them to “buy where they could afford and still live where they want”.

But while there are plenty of good reasons why first time buyers choose to purchase an investment property before an owner occupied dwelling, Mr Flavell said he wouldn’t be surprised to see a slight reduction in the number of first time buyers purchasing investment properties next year.

“As a result of APRA’s decision to cap investment lending growth at 10% for lenders, many of Australia’s banks have started to make some sweeping changes to their investment lending policies,” he said.

“Moving forward, I think we can expect these changes to reduce the current level of investment lending. Unfortunately, it won’t be the middle-aged, middle-class or foreign investors who are locked out of the market, it will be first home buyers – those struggling to get a start. And I can see the gap between the ‘property haves’ and the ‘property have-nots’ widening as a result – especially if property values in markets like Sydney and Melbourne continue to grow.”

The Rise, and Rise, and Rise of Investor First Time Buyers

DFA has just released the latest analysis of survey results which shows that nationally 35% of all First Time Buyers are going direct to the Investment sector. However there are significant state differences, with more than fifty percent of transactions from first time buyers in NSW, and upticks in other states as the behaviour spreads. You can watch our latest video blog on this important subject.

Here is the data we used in the video. The first chart shows the national average picture, using data from the ABS to track owner occupied first time buyers (the blue area), data from DFA surveys to display the number of FTB investment loans (the yellow area), both to be read from the left hand scale, and the relative proportion of loans using the yellow line on the right had scale. About 35% of loans are going to investment first time buyers.

In NSW, the rise of investors has been running for some time, and as a result, more than 50% of loans are First Time Buyer investors. Note the growth thorough 2013.

In QLD, until recently there was little FTB investor activity, but we are seeing a rise in 2014, to a peak of 12%

The rise of FTB investors in VIC started in 2013, but is now growing quite fast, to about one quarter of all FTB activity.

Finally, in WA, where OO FTB activity is quite strong, we are now seeing the rise of FTB investors too. Currently about five percent are in this category.

There is a clear logic in households minds. They see property values appreciating in most states, yet cannot afford to buy a property for owner occupation in a place where they would want to live. So they choose the investment route. This enables them to purchase a cheaper property elsewhere by grabbing an investment loan, often interest only and serviced by the rental income. In addition they get the benefits of negative gearing and potential capital appreciation. Meantime they live in rented accommodation, or with families or friends. About ten percent of recent purchasers have received some help from “The Bank of Mum and Dad“. Finally, some see the investment route as a means to build capital for the purchase of an owner occupied property later, though others are now thinking more in terms of building an investment property portfolio. They are on the property escalator, with the expectation that prices will continue to rise.

There are some significant social impacts from this change, and there are probably more systemic risks in an investment loan portfolio, which should be considered. We are of the view that the recent APRA “guidelines” will only have impact at the margin, so we expect to see continued growth in FTB investment property purchases for as long as interest rates stay low and property values rise.

WA Budget Kills First Owner Grants For Established Property

In WA’s 2015 budget, first time buyers wanted to purchase an established property will loose the ability to tap into the $3,000 FHOG. It had already been reduced for established buyers from $7,000 to $3,000 in 2013. However, the FHOG remains unchanged at $10,000 for those wanting to build their first home. Treasure Mike Nahan said the change was in line with the State Government’s policy objective of focusing financial support on residential construction. Cutting the grant for first time buyers purchasing established homes will be a saving of about $109 million for the State Government over four years.

In other changes, whilst stamp duty concessions for first home buyers of both new and established homes remain unchanged, a new $300 flat land tax scale will come into effect in 2015-16 for land with an unimproved value of between $300,000 and $420,000. This new “flatter” land tax scale is expected to raise an additional revenue of $184 million in 2015-16 and about $826 million over the next four years. Those properties with an unimproved value of less than $300,000 will be exempt.

We think FHOG should be abolished entirely because it distorts the market, but the removal from established dwellings makes perfect sense. You can read our background discussion on why FHOG’s are bad news here.

Investor Loans Still Hot – ABS

The ABS released their housing finance data to March 2015. Pretty common story, with the trend estimate for the total value of dwelling finance commitments excluding alterations and additions rising 0.8%. Owner occupied housing commitments rose 0.8% and investment housing commitments rose 0.8%. In trend terms, the number of commitments for owner occupied housing finance rose 0.4% in March 2015.

In trend terms, the number of commitments for the purchase of established dwellings rose 0.7%, while the number of commitments for the construction of dwellings fell 1.4% and the number of commitments for the purchase of new dwellings fell 0.1%. The growth in investor property loans continued, with more than half in March (excluding refinance). Refinancing also grew in value and in percentage terms, from 18% of all loans a year ago, to over 20%, stimulated by ultra low rates.

Looking at the First Time Buyer data, in original terms, WA had the highest share of FTB, and NSW the lowest.

The percentage of FTB compared with all dwellings is relatively static.

However, if we overlay the DFA survey data on first time buyers who are going straight to investment property, this continues to rise, and pushes the true number of FTB higher. We continue to see a rotation away from owner occupation to investor first time buyers.

NAB Validates DFA Research On Property Investors

The recently released Quarterly Australian Residential Property Survey Q1 2015 from NAB, included some data which chimes with DFA research (and highlights again that the FIRB do not have their figure on the overseas investor pulse).

First, with regards to First Time Buyers, NAB says that the say that around 1 in 4 purchases are being made by first home buyers (FHB), both as “owner occupiers” but also as “investors”. FHB going direct to the investment market was a theme we covered on the blog.

First homebuyers (FHBs) still account for around 1 in 4 of all new property sales, but the share of demand from FHBs owner occupiers fell to 14.7% while FHBs investors rose to 10.1%. Owner occupiers were broadly unchanged at 33.1%, while local investors were down slightly to 24.1%.”

Second, Foreign buyers were more active in new housing markets, accounting for 15.6% of demand.

“There was however a notable shift in activity by location with the share of foreign buyers in NSW rising to a new high of 21% and falling to 20.7% in Victoria (from 33% in Q4 2014)”

In contrast, foreign buyers were less active in established housing markets, with their share of national demand inching down to 7.5% (8.7% in Q4’14).

Foreign buyer demand fell notably in Victoria (8.6%) and to a lesser extent in Queensland (5.1%), but increased slightly in WA (6.1%) and was broadly unchanged in NSW (11.2%).

Nationally, 53% of all foreign purchases were for apartments, 30% houses and 17% for re-development. The bulk of foreign buyers (41%) spent between $500k to <$1 million, with 30% buying properties less than $500k and 5% buying premium property in excess of $5 million.

Once again, this chimes with our research, when we showed a similar level of activity below $1m, and significant foreign investor activity in Sydney and Melbourne.

Owner occupiers are still dominating demand for established property with a market share of 42.4% (42.6% in Q4’14), followed by local investors with a 21.6% share (22% in Q4’14). Property professionals estimate FHBs (owner occupiers) accounted for 15.8% of total demand for established property in Q1’15 (16.1% in Q4’14), with FHBs (investors) making up 10% (9.3% in Q4’14). Foreign buyers were less active in this market in Q1’15, with their share of national demand inching down to 7.5% (8.7% in Q4’14). Foreign buyer demand fell notably in VIC (8.6%) and to a lesser extent in QLD (5.1%), but increased slightly in WA (6.1%) and was broadly unchanged in NSW (11.2%).

At the national level, capital growth expectations for the next 12 months have strengthened in all price ranges in both the housing and apartment markets. Capital growth expectations are assessed as “good” for all houses below $2 million and for apartments below $1 million. Expectations for capital growth at all other price points are assessed as “fair”. By state, expectations for capital growth continue to be strongest in NSW at all price ranges in both the housing and apartment markets, and significantly stronger for apartments valued at below $ 2million. In contrast, capital growth prospects are clearly lagging in WA at all price points, but especially at price points above $2 million, where prospects are considered “poor”

ABS Tweaks First Time Buyer Data Again

The ABS released updated data for housing finance for February 2015 today. As a result the number of first time buyers in the data changed a little. The chart below shows the variation on a monthly basis between the latest revisions, and the earlier figures. They warn that further changes should be expected. The net impact is a fall in the count of first time buyer loans written. The total number of loans recorded does not change.

From the December 2014 issue, the ABS changed its method of estimating loans to first home buyers by adjusting for under-reporting by some lenders that only report on those buyers receiving a first home owner grant. Data on first home buyers are collected by the Australian Prudential Regulation Authority (APRA) under the Financial Sector (Collection of Data) Act 2001. The ABS and APRA continue to work with lenders to ensure that loans to all first home buyers are identified in future, regardless of whether or not buyers receive a first home owner grant.

The model developed by the ABS for lenders who are under-reporting loans to first home buyers draws on the ratio of first home buyers to total loans for those lenders reporting correctly. The new estimation method will continue to be used in future releases. Monthly First Home Buyer Statistics are likely to be subject to future revision, as the modelled component is adjusted to reflect improved reporting by lenders.

The information paper Changes to the method of estimating loan commitments to first home buyers (cat. no. 5609.0.55.003), released on the ABS website on 4 February 2015, describes the new methodology and the extent of revisions to previously published estimates.

Latest DFA Survey – First Time Buyers Motivations and Barriers

We continue our series using data from the latest DFA segmented household surveys. First time buyers are more than ever becoming property speculators. Whilst we have already quantified the number of first time buyers and first time investors in the market,

today we look at their underlying motivations. So, looking at these trends there are some striking observations. We see that the prospect of potential capital gains, is now the highest rated driver at 32%, whilst the desire for somewhere to live is just 28%. We see the prospect of gaining tax advantage is growing, now up to 10%, whilst the advantage of a First Home Owner Grant (FHOG) is falling away as these grants become less accessible. Fewer buyers now expect to pay less than renting, whilst the prospect of greater security remains about the same.

The biggest barrier to purchase are clearly current prices. This translates into too higher mortgages, or too bigger savings requirements to get into the market. The bank of “Mum and Dad” remains a prime source of funding. Fear of unemployment has diminished, whilst the problem of finding a place to buy has increased (now 22%). The impact of potential interest rates reduced slightly, in response to the RBA cut, and expectation of lower rates for longer. Many now assume rates will stay low for at least three years, and they plan on this basis.

Looking at where they will buy, 20% of potential first time buyers are not sure where to purchase. Across all Australia a suburban home is still the most desired property type, but in Sydney, a unit is much more the expectation now, mostly on the urban fringe, or inner suburbs.

If we look at the split between owner occupied and investor first time buyers, we see investors are predominately going after units, either on the edge of the City (inner suburbs – e.g. in Sydney Hurstville, Wolli Creek), or suburban units.

So putting this together, we conclude that first time buyers are reacting to the current house price boom in logical ways. They are however being infected by the notion that property is about wealth building, rather than somewhere to live. This notion, which served previous generations quite well (once they were on the property escalator), may be tested if interest rates rise later, or property prices fall from their current illogical stratospheric levels. The overriding result from the survey is the first time buyers are very fearful of missing out, and that delaying potential entry into the market will simply make it less affordable later. This is why we expect to see a continued rise in the number of first time investor buyers.

Latest DFA Survey – Drilling Down On Overseas Investors

Over the next few days we will be posting the results of our latest household surveys. We are going to start with the hot investment segment, and look specifically at the vexed question of the proportion of overseas investors buying investment property for the first time. This is a tough data set to capture, because by definition such households are hard to contact, or prefer not to talk and they do not use an Australian mortgage. However, we devised a proxy set of questions focussing on funding sources, and as a result we now have a view of the proportion of first time investors in the market, and the overseas mix.

Taking the January data as a starting point, ABS tells us that there were 5,961 loans to owner occupied purchasers. In addition, we identified a further 3,661 first time buyers getting a mortgage for investment purposes. These amount to 35% of loans who are not identified as first time buyers in the ABS data, but are in the overall loan volume data. 8%, or 850, require no mortgage at all, and do not show in the mortgage statistics. We would need reliable purchase transfer records to get at the true picture, something not readily available.

From our surveys we teased out the funding options that first time buyers went with. 36% of deals used an interest only mortgage, 41% used a standard repayment mortgage, but the rest, 850 transactions (8%) did not require mortgage funding from an Australian bank but rather used other sources including parents, or were an overseas purchase.

We can dissect these purchases based on funding. About 125 were local purchasers without finance, over 200 were financed by parents and under 100 financed from other sources. However the most significant number was the 415 by overseas investors, using funding from offshore.

Looking at these 850 transactions through the lens of our surveys, we found that more than 550 were in NSW, more than 200 in VIC and a few sprinkled across the other states. This equates to about 4% of all first time buyers and 9.2% of investor first time buyers. Enough to more than move the dial, especially given the concentration in Sydney.

Next time we will look at investor motivations, and future plans. We think the investment housing boom is likely to continue to run, as more investors get the bug.