Why low interest rates aren’t enough for first-time buyers

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Despite rates at an all time high, the “time to buy a home” index has fallen over the past year. Here’s why.

For more than half a century, the “Big Australian Dream” has owned a house on a quarter acre block and pretty much the entire list of features included in the Burke’s Backyard theme song.

For most of this period, periodic rate cuts have been welcomed by potential homebuyers as calculations around the cost of mortgage payments have become a little more achievable.

This is evident from Westpac’s “Time to Buy Home” index, which has been around for 36 years.

When rates rise, consumer perception that the time is right to buy a home deteriorates, in some cases dramatically. Then, when rates are cut, the reverse usually happens as households become more optimistic about the buying potential under current circumstances.

That is until recently.

Despite the RBA’s cash rate at an all-time high of 0.1%, over the past year the ‘time to buy a home’ index has fallen to its lowest level in recent years. time before the financial crisis, excluding the sudden drop that occurred when Australia first entered lockdown.

This is undoubtedly due almost entirely to the surge in house prices since the end of last year or the beginning of this year, depending on the market in question.

In the United States, it’s a similar story. In the University of Michigan Consumer Confidence Survey, the percentage of people who say it’s time to buy a home is currently at its lowest level since October 1982.

It appears that pretty much everywhere in the world, house prices are rising, excluding potential buyers who could have afforded to buy before the pandemic.

In Australia, the impact of rising prices on first-time buyers has already become clear.

According to housing finance data from the Australian Bureau of Statistics (ABS), the number of new financing commitments for first-time buyers has fallen 22.8% and looks set to continue declining.

Yet despite the significant drop in the number of first-time home buyers and many Australians who seem to see the present as a bad time to buy a home, transaction volumes remain high.

Part of this is due to investor activity in the market, which has increased significantly since bottoming out shortly after Australia’s lockdown last year. Since May 2020, the volume of loans from real estate investors has increased by 124.7%.

According to home price data provider CoreLogic, the number of homes sold across Australia in the 12 months ending in August was nearly 598,000. This is the highest number of properties traded on a period of 12 consecutive months since 2004.

So we end up with a kind of paradox, a housing market where first-time buyers bow out and people generally believe it’s a bad time to buy a home. Yet at the same time, the housing turnover rate as a percentage of the overall housing stock tends to increase and is roughly in the long-term average.

While such divergences are not uncommon in the short term, it must be asked whether this has any implications for the long term future.

Is this the start of a new status quo where more and more Australians are homeless, where many households continue to see it as a bad time to buy a home overall, due to the high prices?

A new normal, where first-time buyers increasingly rely on parental support and ownership is increasingly concentrated in the hands of high-income households in some of Australia’s most expensive areas.

There is arguably some evidence that this is already happening.

According to research firm Digital Finance Analytics, in September, 58.8% of first-time home buyers were receiving some form of parental assistance to buy a home. During that month, the average level of parental assistance reached a record high of $ 94,784.

Or will Australians end up accepting these higher prices and choose another form of housing so that they can afford to be in their own home?

High levels of interstate migration from New South Wales and Victoria to Queensland suggest this may already be happening, as citizens of Sydney and Melbourne try to escape median house prices over a million dollars.

There’s also the rise of multigenerational households and the shift to working from home in a rural or semi-rural area, which has seen hundreds of thousands of Australians chasing a different version of the traditional Australian big dream.

Where from here?

For the immediate future, it seems there are more than enough investors, first time home buyers with parental help, and uptraders / downtraders to move the market forward.

But as prices continue to rise and more households are excluded from home ownership, others are put off by the sticker shock of high transaction costs such as duties. stamps and agents’ commissions, the demand for housing may start to decline over time.

With the uncertainties ahead as Southeast Australia reopens and the global economy stumbles, it’s unclear where long-term housing demand will go.

It may all depend on how many Australians are willing to abandon the pursuit of the traditional version of the Australian Big Dream and instead choose a different path to home ownership.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommenter


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