First-home buyers are priced out of the market, and something must be done

By Catherine Cashmore

Tuesday, 04 October 2011

Single first-home buyers have a battle on their hands if they want to secure a property in today’s market, which is predominantly dominated by second-home buyers, investors, and young couples who are able to draw on combined salaries.  In fact the only time we see a significant rise in this sector of the market is during periods where generous incentives are offered by the government, which conversely does little to ease the pain for property buyers.  The resulting increase in competition caused by a temporary inflation of the economy – particularly in the inner- and middle-ring suburbs – makes it harder to get a foothold, not easier.

We only have to take a brief backward glance at the initiation of the first-home owner boost in 2008 to understand the advantages fleeting targeted schemes like this can effect. The post-GFC property boom was ignited by the first-home owner boost introduced in October 2008. During this period grant recipients accounted for 40% of overall housing turnover.

However, in Victoria it was the extra dollar incentives offered for purchasing new properties in the growth corridors that had the biggest effect on first-home buyer trends, and this was where the buying activity centred. Immediately following the introduction in November 2008 overall sales of new dwellings had increased by 1,764 to 11,695.  Melton, in Melbourne’s West, grew by 8.2%, equating to 7,535 new residents – an all-time high.  Other regions such as Deer Park (17 kilometres west of Melbourne’s CBD) recorded a 15.67% rise in its median value. And by January 2009 there had been 530 house sales recorded in Tarneit (25 kilometres south west of Melbourne), with prices increasing 21%. Werribee (32 kilometres southwest of Melbourne) and Point Cook (25 kilometres south of Melbourne) attracted the greatest number of grant recipients, with Werribee South recording a whopping 25.74% rise in its median house price, which was clearly unsustainable over the long term.

When the grant was finally scaled back demand substantially declined, and the effects are still being felt.  The REIV recorded a 4.3% decline in Werribee’s median house price over the last quarter alone, and according to RateCity, there have been 40,000 fewer first-home buyers entering the residential market in the year from July 2010 – 2011.

The decline has caused a two-tier rift in our property market and left home buyers in the outer-suburban regions facing a long road of potential property stress.  RP Data’s recent equity report shows that “3.7% of home owners across the nation are in a negative equity position,” which includes a significant proportion who purchased at the peak of the market (many of whom were first-home buyers).  Clearly, the reduction in demand following the drawback of the first-home owner’s boost and a sharp period of interest rate rises has taken its toll. Another report analysing mortgage-backed securities by Moody's Investor Services shows a worrying increase in delinquencies from those holding the least amount of equity in their properties. The report has produced a “heat map” for each metropolitan and regional housing market across the country and it reveals the greatest deterioration in mortgage performance is evidenced in those areas “radiating” away from our well facilitated metropolitan inner- and middle-ring suburbs – principally the outer regional areas.  These are the areas our first-home buyers flocked to during the boost and the areas that are now struggling with negative equity and an inability for buyers to bail out due to the reduction in demand.

On the other side of the coin the inner-metropolitan regions where most people want and need to live are fast becoming unaffordable for the majority of home buyers who don’t already have existing equity in the property market – principally first-home buyers.  RP Data now has 40 Melbourne suburbs listed with a median house price of a million dollars or more.  Furthermore, in its recent equity report Victoria came top of the list, with 71.4% of Victorians currently holding at least 50% equity in their property. Melbourne has also recorded the highest rate of capital growth over a five-year period (to July 2011), with dwelling values up 51.5%. The overall results of the report specified that the biggest gains were understandably in the capital cities – areas where job security is strong and vendors are under no pressure to sell. Regional “mortgage belt” areas containing the highest default rates dwindle some 10% behind.

Obviously Australia is suffering a housing dilemma, which is largely the result of our geographical landscape where more than 75% of Australians live in and around our major cities along the eastern and south-eastern costal planes.  The limited land available in these locations, along with a growing population of buyers and immigrants, naturally puts pressure on Australia’s metropolitan prices and even taking into account the recent soft market, which has slightly improved buying conditions across the country, it’s clearly splitting the housing market into a gradual rich/poor divide.

Luring people out of the metropolitan inner-suburban areas is the only obvious way to ease inner-city demand and consequently make housing more affordable. However any future plans to do so have to be sustainable and not fuelled with fly-by-night incentives. In Victoria, the state government’s answer to the shortage of housing has been to action urban land releases on former farmland in growth corridors such as Casey, Hume, Whittlesea, Wyndham, and Melton – areas lacking in public transport, adequate health services, and other amenities needed to support a growing population.  It was boldly stated that infrastructure would be provided in these areas to make them liveable for new home buyers; however this was to come in the form of a hefty new tax called the ”growth areas infrastructure contribution” – the GAIC.

As I understand it, the GAIC is levied if land is sold, transferred or subdivided, or if sizable building works are conducted. The cost can be up to $95,000 per hectare and essentially it falls at the feet of the purchaser, which further increases the underlying cost of purchasing. There is negligible encouragement for any new home buyer to move into these areas, and quite clearly it’s going to do little, if anything, to address the growing issues facing the practicalities of sustainable population growth.

We have a looming crisis on our hands, and the only way to solve it is to build suburbs with enough diversity and infrastructure to foster a sense of community.  Re-igniting the first-home buyer market and committing to a strategised plan to adequately facilitate the outer-metropolitan regions would be a great initial step towards addressing this issue. This means providing more than simply an abundance of “roof space” or high-rise inner- city rabbit hutches, it requires substantial hand-in-hand investment in schools, small business, open spaces, and transport facilities without which growth cannot be sustained. All in all, most owner-occupiers will admit the most valuable asset they own is their home – however it is no longer a right reserved for all – for a growing sector of our population, it’s fast falling out of reach.

Catherine Cashmore