The Property Chain

In comparison to first home buyers – and even owner occupiers, investor activity has been dominant over the previous 12 months which is no surprise - banks are ‘bidding’ for buyers in a highly competitive market, reducing interest rates principally on fixed term loans outside of the RBA’s cash rate cycle and if the right property is sourced, current rental yields are also offering attractive returns. 

However, first home buyers have seen their savings eroded and as the latest ABS finance data outlines, intermittent FHB ‘cash injections’ or the oft quoted myth that rising yields are pushing greater numbers into the ‘market,’ is having scant effect on a sector for which saving a deposit and sourcing a suitably affordable property is no easy task.

It’s not being sensationalist to emphasize, that despite all our statements regarding improved housing ‘affordability,’ and half hearted attempts from both state and federal government to inflate the market with incentives that fail to offer long term solutions - the results for initial buyers are overwhelmingly clear and will consequently bear an effect on the future of both our real estate market and economy as a whole.

The latest figures from the ABS show the number of first home buyer loans in December 2012 fell to 14.9 per cent.  It’s the fourth consecutive month that this segment of the market has been in decline.  Further information from R P Data’s latest ‘media release,’ indicates housing finance activity by first time buyers is -17 per cent below the average figures recorded over the previous 11 years leading to 2012.

A further drop in variable rates currently being offered by a proportion of lenders, may inspire a bit of latent activity – however they are all ‘short term’ fixes and you have to wonder what effect will result when rates eventually rise - especially if wage growth doesn’t match pace.

According the R P Data’s calculation of ‘annual’ price changes (which they’ve ‘assumed’ based on 6 months of statistics) – house prices are already rising “faster than wages and disposable household income growth.” Any help first home buyers get on the borrowing side – they’ll inevitably lose on the other.

We’re losing a valuable demographic of property buyer which will have a ‘flow on effect’ across the property chain as a whole. As the changes push through the generation gap - increasing numbers will retire whilst still factoring as short term renters.

In lieu of first home buyer participation, the predominant activity in the inner city ‘affordable’ sector of the apartment market – activity which is filtering into capital city ‘median unit’ price rises (which APM suggest in Sydney alone, rose to ‘record heights’ over the latter half of 2012) – is being fed by investors.

Investors are managing to drive up property values in this sector all by themselves without the added injection of ‘home buyer’ emotion. Two investors going ‘head to head’ is something I commonly see whilst doing the auction rounds on a Saturday. 

Certainly most ‘off the plan’ and new unit developments are sidelined for this demographic (usually via off-shore funding) – however, investors are also predominant in the ‘established’ apartment market which would otherwise be favoured by first home buyers and perhaps provide a supply of accommodation an initial buyer would be willing to stretch their budget for, if ‘gifted’ the opportunity to do so. 

The percentage of ‘investor owned’ apartments in both Darwin and Brisbane falls close to 70 per cent– and in the other capitals, it comes in between 60 and 70 per cent. 

As we’re all aware, property to some extent connects together like a flowchart. Supply is fed in from the bottom to allow those upgrading – (and then downsizing) - a ready market to sell into in order to ‘make the move.’

However, when investors predominantly negatively gear into the asset class most favoured by first home buyers – which results in inflated property values - and State government fails to come to the party with ‘feasible’ affordable alternatives, our property ‘wheel’ of upgrading and downsizing becomes somewhat stagnated.

Investors tend to hold property for extended periods of time in order to build equity – many choose to invest as part of their SMSF and subsequently do not sell until retirement. Therefore the ready supply which would usually come from initial home buyers selling and upgrading, inevitably starts to slow.

For first home buyers able to stay in the family home longer, they may advantage from entering the property ‘train’ as an investor.  It won’t necessarily help the fluidity of the housing market, but it’s an option a limited number are taking advantage of. 

However, it’s clear from the 2011 census data that greater numbers are being forced onto the rental ladder and subsequently getting ‘stuck’ in the ‘yoyo’ of rising yields and a lack of affordable inner city options until they either meet someone with whom to combine wages – or gain access to the ‘mum and dad’ equity pot.

Proportionally we’re growing ‘older’ as a nation - census data tells us the number of 20-44 year olds has expanded on average by 4.6 per cent per year in the five year period leading up to the last census – however by 2020 it’s expected to slow to 1.2 per cent per annum – (a trend clearly demonstrated by the United Nations World Population pyramid which extrapolates the data out to 2050.)

Considering the predominant ‘home buying’ activity takes place within the ages of 22-44, it seems reasonable to assume that there’ll eventually be proportionally greater demand from those downsizing as we progress through these ‘buyer type’ changes.

However, if the flow on ‘home buyer’ effect doesn’t follow through, the ‘mis-match’ of household size comparable to property type will continue to stagnate our property ‘buying and selling terrain’ and further tie down supply in the areas most want and ‘need’ to reside – areas within easy commutable distance to city suburbs, jobs and essential amenities (schools, hospitals, doctors, public transport systems and so forth.)

Our census data already demonstrates that most lone person households are tottering around in accommodation that’s far too big for their requirements. Building an abundance of one bedroom apartments won’t suffice - only 14 per cent of the total single person households (of all ages) opt for one bedroom units. We therefore need a wider diversity of options (something I’ll expand upon in another column)

If we were building ‘homes’ that were viable for first home buyers to gain a foothold that would not only maintain consistent market demand in order to build equity for those wanting to ‘upgrade’ after seven or so years, but also provide feasible accommodation for this demographic to ‘settle’ for an adequate period of time – then having an ‘investor’ dominated inner city terrain could perhaps be ‘balanced’ somewhat so as not to affect the flow of our home buyer ‘property chain.’

However, as we all know, the ‘new’ home options are either limited to outer suburban estates lacking in infrastructure which every ‘Joe’ on the street recognises is an essential component needed at the ‘start’ of each project if we’re to lure ‘home buyers’ outwards, or alternatively - inner city high-rise ‘rabbit hutches’ which as I pointed out here, are neither desirable home buyer options and regardless – are also investor dominated terrains.

The lack of feasible and affordable ‘new’ alternatives - erosion of savings due to rate cuts - and the consequential ‘property stagnation’ is all producing a ripple effect of unfortunate consequences. 

The financial burden of fostering a rental nation in terms of tightening vacancy rates and competitive rising yields is obviously ‘unwise’ in terms of our national ‘well being’ however, there is no ‘one’ golden answer to solving the ‘home buyer’ property crisis,

A number options should be considered - including ‘reserving’ a proportion of high quality ‘new’ inner city accommodation for our home buyer demographic alone - reducing the ‘heat’ in the investment sector by way of tightening negative gearing incentives on multiple purchases, and considering changes to stamp duty as outlined in the Henry Review.

One thing we should not do is ignore the problem, or try and solve it by way of easy ‘inflationary’ credit.