Walking past a local branch of one of the big four banks near my office last week I noticed a big banner which read ‘First Home Buyers Boom’. The word boom immediately caught my eye as it’s such an emotive term.
Real estate markets are often cast as either boom or bust however, either term I suggest is simply over simplistic. Property markets are complex and currently there’s an almost hysterical atmosphere that suggests a mystical ‘bust’ for some sectors of the residential market.
While, as the bank’s marketing might suggest, the question is; are we in a boom time for first-time buyers or indeed for buyers more generally?
It is true that in some market, not all, that we have seen house prices fall over recent months, auction clearance rates are down, or at best patchy and sales of new homes and apartments have slowed. Professional developers and private vendors are having to work harder to achieve results. I’ve even noticed the re-emergence of champagne being served at house openings which was a fad back in 2010.
Against this background of discounts and champagne should we be worried?
First-time buyers are also taking advantage of incentives in the form of relief from stamp duty, access to superannuation savings, deals from the banks and varied incentives from developers, including price reductions. There’s also far less competition from investors and off-shore buyers.
That’s clearly a combination of good news for first-time buyers that we do not often see.
However, the housing market is very local and regional and describing markets in simple general, average and sweeping terms, as the media tends to do, can over simplify conditions. Over almost any period of time it’s always possible to see some prices increase sharply and yet some will still decline.
Price variations also tend to vary between houses and apartments, a factor that is easily explained by how supply in each of the markets is very different. Although some readers will see this next statement as ‘old-hat’ property ownership and investment has always been a long-term investment option.
There are entry and exit costs to be considered and timing will usually have another set of impacts. Therefore, forced sales are always more difficult, but they do not represent the fuller extent of the market.
It’s simply not a market like any other, it’s not like buying any other commodity. If panic sets in for any reason, often headed by an over burden of debit or a dramatic change in family circumstances, then selling under such external pressures can be a problem. Although that may well create, if unfortunate for a seller, a good opportunity for a buyer.
It’s also true that talking about price changes in averages can hide the more complex nature of the market. Every transaction is different, driven by varied needs and circumstances.
Averages only tell part of the storey.
For example, I’ve seen house and apartment prices quoted as either rising or falling based only upon a very few transactions. Other measures include time on market and if sales have taken place above or below the original purchase price.
Supply and demand are dynamic influences and an over-supply in one sector of the market can damage confidence across all sectors with little justification beyond a loss of faith, and an inability to know that prices will not fall any further. Therefore, buyers hesitate, it’s only a natural reaction.
Any real estate purchase is a big investment and so when markets look unstable buyers will sit on their hands, thinking that a particular property might be cheaper tomorrow.
When price movements happen, they do not just happen in isolation, and are always tide into other social and demographic shifts taking place in the community.
One example being the downsize or right-size market, where price, supply and demand pressures are very different away from what’s driving the first-time buyer.
Even here the two are linked as mum and dad might be moving to release capital to help their children, there’s a lot of emotion at play. While markets have a distinctive character, they are interrelated.
‘How investors outgun first home buyers’ – this was the headline from the Sydney Morning Herald back in April 2016, and similar headlines become common place and more emotional, that is until recently.
At the time, this sort of media attention almost started to demonise investors, I suggest unfairly. Investors were stereotyped as somehow undermining the market and pushing up prices because they did not plan to live in the properties they were buying.
Back then, it was estimated that one in three buyers were investors, and in some price-brackets competing directly with first home buyers.
Investors were also buying properties at lower price points, because they were more rentable however, these properties were, and still are an important part of the total housing supply.
It’s fairly logical that if as a potential first-time buyer, you’re saving a deposit you will not want to be paying the top end of rents. Like off-shore buyers, investors should have the right and ability to be part of a free market.
We now see both these groups less active and openly discouraged from the housing market, finance and tax changes have played their part.
Would this have occurred without direct and indirect policy intervention, and with fewer investors active, will first-time buyers be the winners, or in the longer term will a smaller pool of rental properties result, and push up rentals?
Low Unemployment & Low Wage Growth
If lower house prices are to deliver a wider benefit then at least two other factors are important, the level of unemployment and wage growth. Both factors will be even more important if we see home loan interest rates rise beyond what the banks have already done.
Figures published last week by the ABS show that the unemployment rate in Australia has fallen to 5%. In the USA, they are doing better with a low 3.7%, but by historical standards 5% is a low rate for us.
We need to go back a decade, to just before the financial crisis of 2008, to see levels much lower than this, when the unemployment rate briefly touched 4%.
Allied with low unemployment we have also seen very low wage growth in hand with low inflation. If both inflation and interest rates increase then some of the advantages being enjoyed by first-time buyers will start to fade.
The last time local real estate values dropped was in 2010 as the impact of the GFC took hold, now almost a decade later, prices are facing more turbulent times, but the impact varies between different markets.
Real estate prices do rise and fall, there is no guarantee that we have seen the end of the current cycle however, trends are never uniform and currently first-time buyers are in the box seat. Helped in part by government policies and in some markets by pockets of over-supply.
Many factors; local, regional and national need to be taken into-account, along with timing. In the immediate future the outcome of the Banking Royal Commission, immigration policy and a number of elections are going to add to the complex mix that currently influences residential real estate prices.