Why I think 2019/20 is a great time for first home buyers
Updated: Aug 8, 2019
Property is expensive, there’s no two ways about it. Either you live in capital cities where we’ve seen massive growth over the last 10 years, you live in satellite cities where the travel costs to get to where a lot of the jobs are is expensive (and property prices have still been skyrocketing) or you live in regional areas where there are fewer job opportunities to pay for a home loan. Sure, there may be a few exceptions to this generalisation however for the most part I think it rings true for most people.
The recent changes in residential lending are some of the biggest we’ve seen since the deregulation of banking in the 1970’s. It started with APRA limiting the amount of investment and interest only lending banks could offer. Then, with the royal commission highlighting much of the profit over people mentality that has been occurring for decades, banks reacted by ‘closing the shop’ on much of the lending they would’ve had no problem with just months before.
This all happened at the peak of the property market, there’d already been many pundits reporting the ‘inevitable’ crash of the property market and indeed, property prices started to slip. As lending was restricted, so was buyer sentiment and for the first time in quite a while, we saw average property prices falling.
So with the doom and gloom of the previous paragraph, why am I so bullish about first home buyer opportunities at the moment?
The answer lies in psychology as much as it does lending criteria and legislation.
Buyer sentiment has seemed to improve, at least for the short term, since the government won the unloseable election. Had Labor won like most predicted, property investment would not look anywhere near as attractive as it does. Still, while there isn’t the restriction on property investment as there may have been with a Labor government, I still see this next year as a time that really splits property buyers into the ‘We have to have it’ and the ‘it would be nice to have’.
There are many reasons people want to buy their own home. Whether it be just to get into the market so they don’t miss out, having stability in a place to raise a family or simply to be able to hang photos without asking a landlord if they can nail picture hooks into a wall there is always one common trait. An overwhelming desire to get into that home.
Desire is a powerful emotion. If it translates into not just wanting, but needing something, it changes how we look at a problem. When we need something, we are looking for what needs to be done to get it. When we just want something, more often than not, we’re looking for the problems that will stop it happening.
Let’s look at some of the problems with buying a home from the perspective of someone who wants to buy a home vs someone who is thinking about investing at the moment.
As a first home owner, property prices have been a bugbear for years now. It’s been hard for people to keep faith that they’ll be able to save a deposit for the property they need when the prices and therefore the deposit required, keep rising.
Years of inflated property prices, banks restricting the lending they will provide based on applicant expenses and existing debts and investor concerns with the market mean we are more likely now to see slower growth than we have for some time. For the first home owner this means more stability in the price of the home they want to buy and a better opportunity to plan for that purchase. While an increase in the value of the property after it’s purchased is desirable, it’s not the main driver. A first home buyer wants to get into their home and stop paying rent. They’d rather put money into their own home even if the value goes down - it’s better than ‘dead money’ into someone else's mortgage.
As an investor, this looks quite different. Human psychology means most people struggle to really think about things over the long term.
The last 12 months of flat or negative property growth has a lot of people who 2 years ago would’ve been doing everything they could to buy more property ‘waiting to see what happens’.
Even though the best property investment strategies involve holding a property for 20 years plus, most investors can’t stop thinking about the next 12 months. Fear of loss is something most aren’t equipped to deal with. They can’t stand the thought of a property being worth less in 12 months than what it is now, regardless of what it’s likely to be worth in 12 years. This is a broad section of buyers who are no longer forcing the price of a property up - it’s a self perpetuating cycle.
There’s been a lot said in the recent royal commission about the metrics banks use to approve a loan. One of the main concerns addressed was living expenses. Studies have shown that ‘Liar Loans’ have been prevalent, applicants have been reducing their expenses to match what is required to be given a loan. Of course, with the backlash of the royal commission this has meant that there are now a lot of lenders who are in fact checking what people spend on a monthly basis - you can read a blog I wrote about this recently here
Okay, so this doesn’t help first home buyers, yet they are in a better position to handle this than the investor. When people have made the decision to buy a home, they’re generally already saving money to reach this goal. They’re less inclined to spend money without thought, after all, is that weekend away really worth more than buying a new home right at the moment? Therefore they’re already restricting their expenses and are less likely to have any issues should a lender check what they’re spending.
The investor has the issue of complacency. Most people spend what they earn. When there’s a goal we’ve turned into not just a want, but a need (like buying a home) then we ‘spend’ money by saving on achieving that goal. It’s not as easy for the investor - most want to invest, but they’ve been getting by with what they have so the desire is not generally a ‘need’. This limits the will power to not spend on lifestyle - this very well may limit their borrowing power. On top of this, most property investment will cost the investor each month - this is what negative gearing is all about. So they face their expendable income being reduced every month for a property they are already questioning if they will see the immediate growth they’ve come to expect.
Lenders also build buffers into the servicing calculators they use. Recently we’ve seen APRA reduce the servicing requirements enforced on banks (it used to be a minimum of 7% regardless of the rate the applicant was paying, it has now been reduced to a minimum of 2.5% above the rate the applicant would be paying). This works out well for all lenders. What inhibits the investor though is banks do not accept all the actual financial benefits of a property investment. The rules change for all the lenders though these are just some of the issues that face the investor:
Rental income - Banks will only generally only accept 75 - 80% of the income expected from an investment property. To meet serviceability criteria, the applicant will have to show their income can cover that additional 20-25%.
Negative gearing - Some lenders accept that there is a cash flow benefit to negative gearing, some don’t. If an investor is talking with a lender that doesn’t then they have to show they can meet serviceability without the tax benefits.
The more properties someone looks to own, the harder it is to show meet the criteria borrow against those properties.
Restrictions in lending to the investor makes it ‘all a bit to hard right now’. To the first home owner, it’s the ‘rules to get what we want’.
Governments want people to own homes. They also want new properties to be built - they need homes to house a rising population.
One great piece of legislation that came out a few years ago was the first home super saver. Unfortunately, this has been greatly underused by the wider public. The first release of this legislation had issues that made it difficult for first home owners to utilise, this has recently been rectified. The biggest issue with it I believe was superannuation advice is under different rules to mortgage advice. Therefore if a home buyer needs advice on how to use it correctly they either have to employ a financial adviser and a lender, or find someone that can assist them with both.
First home super saver means if you’re eligible to utilise it, you access savings for your home that can be at a significantly reduced tax rate compared to your normally taxed savings.
It reduces the ‘gap’ between the savings ability of the first home buyer and the investor that has tax and equity benefits.
Here in Victoria, the state government has stamp duty exemptions and discounts for first home buyers. If a property you buy is $600,000 or lower, you pay no duty. If it’s between $600,000 - $750,000 there is a discount of the duty on a sliding scale. A $600,000 property is $31,070 cheaper for the first homeowner than it is for the investor.
If the first home owner is buying a brand new home, or building one, then they have access to the first homeowners grant. This can be $10,000 for buyers in metro areas or $20,000 in regional areas. In most instances for people in metro areas, I think this is a benefit that’s best left for someone else to use. I explain more in this blog I wrote a while ago
The Coalition’s promise of the first home owners scheme might also save a considerable amount of mortgage insurance payable for a lucky few. The limit of this being available for 10,000 purchasers means it won’t be something many have access to however it’ll be interesting to see how this offer might grow over time.
Sure, investors still have access to some tax benefits that aren’t available to the first home owner. But the playing field isn’t quite as lopsided as it was a while ago. Again, these benefits are available to the people who have the most desire to buy property this year. Due to the restrictions on the price of a property that’s eligible for these benefits, it makes them more attractive to the first home owner. Sure, this means there are other first home owners you’re competing against, but it also makes the property less desirable to the investor. They don’t see it as competing for a home to live in. They see it as an asset that isn’t as valuable to them as it would be without first home buyers competing with a financial benefit. For the investor to remove the first home owner benefit from their competition, they need to invest in higher priced properties - this means even more money each month being ‘taken away’ from their current lifestyle.
As a population, we struggle to believe anything politicians tell us at the best of times. While the government won the election and put an end to the idea of investment restrictions for the time being, it’s likely there are many would be investors who saw Labor’s policies as a warning of things to come.
The possibility of change is likely to have put a lot of potential property investors back on the sideline, at least for a while.
First home owners still just have the one thing on their mind - doing what they need to do to get that home.
There’s been a lot of change in the property market over the last 12 months. There’s not been a change in the way people process problems though. First home owners are more likely to ‘need’ that first home than the investor ‘needs’ to get more skin in the game right now. This reduces competition, is likely to keep property prices more stable for the time being and gives the first home owner an opportunity to plan for their future in a way that might’ve seemed out of reach not that long ago.