Painful Inexperience
The flood of first home buyers pouring into the Australian property market is a worrying development at this time in the economic cycle.
As such, many may soon find the excitement of owning their own place short lived as job losses rise, house prices fall and instances of negative equity grow.
Over a quarter of the 7,673 mortgages, or 26.1 per cent, sold in February 2009 by Australian Finance Group (AFG) were to first home buyers.
This provides a strong leading indicator of Australian Bureau of Statistics housing finance data which lags by a month, given AFG accounts for a tenth of all mortgages sold in Australia.
Meanwhile the increased government grants for first home buyers have without doubt provided a stimulus, evidenced in AFG figures with 4,786 first home buyers in the three months to February 2009 – more than double the 2,316 for the corresponding period a year before.
But is creating higher household debt the solution?
The loan to value ratios, which is the loan expressed as a proportion of the value of a property, were 76.6 per cent and 75.0 per cent for New South Wales and Victoria respectfully, which AFG said were higher than normal due to the impact of first home buyers, who usually have smaller deposits.
The February average for all mortgages at AFG was $349,000, with borrowers running the gauntlet that interest rates will continue to fall, as only 2.5 per cent of new mortgages were fixed, even though Australian banks have already indicated passing on any more Reserve Bank of Australia official rate cuts will be difficult due to higher funding costs.
These indicators provide the scenario that first home buyers are borrowing more than ever before, spurred on by government grants and falling interest rates, all during a time when the global financial system is imploding, which undoubtedly will have a further negative impact on the Australian economy.
Job security continues to slide, with Australian unemployment in January 2009 increasing to 4.6 per cent, up from 4.1 per cent a year earlier, according to the Australian Bureau of Statistics.
Reserve Bank governor Glenn Stevens did though provide some positives in his monetary policy speech last week, saying, ‘The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers’.
But Stevens added the stark reality that, ‘Nonetheless, economic conditions are clearly weak, and given the speed and scale of the global economic deterioration and its effect on confidence, weak conditions are likely to continue in the near term’.
With unemployment rising, weak global economic conditions, and unsustainably low interest rates, Australia suffers the potential problem of enticing the financially inexperienced to load up with future levels of unserviceable debt, which is what landed us in this financial mess in the first place.
Debt Donkey says:
First home buyers taking on so much debt are crazy, they need a kick is the ass.
Andrew Jenkins says:
I have to agree – the Govt’s plan to help first home buyers may prove to be a poison chalice. Surely a good thing for first home owners is to see home prices fall, yet this “stimulus” package may just do the opposite. It’s certainly creating some activity …. but perhaps not activity that will “stimulate” anyone’s balance sheet except the vendors.
barefoot investor says:
I couldn’t agree more.
Today, I see a dangerous storm brewing.
First homebuyers are all but propping up the property market. After years of sitting on the sidelines they can now afford to buy. And with $21,000 (plus) from the Government, and interest rates at record lows, they can afford to borrow a bit more they email me about it all the time.
The banks understand this. So do the developers and the real estate agents. Yet as my mate, property expert Neil Jenman, says, committing yourself to the maximum when rates are at their minimum is a recipe for maximum pain in the future.
The storm will erupt in a few years time when many of these young homebuyers lose their jobs as a result of the prolonged economic downturn. Little savings, rising repayments, are ingredients for disaster (especially with an extra mouth or two to feed).