Impending Hangover

Fewer punch-drunk first home buyers are staggering into the housing market party as the federal and state leg-ups – fuelling a new debt binge at the lower end of the market – approach last orders before closing-time later this month.

In Victoria alone, these hand outs, have led to a 9.2 per cent spike in average loan values between July 2008 and 2009 – during what has been economically the most unstable and volatile period in living memory.

Despite the run up, some predict there is time for one last tipple – after new data released this week revealed 19,000 more first time purchases were made in May 2009.

This was driven by a flood of buyers entering the market in an attempt to access the various federal deal-softeners ahead of the then scheduled cut-off in June.

Though after the May Budget extension, by July first home buyer numbers crashed 10 per cent to 17,200 compared with May, with the average loan down 5 per cent, or $12,700 to $269,100,

This directly highlights the impact newbie home buyers are having on average loan sizes in Australia.

Victoria, in particular, reveals this phenomenon, as the state’s own additional grant enticers lessened the drop off in first time purchases – decreasing only 6 per cent from the May peak in July.

Meanwhile a notable drop off took place in two other key states with a 14.2 per cent reduction for the same period in New South Wales and 14.9 per cent in Queensland.

Despite Victorian first home buyer numbers appearing more stable than New South Wales and Queensland, this actually creates a much bigger problem in that more Victorians are being encouraged to over-extend their debt obligations by continuing to inflate property values at the lower end of the market.

For the year to July 2009 – the duration of the global financial crisis and broader economic instability – state and federal government grants encouraged Victorians to borrow an average 9.2 per cent, or $21,600 more, pushing the average first home buyer loan to $255,600.

The pending reduction in the first home buyer boost in September, will possibly only encourage any remaining would-be first home buyers who don’t want to miss out to jump into the market.

In the short term, pushing purchase prices and loan levels higher for August and September, and locking even more into the debt trap of trying to service loans taken out on properties at a future value – with the added problem interest rates are certain to rise before the end of the year.

Let’s just hope these first timers can keep their jobs and that the RBA has the timing right in the event of a period of monetary policy tightening.