Aussie Dream

Government handouts, tax concessions and low interest rates are a lethal combination, especially when they are targeting the young first-home buyer.

Many first home buyers were lured into the residential housing market by government handouts and cash rates at stimulus levels (3.00% at 8 April 2009) and couldn’t get onto the property ladder quick enough.

The result has been significant property price growth over the past few years as the stimulus brought forward a whole generation of homebuyers.

Many who took advantage of the generous offerings have made a considerable return on their investment in a relatively short period of time.

Consider now the GFC, spawned from the sub-prime home loan debacle in the US – a phenomenon generated by lenders offering home buyers minimal deposits and honeymoon interest rates.

Sure enough, once the honeymoon was over, interest rates reverted to their long term average, considerably above the introductory rates and as a result, thousands of borrowers defaulted on their repayments.

So what does this all mean for those stuck in the rental market, struggling to save a sufficient deposit to purchase their first home? Those who quietly revel in hearing a mortgage owner complain of interest rate rises and think of the positive impact that each rise has on their savings account?

Australian lenders seem to have learned their lesson from the GFC; the days of 0% or even 5% home loans are all but over. Lenders are now demanding a minimum deposit of 10% and in most cases 20%.

This is not easy to save when you factor in rising rents, petrol and energy prices and grocery costs – not to mention artificial house price growth spawned by the Government handouts.

According to the ABS Established House Price Index, property prices have grown an average of 18.4% across major capital cities and 21.4% and 24.3% in Sydney and Melbourne respectively for the 12 months to June 2010.

So while a $400,000 loan purchased in June 2009 might have required a 20% deposit of $80,000, a home buyer considering buying the same property today would require a loan closer to $473,600 and a $94,720 deposit – an increase of just over 15% (or just under $15,000).

In light of all this, have renters missed the boat? The Government’s property stimulus is on the way out and interest rates are on the rise.

We are forever being told that there is a housing shortage and exploding demand. The number of investors significantly outweighs the number of home buyers and it has never been easier for international investors to access the Australian market.

How then can property prices retract?

The current cash rate is 4.5%. That’s 1.5% higher than the April 2009 low and still stimulatory, yet recent research by CoreData suggests mortgage stress is beginning to appear.

If home owners – and in particular younger first time home owners – are beginning to feel the pinch of rising monthly repayments on their lifestyle, as the research suggests, what will happen should rates continue to rise?

How many more interest rate rises can the market sustain?

Only time will tell whether demand will continue to buoy prices, even if stressed mortgage owners are forced into fire sales, or whether renters will realise their Aussie Dream a little sooner than they expected.