Saving that extra $20,000 is the drag causing first home buyer slump

BIS Shrapnel’s Angie Zigomanis recently put the current absence of first home buyers in capital city property markets squarely at the feet of state governments.

But he could have also pointed the finger at the Federal Government, past and present.

The BIS Shrapnel economist noted the first home buyer absence was due to successive state budgetary changes allocating first time housing incentives to new homes, not established homes, rather than the recent rising house prices.

The removal of the generous grants stamp duty concessions to buy existing homes has reduced the borrowing power of first home buyers.

Forcing them to save longer for a deposit is the immediate enduring outcome, but the question in the back of many industry observer minds is possibly could these potential buyers actually stick to renting well into the future?

Put bluntly a NSW first home buyer now needs an additional $20,490 to buy an established house costing $400,000, assuming a loan-to-valuation ratio of 85 per cent.

“These losses in buying power have reduced the capacity for first home buyers to enter the market immediately after incentives have been reduced,” BIS Shrapnel’s Angie Zigomanis recently told the Australian Financial Review.

Angie Zigomanis suggests some first home buyers are ­sitting out and building up a bigger deposit to compensate for the lost incentives "while others are saying it’s just too hard and are choosing to continue to rent instead.”

His comments came before the latest ABS housing finance loans approvals for November were released earlier this week. 

The first home buyer market remained subdued, with their share of total loans to owner-occupiers moderating a little to 12.3 percent in November, from 12.6 percent in October and 15.8 percent a year ago.

Most notably in Victoria lending to FHBs slumped 37% between June and November in response to their July 1 change in available government incentives. According to the data, 12.2 percent of loans were to first home buyers in November 2013 in Victoria. It's worse in NSW, first-home buyer activity remained at 7.4 percent, just above the record 6.8 percent low in September.

Governments - especially the Napthine Government - can't say the outcome wasn't foreshadowed.

In April I wrote that the decision by the Victorian Napthine Government to scrap its first-home owner grant for established house and apartment purchases from July 1 was "simply extraordinary."

They only had to look north to NSW and Queensland to see the folly of their new scheme but the Victorian treasurer Michael O'Brien suggested ending the first home grant for established houses was smart as it brought Victoria into line with other states.

The decision by first home buyers not to buy in NSW has actually assisted the O'Farrell Government with a budget savings windfall given the dramatically reduced take-up of new home acquistion by first time buyers since the NSW $7000 first home owner grant for established properties ended on 30 September 2012. The scheme established to assist first home owners instead to purchase or build a new home with a $15 000 grant has operated from 1 October 2012.

NSW first home grants recipients remain low.

The same experience in Queensland which ended its $7000 basic grant scheme in October 2012, replacing it with a $15,000 grant for new homes. Latest Queensland figures show a severe drop.

Ray White chairman Brian White was quick to sense the new fhos grants were distorting the market “and not in a healthy way".

“It’s no longer a first-home buyer’s grant but a builder’s incentive,” said White who labelled it deceitful to describe it as a first-home buyer’s grant.

Technically the Federal Labor Treasurer Wayne Swan abdicated his responsibility when it came to bringing the states into line appearing happy to allow the state governments to break their commitment to offer “universal” first-home owner grants.

But don't think the Federal Liberal Treasurer Joe Hockey will call in the state treasurers and knock heads.

You'd like to think Joe Hockey would actually be among the property industry observers, who like me, think any first home buyer's grant as mostly mis-directed - creating unnecessary market distortions - and creating a gift for vendors.

But he's on record as saying the rejigging of their assistance packages for housing are an effective way in boosting the supply of new stock. Joe Hockey reckons the problem in the housing market is not a lack of demand but rather a lack of supply.

"I particularly like what the NSW government is doing in this area although it is not the only one," Joe Hockey said in the lead-up to the recent election. "I also believe the Victorian government is going down the right track," he said.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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