Property market activity shifts to first home buyer territory

Changing market conditions and the return of first home buyers has created a very visible shift in the housing stock that is being sold in residential markets around the country.

Over the last half of 2008 there has been a fundamental shift in the type of stock that is transacting in the market place. Premium sales are fewer and sales of affordable housing have increased. These figures come as no surprise considering that first home buyers now represent more than one quarter of all owner occupied housing purchases; up from just 17% one year ago.

Over the second half of 2008, house sales priced between $300,000 and $500,000 accounted for 48% of all sales. Compared to the same period in 2007 this is a 5% increase in these more affordable sales.

Corresponding to the increase in more affordable housing sales, the higher priced end of the market has seen proportionally fewer sales during the last half of 2008.

This trend can be seen in varying degrees across each of the capital cities. The lower priced segments of the market, particularly properties priced between $300,000 and $500,000, have gained market share while higher price categories have lost market share.

Perth has recorded the most significant shift: houses which sold for more than $800,000 made up 16% of all sales in the second half of 2007 and just 10% of all sales in the second half of 2008.

An interesting finding from the analysis is that the absolute bottom end of the market; those houses priced under $300,000, have seen a reduction in their market share across most metro areas (apart from Perth and Sydney). Most first home buyers are seeking properties priced between $300,000 and $500,000 meaning properties at the ‘bottom of the barrel’ may be overlooked.

On a city by city basis, Sydney is achieving the highest proportion of million plus sales. Over the second half of 2008 these top end sales comprised 12% of all house sales. Melbourne and Perth were a distant second and third with million plus house sales making up 6.9% and 6.4% of the total house sales respectively.

First home buyers take advantage of strong buying conditions

The combined effect of the federal government’s First Home Buyer stimulus, historically low interest rates and prime buying conditions, has seen the number of housing loans for first home buyers jump.

The latest housing finance data provides an interesting insight into the Australian residential housing market. The number of finance commitments for residential housing, which includes all significant bank and non-bank lenders, has risen consistently from month to month since the first interest rate cut back in September. The increase in the volume of housing loans suggests the combined effect of the government’s stimulus and falling interest rates, together with market conditions that favour the buyer, are having a positive impact on consumer confidence in the residential real estate market.

On a seasonally adjusted basis, the volume of owner occupier loans jumped to 10.3% over the December quarter. The most dramatic jump in percentage terms has been for new housing where the number of loans is up 32% for the December quarter, suggesting the tripling of the First Home Buyers Grant for newly constructed housing is providing a real boost to the industry.

The lift in market activity has almost exclusively been concentrated in the owner occupier segment of the market. Despite a 2.9% rise over the month of December, the value of investment housing loans actually fell by 3.6% over the December quarter (seasonally adjusted) highlighting that investors are still mostly happy to remain on the property market sidelines.

This is good news for first home buyers, because fewer investors mean less competition. These two segments of the market often compete for the same housing stock due to the low entry price and generally strong rental yields. The prime buying conditions, where there is little competition amongst buyers, a lot of stock to choose from, and plenty of time to make a purchase decision, will probably not last much longer. The increase in the First Home Buyers Grant expires at the end of the financial year creating an increasing level of urgency. Although there is wide spread speculation the grant time frame will be extended, this is not guaranteed.

The most significant statistic is the rise in first home buyer loans. First home buyers now account for just over one quarter of all housing loans, compared to just 17% two years ago and 12.6% back in early 2004. On a state by state basis, first home buyers represented the largest market in the Northern Territory (27.4%), New South Wales (26.9%) and Western Australia (26.7%).

Most banks are now seeking a loan to value ratio (LVR) of 80%, which means first home buyers will need a deposit of 20%. Based on this assumption and the average loan amounts for first home buyers, we can estimate the average value of a first home buyer dwelling. In Tasmania, where housing prices are the lowest of any state or territory, the average first home buyer will need savings of approximately $46,325 to purchase a home worth around $230,000. In the Australian Capital Territory, where the average first home buyer is taking out a $297,600 loan, they will need a saved deposit of around $74,400 (keep in mind that Canberra is a relatively small first home buyers market).

It is likely the trend of greater first home buyer activity will continue, with anecdotal evidence continuing to indicate higher first home buyer turnouts at open homes and auctions. With more buyers active in this segment it is highly likely we will start to see upwards price pressure in this segment during the first half of 2009.

A silver lining in the storm clouds

It will be a tough year for everyone in property, but first-home affordability is rising, writes Mary Costello.

While it’s not yet clear whether we’re facing a grim slump or a full-blown depression, 2009 will be a difficult year in property for all concerned. Vendors are painfully reassessing the value of houses bought at peak prices, and the building industry is suffering, with housing approvals falling more than 10 per cent in Victoria in November.

Yet November also saw a significant rise in first-home buyer mortgage applications, following the increase in first home buyer grants combined with interest rate cuts. Housing is now more affordable than it has been for years for first-time buyers, and this year most residential building activity will be at the economy end of the market.

Nigel O’Neil, CEO of Hocking Stuart, believes that affordability is still on the rise. “Housing affordability is driven by four factors,” he says. “Income levels, which should remain stable and increase in line with inflation, notwithstanding the likely growing number of unemployed; interest rates, which are expected to continue to decline for at least the first half of 2009; financier lending requirements, including minimum upfront deposit and acceptable risk profile, which are expected to continue to tighten; and house prices.

“We’ve seen a wide variety of results across Hocking Stuart’s 37 locations. Comparing the prices of dwellings we’ve sold from the 2007 peak to the last six months of 2008, the average dwelling price has reduced by 9 per cent overall. When grouped by office average sale price, the results are quite varied.

“Considering all factors, although financiers are expected to tighten credit requirements, with income stable for the majority of the population that remains employed, interest rates continuing to decline and average dwelling prices marginally declining, housing affordability should continue to improve,” said Mr O’Neil.

Not surprisingly, it’s a different story in first-home buyer territory. In Melbourne’s north and west, house prices have risen in the past three months, and there’s been a surge in land sales in growth corridors.

Oliver Hume’s national general manager of research, Andrew Perkins, says project land sales rose by about 30 per cent in November, following the increase in first home buyer grants to up to $26,000 for new homes.

“Around 60 per cent of all Oliver Hume’s sales during November were to first-home buyers, many whom have been considering entering the market for months.”

He believes that the recent increase in land availability, to about 2400 lots in the Melbourne area, should also improve affordability.

The deadline for first home buyer grants may be extended beyond the original June 30. But until any extension is confirmed, if buying land, make sure that it will be titled in time to have contracts settled by the cut-off date.

Some mature investors will also benefit from the grants, as they seize the chance to eject adult children from the nest, easing their passage with a little financial help.

“We’re seeing a new breed of first-home buyer,” says Kingsley Andrew, general manager of Stockland Victoria. “They’re turning up with their parents, calling upon parental advice and financial assistance to get them into a house when the market is attractively priced. First-home buyer sales have increased considerably in Victoria. At Stocklands’ Highlands in Craigieburn, they’re up 25-30 per cent.”

Victoria now has some of the most affordable new home and land packages in the country, with developers and builders offering incentives including price discounts, materials upgrades and extra inclusions such as landscaping, driveways and luxury appliances.

At Evadene in Tarneit, one of Melbourne’s most affordable locations, Villawood Properties and Porter Davis Smart Living are offering home and land package for $240,743.

A little further out, in Wyndham Vale, Dennis Family Homes has packages for less than $240,000, while at nearby Bluestone, Sunland is selling the Vibe, a two-bedroom, semi-detached house on a small lot, for $222,100.

At estates across Melbourne, Metricon is offering fixed-price packages starting at $280,000, and topping up the first home buyers grant to $42,000.

At Vantage Point in Doreen, Australand has blocks from $147,000; at Carlisle Park in Cranbourne, house and land packages start at $249,000.

If you are retired, can telecommute, or just love the country, consider embracing life in regional Victoria.

Not only will you be spared capital city prices, you will be eligible for the regional first home bonus, bringing grants for new houses to $29,000.

At Wallara Waters in Wallan, 50 kilometres from Melbourne, land is available from $115,000. Near the snowfields, at the new Timber Jinker Estate in Marysville, $106,000 will buy a big block, with superb views, within walking distance of the main street.

King’s Cove at Metung on the Gippsland Lakes offers affordable coastal living.

This two-marina waterfront development is built around a golf course, with views from most blocks.

Lots are available from $95,000, with one house, land, furniture and landscape package on offer for $370,000.

Know your materials

You can produce small but critical savings all the way through a project:

Many builders calculate ceiling heights by the widths of plasterboard sheets; the maximum height of a ceiling depends on the availability of wider sheets of plasterboard.

Aluminium-framed windows – even of more solid, semi-commercial frames – are more economical than timber-framed windows, as there is little additional preparation time … no sanding, no painting.

Brick and masonry construction is being replaced by lightweight structural systems and cladding: much faster turnaround times and fewer tradesmen involved on site.

Use standard colours and sizes. Mass-produced powdercoat and Colorbond colours are more economical than a one-off colour, as are standard window and door sizes, and standard cupboard details for kitchens and bathrooms. Even with a non-standard feature such as a curved window-wall, standard size windows can be used. More affordable housing is also more sustainable. If the global financial crisis sees the end of the 40-square house for a family of four, something good will have come out of it.

How to avoid busting the budget

Clever design is the key for owner-builders who want to minimise costs, and a well-designed house will be a superior investment over time. Architect George Petridis is an expert in designing homes on a budget.

“Our developer clients are generally hard-nosed in their strategies: any decision has repercussions many times over. Their approach can also be applied in the design and construction of one-off family homes.”

Petridis’ tips for designing a quality, affordable home are:

Size matters. The most crucial element in building cost is size. The smaller, the cheaper. Building plans must be efficient so there is little waste in passages, few walls or doors, long vistas (to create a sense of space), and lots of light.

Keep it simple. Complicated plan shapes or highly articulated roofs cost. Bays, curves, angles, steps and changes in level, or hips, valleys and gables cause costs to soar. Simple buildings are faster to build, and reducing time spent on a project gives further savings.

Open-plan living. Open-plan and the use of long-span floor joists and roof trusses mean fewer materials and lower labour costs.

Sunshine Coast housing is affordable: Govt

A report naming the Sunshine Coast as one of the least affordable housing markets in Australia has been shot down by the Local Government Association of Queensland.

The Residential Development Council report, released last month, claimed the Sunshine Coast, Gold Coast, Brisbane City and Mackay were among the 10 least affordable housing markets in Australia, with residents allocating between 65% and 93% of median household incomes on mortgage payments for a median-priced home.

At the time the report was released, Coast experts said it was not an accurate reflection of the realities of the Sunshine Coast real estate market.

LGA executive director Greg Hallam agrees, saying the claim “seriously distorted the truth”.

“At the top of the RDC report was the Gold Coast,” he said.

“Incredible is the best way to describe the Gold Coast figure of 93% of median household income devoted to median house purchase.

“The most recent (2006) Australian Bureau of Statistics figures, based on the census, showed that mortgage percentage of median income was actually 33% for the Gold Coast, 34% for the Sunshine Coast, 29% for Brisbane City and 26% for Mackay.

“Even though this data is two years old, it is most unlikely the relativities between income and mortgage payments have changed significantly.”

Mr Hallam said he believed it was time the Residential Development Council “got real with its research”.

“Throwing up ridiculous, headline-grabbing figures such as they have done benefits nobody.”

Sunshine Coast homes least affordable

Sunshine Coast homes are among the least affordable in the world according to a recent international survey but local agents say buyers should not hesitate.

The fifth Annual Demographia International Housing Affordability Survey for 2009 compared average income with average house prices in 265 markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States for the final quarter of 2008.

The Sunshine Coast was ranked 265 with a 9.6 rating. A rating greater than 5.1 was considered severely unaffordable.

Honolulu was ranked second with an affordability rating of 9.1 and the Gold Coast was ranked third with 8.6.

Real Estate Institute of Queensland Sunshine Coast chair Jean Hamer said it was no surprise the local market appeared unaffordable because of the types of people moving to the region.

Ms Hamer said many retirees, with a low taxable income but “high net-worth”, moved to the Coast and bought homes at the higher end of the market.

She said this made it appear there was more of a gap between what people earned and what they needed to spend on buying a home.

There was no need for the market to adjust in light of the Demographia report, she said.

“It’s always been known the Sunshine Coast has a high number of retired people,” Ms Hamer said.

“People have got their investments sorted out and their taxable income is quite low.

“They invest maybe everything in the house.”

Ms Hamer said affordable properties could be found in railway towns such as Nambour and Palmwoods and buyers should not wait to see if prices drop.

“I don’t think the market will be any different in a few months,” she said.

Lloyd Edwards, from Ray White at Buderim, disputed the report and said that affordable homes were available but properties for sale at the lower end of the market could soon dry up.

“You can buy a two or three bedroom unit for around $240,000 which I thought would have been affordable,” Mr Edwards said.

“I’m not saying affordability is going to get worse but there is a shortage at the lower-priced properties and, perhaps, that will excacerbate.

“People would be best to buy sooner rather than later and ignore any adverse news.

“If rates go down in February, there will be low cost of living, low interest rates and, if we’re not careful, low supply.”

Mr Edwards agreed the large number of retired people living on the Coast could skew affordability results.

RBA lops rates by 1% to 3.25%

Today’s cut will save a mortgagee with a typical 30-year, $300,000 home loan about $170 in monthly repayments if the lender passes on the full amount. Over the life of the loan, the savings will total about $61,272.

”There was a significant deterioration in world economic conditions late in 2008,” said RBA Governor Glenn Stevens in a statement accompanying the cut. ”The effects on household and business confidence of the financial turmoil following Lehman’s collapse, and continuing strains on major financial institutions, saw a significant downturn in demand around the world.”

The RBA has now lopped four full percentage points off its cash rate since it changed tack and began cutting rates last September. The cash rate has not been this low since 1960, according to Bloomberg data.

The rate reduction comes hours after the Federal Government announced a $42 billion stimulus plan aimed at keeping the economy out of a recession. The spending includes some $12.7 billion in cash payments and $28 billion on new infrastructure projects including roads and schools.

“What they have done is certainly enough, put together with the fiscal package,” said Michael Blythe, chief economist for the Commonwealth Bank. ”Policy setting in Australia is very stimulative, although we are quite likely to see rates lower” in the first half of 2009.”

Double boost

The central bank said it had taken into account the additional government spending.

”The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” the RBA said in its statement.

Today’s RBA cut matched market expectations.

The Australian dollar initially jumped, rising from 63.5 US cents to 64 US cents after the RBA move. The benchmark ASX200 share index was recently 1.2% up for the day, easing from 1.4% higher shortly before the RBA release.

More cuts to come

The fact the RBA assessed the likely impact of today’s stimulus package indicates the bank may have been considering a bigger cut, said JP Morgan economist Helen Kevans.

Ms Kevan expects another 50 basis point cut when the RBA board next meets in March to complete the central bank’s current easing cycle.

Today’s RBA’s rate cut follows the Federal Government’s revision of growth forecasts for the economy. The Rudd Government expects Australia’s growth to slow to 1% this fiscal year to 0.75% next year – one of the few economies to continue to expand.

The RBA said Australia remains relatively strong.

”Australia’s financial system remains in a strong condition and large interest rate reductions over recent months have been passed through in substantial measure to end borrowers,” the RBA’s Stevens said.

”Nonetheless, the combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand.”

The Reserve Bank indicated it had more scope for cutting rates as inflation eases.

”Inflation has begun to moderate and, given recent developments, it is likely to continue to decline,” the RBA’s statement said.

Consumer prices fell by 0.3% in the December quarter, its first reduction since 1997, according to statistics released last week.

Three-year bond futures fell 0.085 points to 97.035, while 10-year bond futures shed 0.045 points to 95.870.

Rents holding steady or rising modestly

There has been a slight up-tick in median weekly rents in the December 2008 quarter, offering some respite to renters from the aggressive double-digit price growth witnessed in the early stages of 2008.

Particularly, the growing population of renters in units will be pleased to hear that their landlord’s appetite for hiking up the rent seems to be diminishing. Changes in median asking rents over recent quarters are gradually slowing. In Sydney, median asking rents increased by 4.7% for homes but recorded no change within the unit market. Canberra recorded the largest quarterly increase in the housing rental market with a rise of 5% while the unit and apartment market also rose by 5.3% or a nominal increase of $20 since the September quarter 2008. There were five regions that had not recorded an increase in median asking rents over the December quarter in the housing market where as the unit market recorded four coupled with a fall in median weekly asking rents on the Sunshine Coast.

For landlords, rental yields have risen very modestly, but are only slightly above short-term interest rates. The most attractive yields are, not surprisingly, in Darwin where median weekly asking rents in both the house and unit market has skyrocketed by an average of 22.5% over the last year. Yields in the Darwin housing market currently command yields of 5.38% while in the unit market it is 6.39%. Canberra is also commanding a relatively larger yield in the unit market. Most other regions are averaging 4.5-5%. This does not provide an adequate premium for potential investors to enter the market, and therefore supply additional rental accommodation. When the risk-free return almost mirrors yields in a market full of risk then further deep interest rate cuts would be required before investors depart with their cash.

There’s no immediate ease to the rental squeeze and the expected end to the First Home Owners’ Boost, in mid 2009, for new dwellings will not assist long-term price stability in the rental market.

That said, moderations in rental increases will be more evident as the constraints of a slower economy, falling incomes and higher unemployment reduce the willingness and capacity of renters to pay significantly more in Australia’s major capital cities.