Australia’s first home buyers get a $14,000 First Home Owners Grant, and $21,000 for first time buyers that build new home. In some states that can be more. Are these grants really pushing up home prices?
Well apparently two out of three of Australians believe the Federal Government’s first home owners grant is in fact pushing up house prices, a new survey shows.
In my opinion this is not true, and so I thought I would show you my reasoning on what is happening in the Australian Real Estate Market.
Real Estate 101
Lets look at a few time honoured laws that govern prices in real estate.
1. Property Value. The first law of real estate is that property is only worth what someone else will pay for it. When buyers are skinny on the ground, that should mean that prices will fall. Buyers have been scarce, but prices in general have held firm.
2. Supply and Demand. The second law is the Law is Supply and Demand. When you have more buyers than sellers, then prices will tend to rise. When you have more sellers than buyers then prices will over time tend to fall. First home buyers are setting records in property acquisition.
3. Ability to pay. The third law is that the ability to pay more will tend to have buyers pay more. The higher your incomes, and the bigger your deposit, and the better your credit rating, the more you can borrow.
4. Finance Availability. The fourth law is that the increased availability of finance will tend to see prices rise. Withdrawing the availability of credit will tend to make house prices fall. Australian banks are out lending money as if money is going out of fashion.
5. Cost of Money. The fifth law is that when the cost of finance falls, then the ability to buy is enhanced and more people enter the market. Each person can borrow more. More buyers will tend to make prices rise. Double whammy here.
6. Credit Standards. The sixth rule is that when credit standards are lowered, then home prices tend to rise. NAd credit standards have been tightened recently.
7. Fear of Loss. The seventh Law is fear of loss. Fear creates doubt and loss of confidence. When the perceived chance of losing on a home investment is in balance with the chance of gaining a profit, then the fear of loss wins, and the individual will not buy.
8. Knowledge and experience. The eight law is knowledge and experience. The more knowledgeable and experienced a buyer, then the lower the price will be on a negotiable sale, on the basis that their is more sellers than buyers. The longer you live the more you see things that have happened before.
If we glance over these “laws” we can quickly see that the First Home Owners Grant is just a small part of the reason why home prices would, if all things were equal, tend to make home prices rises. In fact there are many reasons why prices are rising or staying solid in the financial crisis, that in some way are impacted by the first home buyers grant.
So lets go over those eight laws and see if and if so why extending the First Home Owners Grant has affected home prices.
1. Property Value. Inexperienced home buyers have less knowledge than folks who have bought homes two or three times before. Experienced buyers are better in the main at understanding value. So First home buyers tend to make decisions faster, are more easily influenced by sales people, and don’t calculate all the costs of home-ownership besides the price. Once you have established a value for a home by sales, then the market tends to pay that price unless an event prevents people from buying. Modest job losses in Australia and lower job ads have not deterred young people in secure jobs and industries. In fact many young folks have seen their pays increase!
2. Supply and Demand. Property investors have retreated over the last couple of years. In fact many sold their property to invest in superannuation to gain tax advantages, only to see that market crash with the Stock market values. So as these investors came out of the market, then the first home buyers has taken up the slack, equalizing more or less the balance of the supply and demand. So the Government may have been priming the market to prevent a massive loss of values, rather than a house price rise.
We also need to consider the fact that in Australia we have less housing stock than is required to satisfy the market. So prices will tend to rise in any event, first home owners grant or not.
There are few builders who develop “spec” homes in Australia. Land Developers and builders here are separate business models here. But the the US many land developers also build out the estate. Many got caught in the downturn and had the sacrfice stock. This did not happen in Australia.
3. Ability to pay. Young people are getting healthy pay increases. Home buyers in their twenties expect that their pays will increase over time and the repayments will be less of a burden. Couples are putting off having children up to their forties in some cases so there are mostly two income families that are buying homes.
On top of this, the First Homeowners Grant has added a hefty deposit, that does not have to be saved. So the grant has accelerated young home buyers into the market. Without the grant they would not be able to afford to get into the market at all, because the costs of buying [besides the home price] have risen sharply over the last 10 years.
4. Finance availability. Having an instant deposit has helped people with no saving get into the market, but that was happening before the grant was extended. In fact recent requirements by the banks have meant that many banks now want to see saved deposits.
In addition to this banks are tightening their credit policies, so this is having a negative impact of sales to first home buyers. In this respect the First Home Owners Grant is having no affect of demand or house price increases.
5. Cost of finance. We are currently seeing the lowest mortgage interest rates in our history. This is great for homeowners, as well as home-buyers. Whilst it means that yes, home buyers have more borrowing capacity, which would tend to push up prices, the media is full of warnings that rates will rise and even young first time buyers seem to weighing this is their buying decisions.
But these lower rates also mean that homeowners that were suffering from mortgage stress last year are benefiting, and not requiring to put their homes on the market due to an inability to repay the loan. This is good news for the banks, and the highly leveraged borrowers. But it does mean less housing stock on the market and so this would tend to make prices rise. Again, nothing to do wit the extended First Home Owners Grant.
6. Credit Standards. Australian banks had little exposure to the US mortgage credit to bad credit risks, and came out largely unscathed. There is no doubt that credit standards here have tightened in the wake of many bank and mortgage lender collapses in the US and the UK, and this would have to take many potential home buyers out of the market. First home buyers would be the hardest hit by this because they have no equity in property to offer a big deposit on the home purchase. And a bigger deposit [down payment] means a greatly reduced risk to the lender and the mortgage insurer.
7. Fear of Loss. The younger we are the more fearless we tend to be. The less we have to loose and the more we have to gain are both powerful incentives to play. So the first home buyer is more likely to buy a home, especially when most of the initial costs are paid by someone else.
In fact the fear factor is flipped over in the case of First Home buyers, because the extended First Home Owners Grant is marked for being reduced in 2010. So the fear of loss kicks in, and this is more powerful than the desire for gain, and so I believe that first time home buyers will drive the housing market right through 2009.
8. Knowledge and Experience. We have already mentioned that first home buyers have less knowledge and experience than a property investor for instance, and therefore may tend to pay more. But they do have equalisers. They can consult with parents and they have the Internet. The other thing that would motivate anyone, is they are looking at homes generally between a third and a half a million dollars. So by the time we add interest, a home is costing a million dollars these days and this must have a sobering effect on first home buyers.
On the otherhand they are probably the first to realise that home prices one day will be double what they are today, and that means that the sooner they buy, then the less they will pay.
In summary then its easy to assume that the first home owners grant has pushed up prices. But the reality is that is most states home prices have stayed about the same, and are not predicted to rise much over the next 12 months. Even if the first home owners grant had pushed prices up by their value of $14,000 in the used market, it would be less than 5% increase. The fact that these increases have not materialised tends to prove that the First Home Owners Grant has not pushed up prices at all. Rather it has stabilised the house market prices, and prevented deeper falls, by encouraging and allowing first time home buyers to buy their first home before they would have.
That has to be a good thing for all Australians.
Author: Rick Adlam is Mr Mortgage
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About: Rick: Rick Adlam has been involved in mortgage finance since 1996 with Equity Home Loans as a Founding Partner. Rick created Mr Mortgage™ in 1999, one of Australia's first online mortgage brokers. As a mortgage introducer Rick specializes in helping his clients get approved for low interest mortgage loans with no ongoing fees and charges, and low doc home loans for the self employed.
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About the Author
Rick Adlam Has Written 139 Articles For Us!
Rick Adlam has been involved in mortgage finance since 1996 with Equity Home Loans as a Founding Partner. Rick created Mr Mortgage™ in 1999, one of Australia's first online mortgage brokers. As a mortgage introducer Rick specializes in helping his clients get approved for low interest mortgage loans with no ongoing fees and charges, and low doc home loans for the self employed.
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