First home buyers facing into the affordability storm

As 2021 draws to a close, it’s no understatement to say it threw up more than a few surprises. The banking system navigated a once in a generation pandemic, societies adapted to the absence of travel and working from home. And many became used to a completely different way of living.

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One surprising aspect was the rollercoaster ride Australian property prices have been on. After initially dipping when the COVID-19 pandemic first hit Australia in early 2020, prices in most Australian cities have skyrocketed as people scramble to get a foothold in the market as our economy emerged from lockdowns and restrictions.

While this is positive for owners, it has again underlined the challenge many in this country face with housing affordability.”

At a national level housing values have been rising since October last year posting a 20.3 per cent increase over the 12 months to September 2021, according to ANZ-CoreLogic’s latest Housing Affordability Report. Over the same period rents jumped 8.9 per cent, the fastest growth trajectory on record.

The report shows dwelling values dropped 2.1 per cent between April and September 2020 but then surged to a record high in January 2021 and have reached a fresh record high each month since.

This paints a pretty sombre picture for people hoping to enter the market for the first time. But the data present an intriguing contradiction – despite record property prices the participation of first home buyers also hit record highs.

ABS lending data suggest activity among first home buyers surged between June 2020 and January this year. The number of monthly first home buyer loans has since trended down, falling 22.8 per cent between the end of January and August.

And it’s not just metropolitan areas experiencing the change in market conditions. Regional markets of Australia have seen rising prices and pressures on affordability as people’s patterns of living and working evolved in the wake of COVID-19.

City and country divide

Between the March 2020 and June 2021 quarters, dwelling values across regional Australia increased 18.1 per cent, outstripping the 11.2 per cent uplift in combined capital city dwelling values. Regional rent values also jumped 11.5 per cent compared with a 4.2 per cent rise in combined capital city rents over the same period.

At the same time levels of housing stock have slumped. Through the June quarter of 2021, listings in regional Australia were 21.2 per cent below the five-year average.

While this is positive for owners, it has again underlined the challenge many in this country face with housing affordability. Based on ANZ-CoreLogic figures at the end of June 2021, it would take the typical household a record 10.2 years to save for a deposit.

Given this, what drove such frenetic activity from first home buyers at a time when property prices were going through the roof?

Firstly, demand was driven by Federal and State Government incentives for first home buyers. Concerned young buyers would be locked out of the market both levels of governments stepped in with a variety of programs.

Policies like the First Home Loan Deposit Scheme have offered tens of thousands of first home buyers a leg up with their deposit by wiping lenders mortgage insurance obligations. Additionally, the HomeBuilder scheme, while not having much impact on improving affordability, likely incentivised first home buyer decisions.

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Further rises to come

Such schemes often help bring forward demand, allowing people who might have bought their first home in future years to purchase sooner. This can, in turn, put upward pressure on prices for future first home buyers.

As prices continue to surge, first home buyer demand may continue to decline. ANZ economists recently updated their forecasts for next year with prices estimated to rise 6 per cent in 2022 before declining about 4 per cent in 2023 as more stock becomes available, more new housing is built and government support programs cease.

Regulators may also consider further macroprudential tightening measures, which would constrain demand for credit, and banks may continue to lift fixed mortgage rates as they’ve done in recent weeks, according to ANZ economists Felicity Emmett and Adelaide Timbrell.

Another factor at play is the rising amount of household savings. ABS national accounts data suggest the household savings rate surged to 22 per cent through the June 2020 quarter, compared with an average of 6.7 per cent over the previous decade.

In the financial year to September 30, the amount of retail and commercial deposits we held for our customers jumped by $18 billion in one year. The amount of money our customers held in offset accounts soared to $39 billion from $27 billion in the 2020 financial year. We also had more than 530,000 customers set up savings goals through the ANZ App.

There are many reasons for this boost in the national savings, not the least of which is changing consumption patterns as lockdowns and public health restrictions across Australia curbed our ability to spend on traditional items like overseas holidays, entertainment and hospitality. People are also predisposed to putting a bit of extra savings away for a rainy day, especially during uncertain times like a pandemic.

RBA action

In addition to these factors, we’re still in an extended period of low interest rates. Since the onset of the pandemic, the Reserve Bank of Australia has reduced the cash rate to a record low 0.1 per cent and implemented unconventional monetary policy measures to reduce bank and government borrowing costs.

This has allowed mortgage rates to fall to record lows, which has in turn increased demand for housing credit and contributed to property price increases. RBA Governor Philip Lowe said recently that interest rates may rise earlier than the bank’s previous guidance of 2024 if the “global inflation shock” turns out to be more persistent than expected.

One final trend that appears to be helping first home buyers is what’s become known as “the Bank of Mum and Dad”. This is where parents or other family members help first time buyers with funding for their deposits or act as guarantor on their purchase.

While exact figures can be difficult to quantify, anecdotally it does seem to be a significant factor assisting many young people getting into the market for the first time.

It remains to be seen how first home buyers fare in the property market of 2022 and beyond but we certainly know thousands of them have managed to get their feet on the first rung of the ladder – even during a once-in-a-generation pandemic.

Mark Hand is Group Executive for Australian Retail and Commercial Banking at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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