First timers fearful of missing out, turning to investment property: DFA survey
First time buyers are reacting to the Australian house price boom by increasingly turning to investment property, apprehensive of missing out as a majority expect prices to rise, says a recent report by consulting firm Digital Finance Analytics.
According to the latest Property Imperative, a bi-annual report by DFA on the residential sector, the survey identified about 321,000 households as first time buyers with the majority seeking to purchase, or have recently buying an owner-occupied property (72%), while the rest preferring an investment property.
Only 9% of these households expect to transact within the next 12 months, despite 53% believing house prices are set to rise in the same term.
The Australian residential property market of 9.53 million dwellings is currently valued at over $5.86 trillion and includes houses, semi-detached dwellings, townhouses, terrace houses, flats, units and apartments with the value doubling in the past 10 years, says the report.
"It is one of the most significant elements driving the economy, and as a result it is influenced by state and federal policy makers, the Reserve Bank (RBA), banking competition and regulation and other factors. Indeed, the RBA is 'banking' on property as a critical element in the current economic transition," says Martin North, founder of DFA.
"Residential property remains in the cross-hairs of many players who wish to influence the economic, fiscal and social outcomes of Australia. In policy terms, debates around negative gearing and capital gains tax breaks for investment properties have hotted up."
Data from the CoreLogic RP Data Home Value Index shows dwelling values across Australia’s combined capital cities rose 0.5% in February, pushing home values 1.4% higher over the past three months.
Coming back to the survey, the biggest barrier for first timers to purchase include high house prices (52%), fear of unemployment (7%), finding the right property (24%) and rising costs of living (6%). In terms of financing, 60% of households will need to borrow more than they can currently obtain to transact, whilst 62% of households will consider using a mortgage broker to assist with the finance arrangements.
The barriers do vary by state. In NSW, first time buyers were finding it more difficult to find a suitable place to buy (31%), whereas costs of living were less significant here. In WA, fear of unemployment (24%) and high prices (52%) were the most significant barriers.
First time buyers are split between looking for a house or a unit (in Sydney more are looking for a unit). A greater proportion (21.5%) this time were simply not sure what to buy, or where to buy, a rise from 4% in 2013, the survey showed.
A greater proportion of first time buyers in Sydney are likely to buy, or have bought a unit, rather than a house. In the other states, the preference for a house is stronger, though in Melbourne and Brisbane, it continues to drop. In Perth, house preferences are stronger.
While comparing the elements influencing a buying decision, the report found a stronger focus on price in 2015. Schools are important, then access to transport, though almost all elements were traded away because of high prices.
Whilst the ABS tweaked their estimates of first-time buyers taking a mortgage to adjust for the decline in first owner grants, they still give an incomplete picture.
The traditional wisdom is that first time buyers are sitting out of the property markets, because prices are high, loans harder to get, and confidence is falling. However, one of the most significant developments surrounding first time buyers is that many more are now going direct to the investment sector.
The original data from the ABS, shows a small rise in the month to 15.1% in December 2015 from 14.9% in November 2015. The DFA data for investor FTB also rose.
Also included in the DFA survey are more than 1.35 million households aspiring to purchase property, with 83% looking for owner-occupied and 17% investment. At the moment 21% are actively saving, hoping to buy sometime in the future.
The number of first time buyers are still sitting at around 13,000 a month in total, still well below the peaks in 2009. Our surveys indicate strong FTB investor appetite. The changed underwriting requirements are, however, having an impact.
There are a number of drivers to this trend.
First, most first time buyers were unable to afford to purchase a property to occupy, in an area that made sense to them and were being priced out of the market.
Next, many were anxious they were missing out on recent property gains, so decided to buy a less expensive property (often a unit) as an investment, thanks to negative gearing, they could afford it.
These buyers are hoping the growth in capital could later be converted into a deposit for their own home – i.e. the investment property is an interim hedge into property. Some are also teaming up with friends to jointly purchase an investment, so spreading the costs. In fact, about one third who purchased were assisted by the bank of mum and dad, and would consider an investment property by accessing their superannuation for property investment purposes.
Given the heady state of property prices, the growth in investment property by prospective first time buyers is on one hand logical, on the other concerning. The report warns against increasing first-time buyer incentives.
A deeper look at the trend shows the prospect of potential capital gains being the highest rated driver at 27%, whilst the desire for somewhere to live is just 27%. The prospect of tax savings is up to 12%, whilst the advantage of a First Home Owner Grant (FHOG) is falling away as these grants become less accessible (1%). Ten percent of buyers now expect to pay less than renting, whilst the prospect of greater security remains about the same.
In conclusion, the report says first time buyers are being infected by the notion that property is about wealth building, rather than somewhere to live. The idea may be tested if interest rates rise later, or property prices fall from their current levels, it warns.
The overriding result from the survey is the first time buyers are very fearful of missing out, and though recent changes to underwriting standards may cramp their style, but DFA still expects to see a continued rise in the number of first time investor buyers.
For the report, click here.