FHBs at heightened risk, despite great repayment track record

FHBs at heightened risk, despite great repayment track record
FHBs at heightened risk, despite great repayment track record

When the developer Dyldam launched its South Quarter project at Parramatta – on the former Auto Alley – last  month they noted there was especially strong interest from first time buyers amid high local interest.

The average off the plan sale price was $750,000 in what will become a $876 million residential mixed-use project on the former Holden car yard.

It is a sign that after a lengthy absence, first time buyers are emerging across NSW, perhaps lured by the expansion in the available government grants. 

The latest ABS data calculated 2,426 first home buyer commitments in August which represented the biggest monthly number for five years.

Though still below the longterm average, NSW first home buyers accounted for 12.9% of owner occupier commitments over the month, the highest proportion since 2012.

It was up from a recent NSW low of 7.5% in February 2017 when it looked easy to conclude that our higher housing prices had significantly reduced the probability of many ever becoming an FHB.

There's been research recently done by the Reserve Bank of Australia which confirmed that ‘generation rent’ is a reflection of higher housing prices rather than any shift in preferences.

It seems young households still have a desire to become home owners, however, fewer potential FHBs are actually able to enter the housing market.

It particularly noted the underlying desire to become an FHB has not changed since the global financial crisis.

"However, people’s ability to, or comfort with doing so, has been affected," it noted.

The research suggests the decline in home ownership was not as much influenced as previously thought from social and demographic and factors, including key life-cycle events such as exiting the family home, marriage and having children. 

The research paper, comparing FHB loan characteristics in this pre- and post-financial crisis periods, shows the major consequence of the current higher prices is that FHBs have to save a much larger deposit.

That is despite maintaining a similar median loan-to-valuation ratio of around 83%.

The median deposit size increased by around $28,000 to almost $70,000 in the 2008–14 period.

The median purchase price of FHB homes across Australia in the 2008–14 period was $387,000, which was almost $100,000 higher than the price paid by FHBs in the 2001–07 period

The transition from being a renter to a first home buyer is the riskiest of steps in one's fiscal life. And I'd suggest those doing so currently are doing it with heightened risk.

But interestingly despite higher debt levels, households who became FHBs post-2007 appear to be paying down their mortgages and reducing their debt-to-income ratios at the same rate, or slightly faster, than households who took on a mortgage before 2007.

The research noted in the year after taking out a loan, the reduction in the debt-to-income ratio for FHBs in the post-2007 period was around 8%, compared to 5% for the pre-2007 borrowers. No doubt low interest rates being a key factor.

It also noted recent FHBs have been less likely to have ever been behind schedule on their loan.

This article first appeared in The Daily Telegraph. 

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