First home buyers have revived the Australian property market.
The danger is that many may soon find the excitement of owning their own place short lived as job losses rise, house prices fall and instances of negative equity grow.
Of course such a view is not shared by many; however there is need for caution.
Australian Finance Group (AFG) the aggregation group for MacLean Finance Pty Ltd settled 7,673 mortgage loans in February 2009, of which 26.1% or 2003 were for first home buyers. (The Australian Bureau of Statistics housing finance data which lags behind by a month, indicates that AFG accounts for a tenth of all mortgages lent in Australia)
Naturally the increased government grants for first home buyers has without doubt provided a stimulus, evidenced in AFG figures with 4,786 first home buyers in the three months to February 2009 –which is more than double the 2,316 for the corresponding period a year before.
Loan to value ratios – LVR, which is the loan expressed as a proportion of the value of a property, were 76.6 per cent and 75.0 per cent for New South Wales and Victoria respectfully, which AFG said were higher than normal due to the impact of first home buyers, who usually have smaller deposits.
AFG’s February average for all mortgages was $349,000, with borrowers selecting the low variable rates, with only 2.5 per cent of new mortgages being fixed, even though Australian banks have already indicated passing on any more Reserve Bank of Australia official rate cuts will be difficult due to currently high funding costs.
The facts show that first home buyers are borrowing more than ever before, spurred on by government grants and falling interest rates, at a time when the global financial system is imploding, which may have further negative impacts on the Australian economy, is another sign to proceed with caution.
The Australian Bureau of Statistics indicates job security continues to slide, with Australian unemployment in January 2009 increasing to 4.6 per cent, up from 4.1 per cent a year earlier.
Reserve Bank governor Glenn Stevens provided some positives in his monetary policy speech last week, saying, ‘The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers’. This is reinforced with the Australian big 4 Banks now being listed amongst the top 14 Banks in the world.
Stevens also pointed out that, ‘Nonetheless, economic conditions are clearly weak, and given the speed and scale of the global economic deterioration and its effect on confidence, weak conditions are likely to continue in the near term’.
With unemployment rising, weak global economic conditions, and unsustainably low interest rates, Australia suffers the potential problem of enticing the financially inexperienced to load up with future levels of unserviceable debt, which is what landed America and the world’s financial system in this financial mess in the first place.
The answer for Australians is that the Banks continue with their conservative lending policies, – there is only one lender still lending 100% loans and doing so under very strict conditions – others have dropped their LVRs to 90% and 95%.
Credit impaired borrowers have greater difficulty in getting their loans approved compared to 18 months ago, which is a further evidence of the tighter and more conservative lending market currently operating in Australia, and most of the world.
The interest rate used to qualify borrowers is always loaded by the banks at 1.0% or 1.5% above current rates to ensure they can service their debts once rates move back up. A sound move by the Banks!
If you planning on becoming a First Home Buyer and your employment is secure, press ahead with your plans and take advantage of the opportunity to get into your own home. Being King of your own Castle is still a realistic goal for young Australians.
