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Tough times for first home buyers

Is it harder for first home buyers to enter the market?

Anyone trying to buy a home in Australia knows our property prices are among the highest in the world. As a result, it can be particularly hard for first home buyers to break into the market.

The plight of first home buyers gained more attention in recent months following the release of new figures by the Australian Bureau of Statistics showing that first home buyers’ share of the owner occupier market reached a low of 12.3 percent during November 2013.

Commentators have blamed increased competition from cashed-up baby boomers, investors and overseas investors for “squeezing out” younger buyers, but the Housing Industry Association (HIA) has released a report arguing the reasons for decreased activity by first home buyers are “more complex than media coverage suggests”.

HIA identified the following reasons for the current volume of first home buyer (FHB) activity:

Drag-forward effects

According to the HIA, many first home buyers entered the market in 2008 and 2009, earlier than they would otherwise have done, enticed by the federal government’s generous First Home Owner Grant ‘Boost’ – in effect from October 2008 to September 2009 – and a similar grant by the Victorian state government and stamp duty exemptions in NSW.

“As a result, there were fewer FHBs left to purchase in the following few years,” the HIA report stated.

“The fact that FHB activity over the past five years has not been hugely different [compared] to its long term average is consistent with this characterisation.”

Age structure of the population

First home buyers are generally aged between 25 and 35 and this age group has been declining as a share of the population, falling from 17.6 percent in 1993 to 15.4 percent in 2008.

“It is likely that this has partly contributed to the lower share of FHB activity in recent years,” the report stated.

However, this may change soon.

“Over the last five years, the 25 to 35 year age group’s share of the population has started to increase again. This will eventually cause the FHB segment of the market to become more active.”

Labour market weakness

The unemployment rate increased from 5 per cent two years ago to 5.8 per cent in March. Uncertainty around employment prospects affects younger workers more and is likely to be holding back first home buyers from committing to a mortgage, the HIA said.

“The ability of would-be FHBs to receive mortgage financing will also be seriously curtailed in a scenario of lower employment rates and downside risks to incomes.”

First home buyer investors

The HIA also identified the trend of first time buyers encouraged by strong rental growth and record low interest rates to buy their first property as an investment, rather than as owner occupiers, while they continue to rent or live at home.

“Consequently, such buyers do not show up in the official FHB data and the actual number of FHB transactions is understated as a result,” the report said.

Strengthening market deters FHB

The property market began recovering in 2013 with property prices increasing, which would make first home buyers nervous about jumping in.

“FHBs are a little more risk averse, and will be less comfortable about entering the market at first. This means that their share of the market will temporarily flag as the market negotiates its turning point,” the report said.

“Over time, we can expect FHB activity to gradually increase as the market recovery becomes more established.”

The HIA concluded that the low share of first home buyers in the market is a “temporary phenomenon” reflecting these factors, and they will increase their share as these conditions change.

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