First home buyers retreat

The number of housing finance commitments taken on by first-time buyers were at their lowest level in the six years to 2010, with much of that demand brought forward during 2009.

During 2010 only 96,201 first home buyers committed to housing finance for the purchase of a home.

That represented the lowest volume of first home buyers annually since 2004 and came off the back of the largest number of first-time buyers in a single calendar year in history during 2009.

It is clear that the surge in first home buyers during 2009 due to low interest rates, improving affordability due to property value falls during 2008 and the First Home Owner’s Grant boost pulled forward the majority of first home buyer demand for 2010 into 2009.

The number of first home buyers in 2010 was 50% lower than during 2009.

Between 1993 and 2010 there was an average of 116,284 first home buyer finance commitments annually and 2010 recorded first home buyer activity -17% below the long-term average.

An interesting point to note is that during the past 10 years first home buyers have become much more active when the market recorded superior levels of value growth.

A good example of that was during 2001, when capital city home values increased by 18.7%.

At that time there were 145,000 finance commitments to first home buyers.

The busiest year for first home buyers was 2009, with more than 190,000 housing finance commitments. At the same time property values increased by 12.1%.

In most instances over the past decade periods of strong property value growth have been accompanied by above average numbers of first home buyers.

That would seem to indicate that a higher level of activity by first home buyers typically has a positive impact on the residential property market.

That is no surprise given that a greater number of active first home buyers has a knock-on effect throughout the market, encouraging more people to upgrade their homes.

More savvy first home buyers should probably be looking to become active in the marketplace during quieter years because market conditions tend to be much more in favour of buyers rather than sellers, providing first home buyers with more time to make a decision and secure the best possible price.

Over the long-term average standard variable mortgage rates have been recorded at 7.22%.

Although it is probably expected that first home buyers would be more active when interest rates were lower that hasn’t necessarily been the case.

Looking at interest rates in December each year shows that between 2000-2010 there were only three years – 2001, 2008 and 2009 – when below average rates resulted in an above average level of first home buyer activity.

That is an interesting finding, indicating that first home buyers are not necessarily as sensitive to interest rates as one might expect.

In saying that, 2009 recorded the greatest number of first home buyers in history and was also the period when interest rates were the lowest in almost 50 years.

Despite such a strong focus on first home buyers and their prevalence in the market, between December 2000 and December 2010 they only accounted for 18.5% of owner-occupier finance commitments each month.

At the end of 2010 first home buyer finance commitments accounted for 15.8% of all owner-occupier commitments.

As previously noted, that may be a major contributor to the fact that property value growth has been significantly lower during 2010 than it was in 2009.

With 2009 the most active first home buyer market in history it is interesting to note that at their monthly peak first home buyers only accounted for 28.5% of housing finance commitments to owner-occupiers.

That does not include finance commitments to investors, which the ABS does not publish in the same detail.

With first home buyers far less active during 2010 each state recorded a lower proportion of first time buyer commitments compared to the previous year.

First home buyers are most active in Western Australia (18.9%), Victoria (16.8%) and New South Wales (15.4%). They are least active in South Australia (12.4%), Tasmania (13.5%) and the Northern Territory (13.6%).

With interest rates at above average levels and recent strong property value growth, affordability constraints are again present in the market.

With job security reasonably high thanks to 5% unemployment, the prospect of wages growth and a higher degree of confidence around interest rate movements we may start to see an increase in first-time buyers later in the year.

Tim Lawless is the Director of Property Research at RP Data.