It may seem counter-intuitive but the current slumping housing market could finally provide the ideal opportunity for first home buyers.
There are a number of reasons for that view, many of which have only recently come into play, and can be summarised as follows.
Interest rates are heading down
The Reserve Bank has been sitting on the current 1.5% official interest rate for the entire time the current Governor Dr Philip Lowe has been in charge, but there is a growing chance that the RBA board will be cutting that rate when it next meets on 4 June.
With unemployment nudging upwards, inflation too low, wages growth weak and consumer spending patchy, Dr Lowe has made it clear that he is getting very close to pulling the interest rate trigger that was last used way back in August 2016.
There is also a good chance that banks will pass on all or nearly all of what is likely to be a 0.25% cut, due to the proximity of the Hayne Royal Commission and the uproar that would accompany any bank reluctance to pass the rate cut through to consumers.
Of course, the bad side of that is that deposit rates – which are already inching towards zero in many cases – will be cut as well.
Markets are also factoring in a good chance of official interest rates being cut a second time this year.
While lower interest rates are a sign that the economy is weakening and requires stimulus, that may provide a window of opportunity for first home buyers, particularly if they have a good measure of job security.
The surprise election result which returned the Scott Morrison led Coalition means that a number of potential negatives for the housing market have been removed.
Labor’s proposals to restrict negative gearing and reduce the capital gains tax discount were widely seen as being negative for the property industry so their removal should be a positive.
A second positive arising from the election is the introduction of a new first home buyer’s scheme, which will allow at least some first home buyers to get into the market with just a 5% deposit.
While that prospect should be approached with some caution given the larger debt involved and the cash required to service the loan, in general being able to buy a house with a small deposit without the extra expense of mortgage insurance is a real positive.
While slumping house prices have been bad news for investors, they have given hope to first home buyers that they may once again be able to get into the market.
The Housing Affordability Index, which takes into account the latest house prices, mortgage interest rates and wage growth, rose by 2.2% in the March quarter.
Housing affordability has improved across Australia with the exception of Tasmania and the ACT where price rises have led to affordability levelling out.
As you would expect it is in the big markets of Melbourne and Sydney where the biggest affordability gains have been made.
In June 2018 it took two average Sydney incomes to afford repayments on an average Sydney home but now that has improved to 1.8 standard incomes to buy the same home.
Similarly, in Melbourne affordability has improved by almost 10% in the past year.
Buyers in east coast capital cities in particular will enjoy the improvement in affordability: where it used to
The index for Sydney rose by 12.4%, followed by Melbourne at 9.6%, Perth at 7.7%, Darwin at 5.9% and Brisbane 2.5%.
Heading in the other direction were Hobart down 5.1%, Canberra down 5.1% and Adelaide, down 1.1%.
The improvements are expected to remain in place for a while due to a reasonable growth in new building but affordability may worsen after that.
While it is true that getting a bank housing loan remains difficult, even for qualified buyers, one of the big impediments to those loans was adjusted this week.
Previously, banks had to “stress test’’ loans to make sure that borrowers could afford repayments on a rate of 7.25% – well above where owner-occupied home loans were actually sitting.
The interest rate “floor” was introduced in late 2014 in an attempt to contain soaring house prices and surging housing investor loan growth.
It required banks to test prospective borrowers against the higher of either an interest rate of 7%, or a 2% “buffer” over the loan’s actual interest rate, which usually worked out at 7.25%.
The Australian Prudential Regulation Authority (APRA) has now proposed scrapping that rule.
“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7% floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so,” said APRA chairman Wayne Byres.
“The changes, while likely to increase the maximum borrowing capacity for a given borrower, are not intended to signify any lessening in the importance that APRA places on the maintenance of sound lending standards,” he said.
Banks said the change would benefit owner-occupier customers the most, because banks charge these customers lower rates than property investors.
As a guide, a borrower with a household income of $150,000 a year, could be lent an additional $67,000, to $903,000, due to the changes, which would mean a “stress test” rate of 6.5%.