BIS Shrapnel has false hopes of FHB recovery

Property “experts” predict first home buyers will be back in the market within 6 months with hope they will prevent a property crash. Property markets are close to frozen at the moment with many property purchases subject to the sale of the purchasers own home within an pre-negotiated time period. Without first home buyers propping up the pyramid scheme, many would be upgraders have no one to sell too. Weekend BBQs are now turning to stories of sellers who are getting offer after offer on their homes, only for the finance to be continually knocked back by banks.

The First Home Buyer Boost brought forward the plans of many would be first home buyers

Despite headlines such as First-home buyers quit Perth housing market and figures from the ABS showing sharp declines in FHB activity, BIS Shrapnel economist Jason Anderson told a residential property conference in Sydney this week that “We think that we’re moving to a higher level of first home-buyer demand in trend terms”, indicating first home buyers could be back in the market within 6 months.

The reasons cited was more residential building, less upwards pressure on interest rates and weaker population growth leading to a more favorable environment for First Home Buyers.

But from a recent survey of brokers from the Loan Market Group, 68 percent said a lack of genuine savings rather than interest rates or house prices were keeping first home buyers away in droves. Only 13 percent said sky rocketing prices were any deterrent.

Many banks are tightening LVR (loan value ratios) and for some first home buyers, they now need to provide as much as a 20% deposit.

In February 2008, the government introduced First Home Savers Accounts (FHSA), giving first home buyers very generous co-contributions and tax concessions as they save towards the goal of purchasing their own home. However, they were far too restrictive requiring first home buyers to make contributions to the account for a total of four financial years before their money could be used towards the purchase of a home. As a result, very few accounts were ever opened.

Government still has no idea on First Home Saver Accounts

In the 2010 budget, Wayne Swan announced changes to the First Home Saver Accounts with the aim to make them more appealing. Previously, If first home buyers brought their first home within the four year qualifying period they would have to transfer the funds of their first home saver accounts into Superannuation.

Under the proposed changes, if a home is now purchased within the four year qualifying period, after the forth year, the proceeds of the FHSA can be paid into an approved mortgage. As the proceeds of the account must remain in the account for four years, this means any money saved in the account cannot be used as a deposit on a home if it is purchased within 4 financial years of opening an account.

If buyers anticipate buying a home within four years and need to save for a deposit, they will need to save outside of the government’s FHSA, once again removing any incentive to open these accounts.

As house prices continue to grow and LVR get tighter, larger deposits are needed. Housing Finance data from the ABS show the average first home buyer loan is now $280,900. While not all loans will require a 20 percent deposit, if we make that assumption, then the average deposit will need to be $70,000.

The First Home Buyer Boost brought forward the plans of many would be first home buyers at the expense of lower demand in the years ahead. With more failures in government policy surrounding the FHSA and the tightening of LVRs which in many cases is requiring significant deposits, it is hard to see an “pent up” demand from first home buyers for quite a few years without any further changes to government policy.

» First home buyers due back in six months – The Sydney Morning Herald, 21st May 2010.

» Gen Y ‘hard pressed to save for home’ – The Sydney Morning Herald, 20th May 2010.

» First-home buyers quit Perth housing market – The Australian, 20th May 2010.

» Helping Australians buy their first home by increasing flexibility of First Home Saver Accounts – Treasurer of the Commonwealth of Australia, 11th May 2010.

1 Comment

  1. Are you sure about the qualifying period being 4 years in the proposed changes to FHSA’s?

    As i read Wayne Swan’s press release the qualifying period isn’t specified.

    “To increase the flexibility of FHS Accounts and help Australians buy their first home sooner, the Government will allow savings in an FSA Account to be paid into an approved mortgage after the end of a minimum qualifying period, rather than requiring it to be paid to a superannuation account.”

    Any idea what the proposed minimum qualifying period actually is?

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