What are property buyers doing around Australia?
BIS Shrapnel recently prepared a report Australian Housing Outlook – 2015-8 for QBE Insurance and looked at this issue.
Here’s what they found:
The chart below illustrates the change in moving annual turnover of residential lending to first home buyers, non-first home buyers (i.e. upgraders and downsizers, which include all purchases made for owner occupation and where the buyer has previously owned another dwelling) and investors.
The chart indicates that first home buyer demand has been declining since the end of calendar 2014 with the turnover in loans 2.6% down over the year to June 2015.
For non-first home buyer demand, the rate of growth has been slowing since the end of 2013, with loans to non-first home buyers showing almost no growth over the year to June 2015 (+0.3%).
Some modest year-on-year growth is evident in the latest data reported in June and July 2015, although further data will be required to determine if this trend is likely to continue.
Investor demand has recorded consistent year-on-year growth between 2012 and September 2014.
Although the rate of growth in the value of lending to investors has started to slow since then, it was still 24% higher over the year to June 2015 compared to the year earlier.
First home buyer demand is important because it creates demand for entry-level properties, facilitating broader demand by encouraging current occupiers to upgrade through the value chain.
As a result, incentives have often been put in place to promote first home buyer demand during times of market weakness.
Chart 5 shows existing state and federal government incentives offered to first home buyers.
It refers to grants available specifically to first home buyers and not broader grants and incentives first home buyers can also access.
Where stamp duty concessions are offered, the maximum concession is indicated.
It should be noted there are some purchase price limits for grant eligibility which vary by state.
Over the past four years there have been progressive changes in first home buyer incentives across all states to favour purchasers of new homes over existing homes.
The long-term impact will be shift of first home buyer demand that would have otherwise been for established homes into the new home market, thereby adding to supply.
The short-term impacts on the market as a result of the progressive removal of incentives for the purchase of established dwellings are:
- Future first home buyer demand was brought forward to take advantage of the grants before they expire, leaving a vacuum of first home buyers in the established market immediately afterwards.
- A delay in the next round of first home buyers who then have to accumulate a larger deposit to compensate for the lack of financial assistance.
With first home owner demand being fixed (i.e. households are first home buyers only once), incentives do not create or diminish demand but rather serve to shift existing demand through time.
Once the impacts of the changes to incentives are worked through, first home buyer demand should return to long-term averages.
The impact of the removal or reduction of first home buyer incentives for established dwellings across most states has now largely flowed through.
Tasmania and South Australia removed the first home buyer incentives for existing dwellings relatively recently in July 2014.
The Northern Territory removed the incentives for existing dwellings in January 2015 and accordingly first home buyer activity in these three states is lower than it otherwise would be.
This is evident in the decline in loans to first home buyers in South Australia and Tasmania in 2014/2015.
New South Wales and Western Australia experienced declines in first home buyer demand in late 2014, resulting in a rise in first home buyer loans over 2014/2015.
There have been declines in the first half of 2015, with a year-on-year fall of 31% in the June quarter 2015.
In Victoria and the Australian Capital Territory, the stronger year-on-year growth in June quarter 2014/2015 suggests that first home buyer loans have trended upwards through 2014/2015.
In Queensland modest growth in first home buyer loans has occurred.
Australian Bureau of Statistics (ABS) data on loans to first home buyers are derived from returns submitted to APRA.
A first home buyer is defined as “a borrower entering the home ownership market for the first time”.
The definition includes all first home buyers obtaining a loan (and not just those eligible for grants) but excludes first home buyers who are investors as the data relates to loans for owner occupied properties.
There is some evidence to suggest that an increasing percentage of first home buyers, particularly in the higher priced cities of Sydney and Melbourne, are purchasing an investment property as their first home as a stepping stone into the market.
Upgraders and downsizers
Upgraders and downsizers have historically represented the largest component of residential demand, being 44% of total residential lending activity in the past 15 years.
This is two to three times the size of the first home buyer market.
Since bottoming out in 2011 and 2012 in all states, upgrader demand strengthened over 2013 and 2014.
Over the past twelve months to June 2015, growth in the number of loans to upgraders has stalled, growing by just 0.3% nationally.
Some states, however, are still experiencing growth in upgrader demand.
- Victoria, South Australia, Tasmania and the Australian Capital Territory saw growth in loans to upgraders during 2014/2015, although South Australia and Tasmania recorded small year-on-year declines in loans during 2014/15. All of these states had an accelerated year-on-year decline in the June quarter 2015.
- In contrast, in Queensland and the Northern Territory, growth in loans to upgraders has declined modestly in 2014/15.
In Western Australia, there was a more significant decline in loans during 2014/15. All of these states had an accelerated year-on-year decline in the June quarter 2015.
- New South Wales, consistent with the national average, showed almost no growth over 2014/15 in loans to upgraders.
The June quarter 2015 result showed a small (+0.7%) improvement, suggesting a response to the interest rate cuts in the first half of 2015.
The ABS provides on residential investment in terms of the value of total loans rather than the number of loans.
As a result, changes in the value of loans over time reflect a change in values for property and purchase volumes.
- All states reported an increase in lending for residential investment in 2014/15, and all but South Australia (-5.7%) and the Northern Territory (-6.2%) have continued to show a year-on-year increase in lending for residential investment in the June quarter 2015.
- Notably, investment lending in New South Wales in 2014/15 recorded the strongest growth, rising by 32% to $65 billion over the previous year.
Strong growth over the past three years has broken decade-long period of subdued demand for residential investment finance in the state since 2003/04.
- Of the other states, growth in lending for residential investment in Western Australia and the Australian Capital Territory was more subdued, although both saw strong year-on-year growth over the June quarter 2015, at 19% and 35% respectively.