200,000 reasons why the market will soon boom

The Cotality report for July shows that prices are now falling in most capital cities and many regional areas, so am I predicting a boom?

It’s simple, really.

According to Housing Australia figures, over 200,000 first home buyers have now taken advantage of the federal government’s five percent deposit guarantee scheme.

That’s 200,000 reasons why the government is committed to turning the market around.

Why the government must act

The federal government has effectively underwritten property prices with this scheme in the expectation that property prices always rise, so they will do everything possible to ensure that prices stop falling.

Why?

Because they will have to make up any shortfalls from defaulting owners if prices fall more than five percent.

The last time that the prices of dwellings purchased by first home buyers fell by more than five percent was after the GFC, when they dropped by ten percent, largely because of rising interest rates.

What if a similar scenario were to occur again?

This chart illustrates the cost to the government based on the percentage of defaulting first home buyers. That’s over $1B the government could be up for!

How the government will act

We can expect the government to quietly put pressure on the RBA to start cutting interest rates and also lean on APRA to lower the buffer rate.

They may even introduce further home buyer incentives and deposit grants.

But maybe they won’t have to do anything drastic, because they’re not the only ones who need more buyers in the property market right now.

How the banks will act

Banks rely heavily on property buyers, with around seventy percent of bank loans being housing loans secured by mortgages.

When borrower numbers fall, banks introduce incentives such as low introductory loan rates and cashbacks to encourage more buyers.

What’s clear is that some or all of these home buyer accelerators will be introduced, and probably before prices fall any further.

Because of the growing shortage of dwellings, these tactics will not only stop further price falls but quickly propel the market back into growth.

This makes right now the best time to secure an investment property at a good price that also offers strong price growth and cash flow potential.

About John Lindeman John Lindeman has well over a decade of experience researching the nature and dynamics of various types of assets at major data analysts and is a leading property market researcher, author and commentator. For more information visit Lindeman Reports.