Rising residential construction is an important element in the RBA’s game plan for 2013 & beyond.
As mining-related investment plateaus, residential construction will need to step into the breach. Housing construction has a big employment multiplier.
Yet first home buyer interest – which does not surprise us in least – is in decline.
Investors, when it comes to new property, are showing little or no urgency – and who could really blame them. So new construction is, & is likely to remain, subdued. Falling interest rates can only stimulate new housing demand if other policy settings are correct.
We are reaping what we sow.
First home buyers
A few weeks back, based on the January loan figures, most media outlets ran the “first home buyers abandon market” headline.
The falls were the greatest in New South Wales & Queensland, with just 773 first home loans issued in New South Wales during January & only 750 in Queensland.
But both states changed the emphasis of their first home grant schemes towards new housing late last year. We said then that this would end in tears.
Now, most housing statistics covering the month of January are usually not reflective of the market conditions over the next year. I describe January (and often December) figures as –being “off-market”.
And 14.9% of all loans were taken up by first home buyers during January. Now, despite what the headlines say, a 15% market share is the long-term first home buyer average. The home loan volumes traded by first home buyers during 2009 & into 2010 weren’t sustainable.
For mine – there is no headline, no need for even much conversation about this topic; it is just business as usual.
But if you want to encourage new residential construction, which is what both the NSW & QLD governments want to do with their changes to the first home buyers grant last year, you won’t do it by trying to incentivise first timers to buy something new.
Only one in ten first home buyers buy a new property.
The reason is that a second-hand home offers much better value to a first home buyer because they have energy, enthusiasm & Australian tax laws on their side, which all combine to encourage them to buy something older which they can renovate & in time resell, tax free.
We have all done it. Why would anything change?
The grant by the way doesn’t work.
It hasn’t offset the impact of GST on new property & in fact we have fewer first-home buyers than would have been the case.
According to the ABS, there were 446,000 first-home buyers across Australia just prior to the grant. Today that number stands at 429,000.
The average mortgage taken out by a first-home buyer today is $293,000, against a mean purchase price in the low $400,000 range. This gives many a healthy 30% equity.
However, this equity position has not improved in recent years whilst the size of first-home loans has increased. In short, the FHOG has also inflated the market.
Finally, it has screwed-up expectations; with three out of five first home buyers being either a single or couple household, yet 75% of the stock bought by them now holds three or more bedrooms. One quarter (26%) of first home buyers bought a four-bedroom home last year.
Prior to the grant, most first home buyers bought two (35%) or three-bedroom (30%) dwellings.
On average, investors buy most of the new property for sale in Australia. This buyer profile varies by product type & location, being higher for downtown apartments than detached houses on standard allotments in a suburban setting, but regardless of what & where it is, investors are the largest buyer group of off-plan property & newly constructed product.
But buyers of new property must pay GST (whilst buyers of second-hand property don’t) & also the same level of stamp duties as buyers of established stock.
If you really want to encourage new residential development, you must incentivise the investment markets.
This is very easy to do & was proven when Jeff Kennett took office in Victoria. Step the amount of stamp duties payable on a new property transaction according to the stage of development. No stamp duty being payable if a buyer buys off-plan; some stamp duty due if bought during construction & full stamp duty payable after completion.
What would help – extremely so – is removing GST for new property or making it payable on all property transactions. The former would be much better than the latter.
We are reaping what we have sown. First home buyers don’t need help. Nor do investors for that matter. They (both really) need to be encouraged to buy something new. At least create an even playing field.
And again, get rid of the FHOG.
Michael is the director of independent property advisory Matusik Property Insights and writes the Matusik Missive which is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.
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