The First Home Ownership Dilemma

The width of the chasm between younger renters and first home ownership and its impact on the housing market overall has become an ever increasing problem and is destined to only get worse despite falling house prices, falling interest rates and the increasing willingness of the Banks to lend.

Despite their best efforts to save for a home of their own, many young people are caught in a four-way trap of escalating rental costs, a continuing rise in housing prices, a first home owner’s grant that has not kept pace with market trends, and State Government duties.

First home purchases, as a percentage of all purchases, have dropped dramatically and still remains at very low levels.   Typically first home buyers make up, on average, just less than 1 in 5 of all property sales, however since January 2010 the percentage of first home buyers has been well below that.   We are potentially heading towards a scenario where we may be excluding a whole generation of first home buyers from owning a home.

Many of us may sit back and say: ‘Well, I already own a home, so it doesn’t affect me’.   But that is completely wrong.   The different segments of the market are intrinsically entwined.   People sell their homes generally to upgrade, so previous first home buyers usually sell their homes to buy at the next level.  This creates the buyers and sellers across all market segments.   But by excluding thousands of first home buyers, the flow on effects will eventually be felt at all other levels.   With baby boomers at the higher levels of the housing market retiring over the coming years, and looking to downsize or move into retirement villages, who will be there to buy their homes?

During the height of the property boom, there was a flood of investors into the market, which meant there were plenty of properties available for rent.   As a consequence, rents did not increase much and so property yields went down dramatically.   However, as there were significant capital gains to be made during the period, investors weren’t too concerned with the rental incomes as they knew they would be benefiting from the strong property market and the capital appreciation of their properties.

Fast forward to 2011, the property market has stagnated and even declined in some areas, the share market is flat and rents have increased well ahead of inflation as current investors seek to replace lost capital gains with positive cashflow on their investment properties.  Add to that the SA Government’s recent Budget announcement that they will be getting rid of the State Government assistance for first home buyers and it’s easy to see how young people are starting to think they will never have the opportunity of owning a home.

Prior to purchasing, first home buyers are typically renters.  With increasing rents they are finding it more and more difficult to pay their rent as well as save a deposit for a home.   As the median house price is now $390,000, they must save an increasingly larger deposit.  The trouble is they are caught in what I term the ‘perfect storm’ in that – even if they can find a place to rent – they are paying a much higher rental, and they can’t afford to save a deposit to buy a home.

There are incentives with the Federal Government’s First Home Owners Grant of $7,000 and State Government stamp duty rebates which will halve after 30 June 2012 and disappear completely from 30 June 2013.   The first home owners grant was introduced in 2000 with the GST, but it has not kept pace in real terms since then.  In 2000, the $7,000 grant would pretty much cover the fees and stamp duties for a first home buyer purchasing their home.   Now it doesn’t even go close to covering the stamp duties alone.   But the Government failed to put an indexing clause in the system to ensure that the rebates kept pace with increases in median house prices.


Mark Lewis is the Executive Chairman of Bernie Lewis

This article is for general information only.   Since everyone's personal financial situation is different this article can't be taken as financial advice.   If you would like to discuss this article further or how it could relate to your personal financial circumstances please give us a call on (08) 8300-8300 so we can discuss it with you in more detail.

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