Investors depart, first home buyers return

First home buyers in Sydney and Melbourne have had it tough over the past few years. The key hurdle has been saving the 20% deposit at a time when property prices have kept rising at a rapid pace, so the goal posts are always changing.

Those who managed to get their deposit together (often with mum and dad’s help) then had to compete against a large number of investors going for the same sort of smaller properties, such as apartments, townhouses and semis. Those investors, armed with new equity from their homes or other investments, usually had more buying power so young buyers often lost out.

These challenges have contributed to a record low in first home buying activity in NSW, where just 8% of new loans are going to young buyers today, compared to the long-term average of 17%, according to the Australian Bureau of Statistics. In VIC, 14% of loans are going to first home buyers compared to the average of 21%, according to new statistics for May 2017.

But the pendulum is finally swinging back in favour of first home buyers for the first time in many years, with investors departing just as government incentives kick in to help young buyers.

Firstly, let’s look at why investment is declining.

The most important factor is APRA restrictions are starting to have an impact. APRA introduced a limit on credit growth among the big banks on investment lending to 10% in December 2014. Then earlier this year, they restricted interest only loans (the most popular option among investors).

In addition, since August 2015 the banks have been charging higher interest rates on investment loans, so not only is it harder to get finance approved, it’s also become more expensive to service. At the end of May 2017, standard variable mortgage rates were 5.3% for owner occupiers and 5.8% for investors, according to CoreLogic.

On top of this, investment is a little less attractive right now in our boom cities. We’ve had five years of very strong growth and the rate of annual capital gains is inevitably going to slow very soon. Plus, rental yields are pretty low – just 2.8% for houses and 3.7% for apartments in Sydney and 2.6% for houses and 4.2% for apartments in Melbourne.

So, it’s not surprising that on the ground we’re seeing a slightly less investor demand in the market.

According to the Australian Bureau of Statistics, investor activity during the boom (2012-today) peaked at 53% of the market in NSW in April 2015 and 46% of the market in VIC in May 2015. Today, investor activity is 46% of the NSW market and 36% in VIC. That’s still a big proportion but significantly less than the peak.

Meantime, first home buyers are back. We don’t have data yet, but it’s clear at our open houses that stamp duty cuts in both states are bringing young buyers back.

In NSW, stamp duty has been abolished on new and established first property purchases up to $650,000, with a sliding scale of concessions on properties up to $800,000.

In Victoria, stamp duty has been abolished on new and established first property purchases up to $600,000, with a sliding scale of concessions on properties up to $750,000.

So, first home buyers now have three big advantages. Not only can they save tens of thousands in stamp duty, they also don’t have to compete with as many investors and can take advantage of more favourable mortgage rates for owner occupiers.

It’s still not easy to buy your first home but young buyers finally have a few things going their way. So, it’s a fantastic time for young people to consider buying their first home.

Meantime, I do encourage investors to remain open to opportunities in real estate. Property is a long-term play and even for the most astute investors it’s difficult to buy at the ‘right time’ in the market. The ‘right time’ is simply when you can afford it and you find a suitable property to suit your investment criteria.