Is there really an ‘army’ of FHBs priced out of the market? If so, prices can’t fall far…
The news headlines are on a predictable cycle:
Aussie House Prices to Drop – news.com.au
Australia’s Housing Boom is Over – Yahoo7 Finance
Good News for First Home Buyers – The Age
Yeah, yeah. That’s what you said in 2012.
There has been a palpable shift in market sentiment in recent months though – driven by a bunch of regulatory action
And last weekend, the auction clearance rate in Sydney was down to the low to mid 60s depending on which measure you’re using. That’s way off the peak earlier in the year around 90%.
(Though I noticed auction clearance rates in the Eastern Beaches are still in the high 80s…)
Banks have raised rates facing both investors and owner-occupiers, and the government recently signed themselves up to pretty much all of the Financial Services Inquiry’s recommendations, which will likely mean that banks will need to raise even more defensive capital, and interest rates could push even higher.
(Interesting to note that the only recommendation (out of 44) the government didn’t take up was to ban SMSFs leveraging into property, though they’ve said they’ve got their eye on it.)
And despite the Chinese government cutting rates again last week, Chinese money is not packing the punch it used to, thanks to tighter rules here and capital restrictions at home.
Though, proving there’s a flip-side to every story, the AFR is running a piece about how certain Chinese finance institutions are offering Chinese buyers zero deposit loans to get into off-the-plan developments in Melbourne and the Gold Coast.
The idea, I think, is that this corporation lends them the deposit, secured against a Chinese property, and the buyer then goes and gets finance from an Australian bank. Pretty crazy stuff.
Anyway, the point is, on balance, we’ve hit a couple of major hurdles in the past couple of months, and the mood of the market has shifted.
And the idea that a lot of pundits are promoting is that if prices fall, that will be great news for first home buyers who’ve been biding time on the side-lines, waiting for their opportunity to get into the market.
But let’s think about this narrative for a second. To me it doesn’t make any sense.
The idea we hear is that there is an army of first-home buyers out there who’ve been priced out of the market by Chinese and local investors.
Hot competition has pushed prices out of reach, and all they can do is pray for a collapse in house prices.
Is that true? It’s difficult to say exactly. There’s no data on this sort of thing. The first-home buyer share of the mortgage finance data has fallen in recent years, but it seems that a lot of that fall has been first-home buyers skipping the first home and going straight to an investment property.
On balance, first-home buyers are as active as they’ve ever been.
But perhaps it is true that they want to buy their own homes, rather than just another rental.
And probably the best gauge on that are the newspaper headlines themselves. Media is a savvy industry these days. They’d have a very good idea of what’s going on with their readership.
They’d know that every time they publish an article on house prices falling, or about ‘good news’ for first home buyers, their click-rates jump.
And what’s the first rule of successful publishing? “Give your readers what they want.”
And so on this metric alone, I think there probably are a lot of wannabe first-home buyers out there, who’d like to get into the market, but feel priced out.
(The other explanation of course is that there are a lot of parents out there with the kids still living at home at 28, just waiting for the chance to get them out of the soon-to-be media room.)
Either way, it points to a large pool of potential demand.
But if there’s a large pool of potential demand, that puts a hand-brake on any serious price declines.
The only question is at what point do prices become affordable to this cohort. If prices fall 2%? 5%? 10%? 20%?
My bet is that it’s a lot closer to 5 than 20… and that means that prices can never get a sustained run on, on the down side.
If prices fall 3 or 4%, then this market starts to get activated. They’ve been shopping around, attending auction after auction, and now there’s a place 50-100K under what they’ve been used to seeing.
The only thing that might happen is that sentiment tanks and prices collapse, and this cohort waits for a ‘bottom’. But at the first sign of stabilisation, the FHB cohort will rush in to “buy at the bottom” and prices will quickly recover.
Anyway, the statement, “Prices will collapse. FHB army is stoked.” Just doesn’t make any sense. If that army exists, they’re blocking the road to any serious price declines.
We’ve seen it before. It’s how it played out in the US. I also met an investor the other day who made good money in Europe after the GFC, working with exactly this cohort – first home buyers looking to take advantage of “the bottom”.
It wasn’t the bottom for long.
Which goes to show that there’s money to be made at all stages of the cycle.
Let the media peddle their nonsense to their readership. My bet is we’ll never see the price declines that many people are hoping for.
There’s just too many buyers waiting in the wings.
Are you waiting for prices to pull back before you buy?
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