When These Guys Aren't Buying Its Good News For Property Investors…
I know I’ve written a lot of positive commentary on the property market in these pages. That’s my view. I don’t expect everyone to agree with it.
And if I’m running similar lines in these blogs, I think I’m being consistent. I’m not changing my view day to day.
But I know some people still think I’m just peddling hype.
So just to show you I’m not blind and deaf to the growls and grumbles of property bears, let’s take a look at one of the key arguments that’s popping up in the press these days.
Let’s call it the AWOL FHB thesis. It runs like this:
- First Home Buyers (FHBs) have so far been missing in the current property recovery. All of the action in buying (and therefore price) has been coming from investors.
- This is unsustainable. If there isn’t any “real” demand for houses, sooner or later investors won’t be able to carry the weight of the market.
- Once investors start to stumble, it will create a “run” on property, and prices will go into a death spiral. The market will collapse.
- Jon Giaan will open a fruit stall in outer-Preston.
That’s the basics of it. So how much truth is there in it?
Well, it is true that the share of FHBs in the market right now is falling. Take a look at this chart here (taken from the blog of AWOL FHB thesis proponent, Leith Van Onselen at MacroBusiness.)
So the share of finance commitments going to first home buyers is now down to around 15 percent. This is down from around levels of around 20 percent in 2011 and 2012, and way down for the 30 percent levels seen in 2008.
FHB’s are rushing for the exits and are taking the whole market with them.
So what do I make of this?
Well, the first point is that at this stage that current levels are still higher than they were back in 2003, and that wasn’t the end of the world. FHBS made a solid come back, and the property market boomed.
So a low percentage in and of itself doesn’t seem to be that much of a concern.
The second thing to note is why this share is down. It is true that the value of FHB commitments is down. Check out this graph.
We can see that the value of FHB commitments (the red line) has come off, but nowhere near as much as the percentage. And it’s only around lows seen in 2010, and well above levels seen prior to 2005.
So just on levels alone, again, it’s hardly a flashing “panic” button in my mind. The property market has bounced back from a lot worse.
But there has been a pronounced fall in the past six months. Why is that? Are FHBs the canary in the coal mine?
Well, I’d argue that most, if not all of that fall can be explained by state governments unwinding their first home owner grants – either scrapping them altogether, or diverting them into new construction.
FHBs “pulled forward” their purchases to take advantage of the grants, and that’s left a gap in the market now. A gap, but not a collapse.
But the really important thing to take from all this is the reason why the share of FHBs has fallen so much, is because investors and up-graders (people moving on to their second or third home etc.) have been piling in. You can see that clearly on the graph.
So it’s more of a relative, than an absolute story.
And so if we break that down, why are investors piling in? Pretty simple really.
Returns.
Rents have been growing quicker than prices in a lot of markets. This means yields are rising. And with some pretty pathetic yields on offer in other places, like a yo-yo stock market, this is pulling more and more investment capital into property.
And, property investors are more like to pick a turn in the market than FHBs. They’ll know that prices are on the rise, and so now is the time to make an entry. FHBs have more at stake, and are more likely to hold off until they’re more confident of market direction (or the governments bring back some cash hand-outs, which you’d have to think is an even bet.)
FHBs are never the first-movers. They’re always late to the capital growth party and they don’t buy for investment purposes. It’s almost always up to the investors (the exception is when there’s generous government hand-outs are on offer). Plus FHBs tend to buy out in the outer suburbs, where places are more affordable. These are rarely the kinds of areas that excite investors.
So FHBs are market followers, not market leaders. Think about a stone thrown into a pond. Investors make the splash. FHBs ride the ripples.
That’s why I don’t find it concerning at all that we haven’t seen a lot of activity from FHBs… yet. (And with interest rates heading lower, the renting / buying balance is shifting, so we’ll be hearing more from FHBs soon enough.)
But still the bubble-blowers might argue that if it’s just investors propping up the market, its nothing but a speculative bubble, and it’s bound to blow up in your face at some point.
But look at up-graders. They’re on the march too. They’re piling in just as quick, or if not quicker, than the investors.
So sure, while it might be nice if FHBs were pulling more weight right now, there’s nothing in here that tells me that the markets imbalanced. 85 percent of the market is jumping.
And my tip is that once the direction of the market asserts itself, FHBs will quickly come back to the party.
…and when they return, all they will do is make you and me richer.
Another reason why you should be accumulating “hard assets” like real estate right now. That’s what I’m doing anyway.
So maybe I’m missing something. Maybe I’m blinded by my own hype. But claims that AWOL FHBs are going to bring down the market seem wildly exaggerated to me.
Ross says
Not to mention the fact they still need a roof over their head. If they do not buy it then they will be renting it. The statistics do not show that all FHBs are moving to camping grounds and refusing to be part of the system. Although if they are I will go and buy a few campsites.
Maven says
FHB have traditionally been helped out a lot by Mum and Dad.
Now, as Super has taken a hit, and FHB are turning into kidults, Mom-and-Pop have less to splash around on deposits.
Back in 2009 a solicitor friend had a young FHB couple in his office on Dec 23, hours before COB for the year, with both sets of helicopter parents wanting to know “what will it take ($$$) to get this done NOW? (meaning settlement). With offices closing for Christmas and the year all over town, he said “cant be done”. They came back in January, once the FHB grant had lapsed, and the house they wanted was suddenly $10k cheaper!. Who needs the grant? Only the vendor! and the banks!
Graeme says
It is the same every year. Year in year out and the doomsayers come out and bag property. That is fine with me. I have had many properties for years and there are two things I have experienced overtime and that is rents go up and property prices go up. The share market goes up and then it goes down and then it goes and then it goes down. You be the judge and good luck with whatever you invest in. Probably in yourself is the best place to start. GQ
John Skipper says
I have 3 rules regarding property:
1. Buy Real Estate when you can afford to buy it
2. Buy more Real Estate when you can afford to buy it
3. Never Sell Real Estate unless you absolutely have to
Over time it will always increase in value.
Ann Linford says
Maybe FHB’s are getting a bit smarter. They can get into their first property at an affordable price and rent it out!!. Stay living with the parents or rent a place and share with others. They do not lose their FHOgrant as long they never live in the property it is rented as an investment, easier to borrow for the purchase due to rental income. They do not need to live in the first property they purchase. Then they can commence to step up the property ladder.
Mickey says
i am pretty sure if you own any properties investment commercial etc even if u dont live in it you are void of the FHBG. 🙂
Properties wont move for another 3 years in general its good time to buy and get discount law balling offers in forsure… when rates go up prices go up 🙂
dean says
I would argue, that wages for FHBs are statistically generally relatively low due to their demographics..age..education and experience. Real estate prices are still relatively high for even outer suburb city properties, (and this is “after” the price drops of houses we have experienced since the GFC..which most property spruikers including Jon seems to be in denial of, and some commenters above have fudged about with…saying things like property always go up “overtime”). There is also the demographic twist of a shrinking population…the Baby boomers lack of desire to populate and their kids also shying away from this biological imperative to factor in here. Adjoin these realities with the lack of confidence the general population has in the current market and whom are still metaphorically licking their wounds from the last crisis, and i tend to believe that the market will remain flat for some time…and it wont be the FHBs who rescue the ailing market.
brian french says
Brian says
Jon is right in saying that property values rise over history (time),there have been few
de-valuations over history , if you can ride out these storms , you will always gain in the long term. After each storm ,the property values have always risen. If you are entering the property market , investor or FHB ,the time to buy is during the storm.
Juztino says
So if I have 50k as deposit are you recommending borrowing to buy then renting the bought property and moving back in with the folks? hmmmm
peter krstevski says
What I cant understand as much as I try is why has logan ans brisbane in general lagged so far behind for so long and why has the goldcoast pretty much hit a brick wall longer than the great wall of china? They are so far behind mel and forget sydney. Thats in a world of its own at the moment. The asking prices there are kind of embarrassing to be honest. Im sure it will all even out sooner or later but when.
Emil Andrawos says
The property vacancies are at their lowest levels, that means the investors are not only right but also needed to meet the demand
Ken says
Dean, I’d like to know how old you are, or should I say, how young. The best saying I’ve heard in my 64 years is, ”if you don’t know the past, you will never know the future. I’m sorry mate but if your parents never taught you anything, people like you will never listen to anything from anyone. Greed sucked the FHBS into buying something they could not afford and if the Government stipulates FHBS are only allowed to buy new houses, then the same will happen again. New houses never went down one cent, even during the GFC, they were only built a bit cheaper by leaving out a few luxuries. BEST WAY TO MAKE ANY MONEY is to buy older homes and renovate them yourself. Come on, we do have common sense don’t we and we did do wood work at school, didn’t we? That means being able to use tools of trade. It’s that simple. Ken.
dean says
Ken, being a young 50 at heart, and having retired off the back of Australian realestate at 35, (where i always bought the worst house in the best street and renovated them Ken.) …yes..retired15 years ago…and I have been living overseas in europe for summer and india for winter where i own properties, i feel actually quite qualified to express myself.
Ken, we have been lucky to live in a period when any monkey..including myself, yourself, Jon and most of these property spruikers could not help make ridiculous moneys..even moreso when we applied our wood working and tools of trade skills. I hope you did..i made bucket loads. And, infact, i made bucket loads more just living overseas, on a beach, sipping cold lagers and chillin out in the sun, whilst people / renters paid my mortgages and also for my amazing lifestyle.
However, these heady days are far gone…luckily for me i am set..(and i hope you are..you should be…you certainly had your opportunities to do so for many decades…)
However, i have nieces and nephews..whom are in a totally different kettle of fish nowadays..as im sure you do too. Maybe you also have grand children. Take the time to speak to them Ken!
Just having wood working and tools of trade skills does not totally wash. You also have to have a significant income, you also need to have a significant savings base..(to have 20% of a 400,000 dollar house..means a deposit of 80k!..did you ever have or need such a deposit Ken?)..add on the govt taxes , searches, etc etc and really, you need a cool 100k sitting in your bank nowadays to just enter the market.
A mortgage of 80k when i started out, was a scary 175 dollars a week for 25 years…nowadays a mortgage of 320k is what per week Ken?..at the same rough interest rates circa 650 dollars…a week!!!.. And then you have rates, (throw in another 50 bucks..) not to mention the materials to pay for which those tools of trade need to capitally improve the aforesaid property.
Now, im sorry Mate, but these figures, irregardless of the FHB grant etc, are significant and basically knock the stuffing out of the youth of today..and i do not blame them.
They do not have job security..(a thing of the past perhaps you and I also perceived we had???)..they do not have good wages, they have seen the markets tumble (stocks shares, property, dollar) and have confusions and hesitancy..naturally…and all of these things mean that relying on this demographic…even if they are star tradey kids, to pull the market out of its mire, is ill placed logic.
Cam says
I tend to agree with Dean, because as one of the leading indicators of our economy is demographics . So what are demographics? answer: people/humans. Put people into an area and you will have an economy, take them all out of an area, you have no economy. Like Jon says FHB are a minority so what is the majority? answer: baby boomers, and that generation of people makes up over 30% of our economy so when that many people decide to stop buying real estate, tighten their belt , save for retirement and join the grey army its easy to see their spending cycles since the end of World War 2. Why do you think Jayco(caravans) are doing so well and not just them I have seen caryards in my area change to new caravan sales yards and booming. So until the next baby boom (Gen X) kicks into there biggest spending cycle, charts will tell us there is at least a 7-8 year lag downturn/recession/depression whatever you want to call it before we enter a new fase of spending from these individuals giving us our next growth period. Don’t listen to me go have a look at the charts since World War 2 and then have a look at Japan , their demographics peaked in late 80’s early 90’s and have been in a downward property spiral for 18 years. We as people have very predictable spending patterns and it becomes a lot clearer to see the future when you look at the past.
tina says
so shall I buy now or what ?????
brian french says
yes tina buy now.however slow it may be,prices of real estate are on their way back up.
the low trough has passed.my wife will be buying an investment property shortly.
Graeme says
If you need somewhere to live Tina then yes buy. You are better of paying of your own place rather than one of mine …which I do not mind by the way. Buying a house is compulsory saving ..Most .renters usually find ways to rid them self of money I notice.
Cam says
No Tina, Now is not a good time to buy. With prices still not far off the peak of October 2010, yes prices have come back a little but they are no where near where they are headed. Do your own research and look at the charts Tina to make up your own mind.
what we are looking at is a possible bottom late 2013 into early 2015 and maybe even longer than that , we lag behind the U.S.A roughly a year and a half . Look for the bigger bottom in the stock market as the realestate market will follow . QE ends in December which means right now our markets are on life support with stimulus and governments know the markets cannot survive without it so when that ends whats going to happen is anyones guess but you know what happens when you pull someone of life support who relies on it to survive, they die. And so the bigger question is where is the bottom well we are no where near a bottom in our stocks or our real estate. Yes I agree we all need somewhere to live but rent is cheap and buying a huge liability is not and that is what will keep you poor in the downturn. If you rent you will have cash and cash is king when the shit hits the fan.
Many fortunes have been made by those who positioned themselves with cash when those (the masses) were restricted by debt.
rupert says
I hear what you say Ken…but …How many people can afford to pay $500 per week rent and save cash as well…Not many I would have thought, and if they can afford that scenario they probably already own a number of properties. Money is cheap at the moment and will probably not get any cheaper so it gives you about 3 years to pay down your own debt which is sustainable.
$400,000 in borrowings at 4.99% P&I is $536 per week if you even need that much.
Just do your sums first…
Ken says
Rupert, Thank you for your sincere reply. At the moment, I am helping my son with a renovation of a 3x1x1 house on 841 sq2, that he bought for $200,000, which is being rented at the moment. He pays interest only at the moment which is $850 per month to the Commonwealth bank. This is in beautiful Cairns, North Queensland, and he’s looking at another one for $209,000. Just missed out on 3 others for less than $200,000. Naturally you can’t do this in Sydney, but who wants to freeze their butt off in cold weather where you can’t even hold a hammer. I have full confidence in the market returning to it’s former glory by 2015. So you will be able to pay a house off in a lot of places if you look around. If you like cold weather, I hear that it’s cheap out in the Hunter valley region too. Cheers, Ken.
Steve says
I must say Dean it is nice to hear an experienced property investor who understands the situation of us Gen Y. Congratulations on your success. Its a refreshing break from hearing other baby Boomer aged investors laughing and criticizing us for being “lazy” or Having a entitlement mentality. my parents argue that they dealt with 17% interests rates which is true. However give me these rates on 70-80k properties rather than 5% on 700k properties. I also think it will take a lot longer for those 700k properties to hit 7m in value compared to the time it took from 70k-700k in growth. especially now the baby boomers are more likely to downsize and sell investments now. The other argument is “wages were way lower” Very true but average wages back then were buying properties Thatcher on average 3-4 times yearly income. Show me anything within 30km of Sydney that is less than 6-7 times the average wage (I’m talking to buy a house nit a unit to raise a family )
The baby Boomer generation had a unparalleled period of historical growth in property and have pushed prices up to these crazy levels especially in Sydney.
I’m 28 and have saved around 180k to get into property and thinking it’s about time to finally pull the trigger but am nervous about the worldwide situation and the historical worldwide trends based on baby Boomer spending cycles. I guess I am a student of Harry dent who appears to have been correct about most trends and events like the gfc. He thinks property in general is overvalued in Australia. Who really knows?
Ken says
Tina, buy now, as I explained above about cheap houses, but what ever you do, don’t buy in Sydney. Only unwise people do that. I understand people being afraid to buy at any time when you think you have got to spend over $250,000 to get a house. A lot of people in Sydney are selling and buying the same house in Cairns and banking $300,000. There are plenty of good houses around for $200,000 + but you need to be quick as the housing market is already taking off. shares in my opinion are a wasted space as you can live in a house, but you can’t eat shares. A lot of people as you can see tell of how well they’ve done and should know better but have learned nothing from the past. Maybe they want you to rent one of there houses and prefer to keep it that way. Rent is dead money and you will do better by buying good livable houses. Ken.
Cherry says
Ken
There are not many properties for sale for that price, in the places where there are jobs! Please take note of the words “jobs”! Most of the people on this site disagree with your comments about historical housing cycles etc. I am no economist but I get sick of people baying like lambs about house cycles and prices going up leading to a profit “because they always have done so in the past”.I agree with Dean. Once upon a time, many people got rich through investing in housing. However, we live in a different ‘world’ economy now. Most of the jobs in your time were in this country. Now, they are not! There is no job stability, even in the health sector where i work. If there are no jobs, many of which have not just been taken by foreign countries such as china and india but also due to the advent of technology, how then are the youth of today supposed to afford a mortgage? People who live near places where there are jobs, cannot afford the house prices.let alone the rent.
I am on a good wage (although my job hours have been cut) and with a 30K deposit leaving a mere 240K loan plus council rates, I am just about ok. However, if i were to move to where there are more jobs eg nearer a city, I would not be able to afford a house unless I could sell mine for more than I bought it 3 years ago (yes…prices have gone down in that time, even for old houses like mine), and gather together what will be a mere 80K for a 400K house! If I sold up and rented in an area where there are more jobs, I would have great difficulty in saving a deposit as I would have to rent a house and rents are not cheap!
Furthermore, people are living longer and spending their retirement funds on nursing homes so the old inheritance scheme from the oldies is no longer valid. They are also still in the workforce so this means less work for the youth (especially in the health sector). Also, there are more single people today. Married couples both with jobs are a dying race. Single people struggle to buy houses. If you add up all these factors, plus the extortionate prices of houses, then how do you conclude that house prices will go up to the extent that profits can be made? Indeed, how can prices go up anyway? There are no buyers except for those baby boomers who now want to downsize!
I am cynical for those reasons. Do all these cycles take into account the fact that we live in different times now and there are no jobs????
Also, for those of you FTBs considering buying a house, do not buy one unless you can rent it out for the same price as your weekly mortgage repayments just in case you lose your job and have to move. Not unless you want to go into negative gear plus pay extortionate rents in the place that you have to move to to get work!
Cherry
Michael huggett says
Hi Cherry. You are right, without “job security” it is hard to commit yourself to either renting or buying. In your case maybe doing your place up, selling, moving to a better “job security” area and buying the cheapest house/apartment you can find, in a good area is the best idea. In my +70 years I have seen many cycles and heard many prophets of doom expound, with what sounds like good logic, all the negative aspects of the situation. However later with hindsight it was rarely never as bad as predicted. People who do well are those that bite the bullet and commit their money during these times. It is the Contrarian view, but normally better than climbing on the the wave just before it collapses like most people. If you wait for the “market” to hit bottom, you will always be too late! The truism “What goes up, must come down” is defined by gravity. In Housing and Shares, the opposite is true.
Good Luck
MHH
Ken says
Cherry, I have said many times before, that people like you never learn anything because you have the negative herd mentality. where do you live, in Sydney? If you don’t believe me about house prices, log into any real estate web sites. If you do live in Sydney, how could anyone afford to buy the average house on the average persons wage? At least you can’t whinge about nobody tried to tell you. The saying not worthy of help applies to a lot of people, and if you haven’t got the courage to make a $10 investment, you will never make a $100 one. I see you are a woman, or you would have a long white beard waiting for house prices to crash.