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.
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.