I reckon everyone’s got the First Home Buyer puzzle backwards, and FHBs could quickly go from holding the market back to driving it forward.
Reading this article now , could be the most profitable thing you’ll do all day.
The classic line goes that you need FHBs to get the market pumping. So long as they’re sitting on the side-lines, you’ll never see serious price growth.
But I reckon it’s a chicken and egg problem, and everyone’s got the causation backwards. It’s not FHBs that cause price increases. It’s price increases that cause FHBs!
It’s a bit of a tricky line of thought, but let me flesh it out.
For a few years, the absence of first-home buyers has been a bit of a mystery. Back in 2009/10, FHBs made up 27% of all home purchases. Today, that’s down to just 8%!
That might sound dramatic, but it’s partly because softer demand from FHBs is being offset by extra strong demand from investors. This chart here tells the story, showing the strong pick up in investor activity, relative to owner-occupiers.
And while the share is down, the actual number of FHBs purchasing a house each year hasn’t actually changed much in the past couple of years.
However, the fact remains that given where we are in the cycle, we’d be expecting to see FHBs being a lot more active in the market.
And it’s also true that most of the FHB grants for existing homes have been unwound now. That showed up as some “pull-forward” before the expiry dates. But that created a hole post expiry that has yet to be filled.
And so the question remains, why are FHBs still missing in action? Where did they all go?
This is where Digital Finance Analytics comes in. They had the bright idea of actually going out and asking them what was going on. The last time they did this was back in 2009/10, so it gives us a chance to see what’s changed. The results are very interesting.
To start with, they looked at what FHBs were buying. They noted a pronounced shift away from houses towards apartments.
Here’s the share buying houses in each city…
And then apartments:
Note that in Sydney, a huge 70% of FHBs get their foot in the door with an apartment. I didn’t quite realise it was that high.
They then asked FHBs about their total commute time – how long they spend each day getting to and from work. The results were staggering. Check out the chart:
The first thing to note is that the amount of time spent in traffic (the overwhelming majority of FHBs drive to work) is horrendous. In Sydney, FHBs are spending 160 minutes a day commuting. That’s over 2½ hours every day!
That’s another work day and a half on top of the working week!
Man, I’ve suddenly got so much more sympathy for FHBs!
But the other thing to note is how much commute times have jumped up in just the past three years. Looks like in all cities it’s gone up by about 40 minutes a day.
If this isn’t a town-planning crisis, I don’t know what is.
And so FHBs are being forced into a punishing trade off. They’re being forced to accept extended commute times in order to buy somewhere affordable. And it looks like many end up in new developments on the outskirts of town, where a lack of public transport options forces them onto the roads.
So the question then is not why are the FHBs not buying. If that’s the bargains they’re stuck with, why are they buying at all??
That might sound like a joke, but it’s not. Why would you take this on? If the cost of renting is more or less the same (as it is in most places), and purchasing a house means moving away from the neighbourhoods you love and where all your friends live, and taking on 2½ hours commuting every day, why would you buy a property?
There’s one answer to that. Capital gains.
10 years ago that was the received wisdom. You bought a place somewhere that wasn’t super awesome. You lived in it for a few years, got your foot in the door, and used the capital gains to trade up into something better.
You toughed it out for a while, but it paid off in the long run.
But that only works when prices are increasing. If prices aren’t increasing, or worse yet, are falling, then you end up sacrificing you neighbourhood and family for nothing.
And falling prices is exactly what we’ve just had.
In fact, RP Data show that in real terms (adjusted for inflation), national house prices are still almost 5% below their most recent peak.
Even in Sydney, where prices have grown 10% in nominal terms, house prices have actually fallen slightly in real terms.
And so again, you have to ask yourself, if prices aren’t rising, why would you take the plunge? Make all that sacrifice and risk having nothing to show for it?
To me it seems pretty a rational choice. Stay at home a little longer, save up a bit more of a deposit. Keep renting in the suburbs you like. Wait until the market is showing clearer signs of momentum.
If this thesis is true, then it’s not FHBs that drive prices, but prices that draw FHBs to the market.
But now the market is saying come on in. All the signs are that price momentum is here and gathering strength. 2014 is going to be a big year.
And so you’d have to think that’s going to embolden FHBs to take the plunge. Get their foot in the door before the market leaves them behind and all that.
Of course if that’s true, then we’ll have a major market segment re-joining the game just as things are heating up.
And that means even greater acceleration in prices.
It’s a thesis. Anyone know any FHBs we can ask?