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?
mark says
Pretty reasonable analysis.. I am a prime FHB candidate, and my view in Adelaide is to keep renting…
I can rent my current house for about 40% of what it would cost to buy…. And i can’t see house prices growing at 7-10% a year for the next 20 years, so financially, it make much more sense to keep renting, for 400 a week, and the 600 a week i save over buying, invest into something that will grow at 7-10% or most likely even more… like a business of my own, or even shares…
I think this position is growing amongst FHB, hence the low FHB participation rates…
Prolly also just the sheer magnitude of the numbers…. How many FHB’s can afford $1000 a week to buy a very basic place, without marry or partnering up with someone at any rate?
Patrick says
A great analysis Jon, and sound theory, there are 2 other main factors contributing that you could also take into account,
firstly there is no longer a first home buyer grant (unless you build a new house in one of these new developments in whoop whoop, that you talk of that have not much going for them in terms of infrastructure and transport) and this takes the incentive away to do anything in a hurry.
and secondly with so many investors hitting the market in a big way and flooding the rental property market with oversupply this is the first time in a long time that tenants have the upper hand in terms of negotiating rents and they’re not negotiating up…..
Ive got 2 investment properties both without tenants now and a distinct lack of people wanting to rent them.
so what will it take for them to jump in and buy?
Mikey says
House prices are going to go down by 50% soon. It’s not difficult to predict. Interest rates are at an all-time low, and when they go up again no one will be able to afford the current house prices, because everyone takes out a mortgage to buy a house.
But here’s a recent news article that will help you…
http://www.news.com.au/finance/real-estate/us-demographer-predicts-hit-to-aussie-home-prices/story-fndba8uq-1226816510923
I’d like to short sell some houses to you. Can you find me a way of doing this?
Ed Burton says
Hi Mikey,
Your prediction is amazing!
Just like Professor Keen (who Harry Dent is good mates with) you will be walking (figuratively, but definitely financially) to Mt. Kosiosko as well. I’ve been in real estate all my life and if I had been listening to “experts” like Harry Dent I’de still be living in a 2 bedroom unit near a station! I’m sure guys like Harry Dent will be right ONE day but when? After all the sun is going to burn out so many billion of years from now. While I’ve been waiting for the likes of Harry Dent to be right I’ve accumulated over 20,000,000 of real estate (NET i.e. no debt)….. If Harry Dent is soooo smart how come he’s still working? Have you followed his previous predictions, if so I know where you would be now….. FLAT BROKE!! Do yourself a favour, find someone who has made their fortune through real estate and ask them what they think about it falling 50%. Those that are in my coaching groups have made more than a million each in the last few years following the advise of someone who is rich…..me! But then again, it’s cheaper to go to a free seminar or buy a $20 book or listen to a journalist in a $5 newspaper isn’t it.
Please sell me your real estate and I’ll buy NOW FOR CASH @20% below it’s market value…..that way you “save” 30%!!!
Eileen says
Hi Ed
I’d have to agree with Mark and say your post does sound rather arrogant. I would question why someone worth $20m (NET) would still be coaching groups and not on a private yacht somewhere in the Carribean! I am a reasonably new investor in the property market, (excluding my own home). I am willing to learn. Rather than criticise others, what predictions can you make to educate us please?
Regards
Eileen
Mikey says
Hey Ed,
I once owned a house freehold and made a lot of money on it but lost it due to divorce. Very messy. I decided I wasn’t interested in buying real estate again, and I’ve been having a good time with my hard earned money since.
Now I’m not sure you understand what short selling is. Selling short means I don’t own it to start with. What happens is you lend me your real estate, I sell it to someone and I put the money in a trust account. Then in some agreed timeframe, say 5 years, I buy your real estate back using the money in the trust account and give it back to you. Because the house prices will have dropped significantly, I will make some good money to allow me to continue my fun lifestyle. Short selling (and subsequent re-buying) involves paying MARKET PRICES. I won’t be selling anyone’s property for 20% under market value. I want the FULL PROFIT, because I’m sure you will point out that I’m taking some risk, I might lose.
You won’t lose thought, your real estate is safe, you had it before and you will have it again after I buy it back.
Kat D says
FHBs competing with investors who can negatively gear; no cap on number of residential properties a landlord can own; competition for housing from cashed-up foreigners from Asia who send their offspring here for education and to eventually lord over us because of Australia’s perceived freedom that will have to be curtailed as metro commute times continue rising. It seems to have become more important to own the latest cell phone/tech gadget or finance a new model Hyundai or VW than to own a roof over your head. Pity about our foreign debt levels and persistent current account deficits because Oz has to import more valuable items than we produce for export. Not to worry, our grandchildren will be paying it off in a transnational quasi-socialist system if Europe doesn’t freeze over or the population isn’t decimated from global warming.
mark says
Hey Ed Burton..
Your confidence, almost bordering on arrogance is amazing!
Have you reviewed that well publicized study into 450 odd years of house prices in Holland on canal front property?
Over that time frame, returns pretty much just equaled inflation.
Anytime property prices substantially over or under perform inflation for any substantial length of time, eventually they revert.
So in the study, there was like an 80 year period where prices ONLY FELL.. So you would have older people no doubt like yourself, running around saying that, “in my lifetime, property only has gone down in value, so its a crap, long only investment”
So yeah, property here in AUS has been a one way bet these last 45 years, doubling every 7-10 years… does that mean that will be the case moving forward?
I don’t know… i would suspect not…
Any monkey could have made there fortune in real estate from 2000 thro 2008… i know several of them!!
What of the future however… I am not as arrogant as to profess to know… But i would urge people to re examine there long held assumptions…
Finally, what does 750K (say average Sydney house) grow to if you inflate it at just 7% a year, for 50 years???
And then do the same for the wage side… Grow 75K a year (prolly reasonable avg Sydney wage) at 4% a year for 50 years….
To save you the time, the above scenario means the house is worth circa 22Miliion, and the wage side goes up to about 530K..
Have you ever done this before, and thought about the implications??
Hmmmmm
Clearly, that can’t happen…
Mark
sanjay says
Mark and Ed
Good debate I am sure will benefit a lot of people, my background – I am a migrant from India, so may be some figures dont match to Australia but what real estate does is amazing, back in 1989 I bought a house to leave in for AU $10000-00 we lived in it for 11 years and in 2001 locked the house and migrated to Australia, last year I went to India and got a maket valuation from two different valuers the house is woth between AU $170000 & 190000 so over last 25 years it amounts to roughly 10 to 11 percent appreciation year on year good thing tax free money and you can use the house too
Simon says
Mark, maybe you can tell me how inflation is calculated over 450 years, houses look similar but are vastly different. no electricity, windows etc. but what about comparison of a car to a donkey, or a kitchen with running water and an cooktop to a fireplace? what about types of income and changes to the standard of living? Surely even if you only take the last 100 years the study of inflation for use as a prediction tool of future price levels is meaningless.
The Ram says
Hey ed, I am sure your comments would be taken more seriously if these people actually knew your real name and why you work , you have made me a phenomenal return of 30 percent in months, better still , forget about them , I don’t want them getting in on my deals and learning the system and your invaluable education, as they say fools rush in where angels fear to tread, this beat up will only allow the rich to get richer and keep those papers selling :-)…thank you for opening my eyes..
mark says
Sanjay, u mean what real estate has DONE has been amazing…. and clearly that is absolutely correct!
The real question is tho, what will it do moving forward?
Is 7-10% a year capital growth for my lifetime coming up even possible? Will i get the same amazing capital growth as all the boomers on here, who now think they are all so clever?
In 30 years time, will youngsters be willing to pay 30 times there annual wage to buy the same house that i can buy for 10 times my wage today?
My experience has been that property proponents in general are not very good at basic maths… Hence the stunning silence on some of these facets…
Re inflation over long time frames…. loaves of bread haven’t changed much…. i think basic food is a key metric along with basic wages for unskilled labour…not that hard really…
And yes, clearly you can make money in real estate without relying on capital growth, and to the people that actually add value, and expand the productive capacity of the economy by adding to the available housing stock, well i applaud that..
Unfortunately however, that doesn’t describe the majority of investors…
Simon says
Mark
I am neither a proponent or detractor of property. What I would like to say however REAL growth for leveraged investors is not the issue inflation is. Inflation allows leveraged investors to take money from savers.
Your mention of a loaf of bread is interesting as an example of how inflation can be calculated is really absurd. a few centuries ago people spent a large part of their time providing food in our modern world however far less time is needed to provide food.
Likewise in the future the amount of time that is used to purchase a home might be less and the consumer may consider it more important to spend on other things such as healtcare. I mean who would have thought just 50 years ago that so many people would have been going to a gym these days?
For the leveraged investor however that is not the important factor inflation is and if the world central banks continue to “print money” each time there is a need to move the economy along then up the prices go