How is the Australian property market shaping up for first-time homebuyers?

22 August 2021

Article by Mr. Kunal Sawhney, CEO , Kalkine.

The previous year was marked with incredible price surges in the property market, with housing prices taking an aggressive leap over recent months. For over half a year now, the housing market has been witnessing an overwhelming demand due to record low interest rates.

The insurmountable buyers’ demand has helped sustain a housing price boom that was never seen before. Property rates have reached an all-time high in major cities across Australia, shuffling market participation from first-time buyers to more seasoned investors.

However, this was not the case initially, as the demand for the housing market was almost entirely made up of first-time homebuyers. Formed majorly by the millennial population, the pool of first-time buyers quickly overtook all other buyers in the market earlier this year. However, reins of the housing market soon shifted to investors as they collectively pushed the prices to unprecedented highs, making it quite difficult for first-time homebuyers to afford a property.

It will not be wrong to say that first-time homebuyers were able to taste victory, but only for a brief period. The disproportionately large stream of property investors has managed to crowd out first-time buyers, making them incapacitated in harnessing the benefits of the record low interest rates.

In the given dynamic scenario, some serious questions arise about how well-suited the property market is for first-time homebuyers over the long run.

Investors’ insatiable demand

It is typical for property market investors to exhibit an ever-increasing demand for housing even in the face of record-high prices. Investors rely on property value appreciation over time to obtain gains from their investment. Thus, rising property prices usually did not have any significant effect, if not positive, on investor sentiment. 

On the other hand, first-time homebuyers flooded the market at a time when interest rates were record-low, and government stimulus measures such as the HomeBuilder grant and stamp duty concessions were in place. Thus, being only faintly acquainted with the housing market, most millennial first-time buyers were pushed out as soon as prices moved out of control.

Reports from the Australian Bureau of Statistics (ABS) suggest that new loan commitments for first-time homebuyers in June saw a monthly drop of 7.8 per cent, while the new loan commitments for investors rose by 0.7 per cent during the month. The stark contrast in the direction of the loan commitments between investors and novice buyers is further affirmation that investors have overhauled the market for property.

It should not be overlooked that investors have an additional inflow stream in the form of capital appreciation on their existing property. This explains why the burden of debt on investors does not fall as heavily as it does on first-time buyers, who are mostly young adults looking to buy the property with cheaper mortgages than usual.

Thus, one can say that speculative tendencies of investors with a sound appetite for risk have led to spiraling house prices, landing first-time buyers in a situation where they are squeezed out of the market.

What lies ahead for first-time homebuyers?

Prices would have to be significantly lower than their current levels for prompting first-time homebuyers to make a re-entry into the housing market. Predictions by economic forecasters suggest that an interest rate hike could take shape by 2023. With inadequate wage growth to match the rising property prices, first-time home aspirants are likely to be left with little or no choice other than to opt for renting out a house when rates increase. As a resolution, buyers can utilise fixed-rate mortgages while buying properties, which can help them wade through interest rate fluctuations.

However, pulling the brakes on the housing price surge may hurt investors more than first-time homebuyers as the losses faced by them could be devastating. At present, the possibility of future rate hikes has created a window for investors to lock in profits that may decline in the coming years as housing demand cools off. Thus, the winning streak of investors may come to an end when increased interest rates push enough buyers out of the market to cause a reduction in the prices.

However, in the relatively nearer future, first-time buyers might just be on the lookout for any decreases in the prices. With housing prices in capital cities like Sydney blowing off some steam in the recent months, it will be exciting to see if the decrease spreads to other cities as well.

All in all, property investors appear to have taken away an appealing opportunity from first-time buyers, leaving them on the sidelines to wait for the boom to end. Only time will tell whether the housing market cools off before the interest rates rise or if the investors would continue to reign over the market.

Mr. Kunal Sawhney, CEO , Kalkine.