By Julian

Buying your first home comes with challenges, but for those shopping in the sub $700k bracket it’s a case of ‘Game on!’

First home buyers looking to capitalise on stamp duty exemptions are not only pitted against investors who see this bracket as a ‘safe zone’, but are also competing with the swelling number of down-sizers and new entrants to the Melbourne market who are coming from Perth, Adelaide or Queensland.

Add to this the latest first homer buyer initiative, the First Home Loan Deposit Scheme (FHLDS) – this time at the federal government level – which guarantees loans for the first 10,000 successful applicants and alleviates the need for costly mortgage insurance. The question is, what kind of impact will this have on properties up to this price point?


The FHLDS Lottery

Clearly this is a huge advantage for the 10,000 first home buyers who are successful but before we get too excited, let’s look at the fine print.

Under the scheme, the Government will offer loan guarantees for properties priced up to $700,000 in the Sydney area, and $450,000 across the rest of New South Wales.

In Melbourne, eligible buyers will be able to access the scheme when purchasing a home worth up to $600,000, and $375,000 across other parts of the state.

And for Brisbane, it’s capped at $475,000 and $400,000 for the rest of the state.

From a buyer profile perspective, singles can have a taxable income of up to $125,000 a year or $200,000 a year for couples.


The numbers

Let’s consider what a first home buyer would need if they were to buy a $600,000 property without the benefit of state or federal first home buyer schemes and avoiding mortgage insurance.

20% Deposit:   $120,000

Stamp Duty:    $33,000 (approx.)

TOTAL:            $153,000

Don’t forget, the amount above does not include any professional fees such as conveyancers, building inspectors, solicitors and buyers advocates.

So, say our first home buyer can afford to save $300 a week. In order to get the capital to get into the market it would take them 510 weeks of disciplined saving, or almost 10 years. And judging from Australian trends, the property would cost much more than $600,000 after 10 years so even after saving all that cash, it would most likely still be out of reach.

However, with the stamp duty exemptions, the loan guarantees and a mortgage insurance waiver, a first home buyer would only need a deposit amount of 5% (or $30,000) to get into the market. This is $123,000 less than the previous scenario making it way more achievable. By putting aside the same amount of $300 per week, our first home buyer would be ready to start their property hunt in only two years which is a fifth of the time it would take compared to the previous example, not to mention alleviating most from (humbly) approaching the bank of mum and dad.

According to NHFIC (Nation Housing Finance & Investment Corporation) data, these examples are already beginning to play out with median income levels of the first tranche of 3000 applicants at the pre-approval stage being $68,000 and $108,00 for singles and couples respectively – a huge segment that is hardly considered to be in a high-income category.


So, what impact can we expect?

In short: competition.

Seasoned investors who enjoy the sub $700,000 ’safe-zone’ will start to feel the increase in demand from new entrants. Adding to this is the stock shortage of properties at this price point. (Ironically, this may actually play out as an advantage for investors who can afford to narrowly edge out first home buyers who are restricted by the $600,000 and $700,00 caps on purchase prices in Melbourne and Sydney).

However, owning to the ‘first in best dressed’ scenario for the government backed home loans, and the fact that applicants have only 90 days to find a property once approved, we may see buyers taking risks and making quick decisions early in the year to ensure they don’t miss out, especially since only 7000 grants now remain in the second tranche of approvals.

House and land packages will be sought after so builders and developers will naturally benefit from this increase in demand. When compared to building inspections, countless viewings and attending emotionally driven auctions, the comfort of completing a sales form and buying off the plan can be seen as a much more comfortable process for some first home buyers.

The 20-34 aged home buyer segment constitutes a population of around 5m in Australia, and this is typically the age most buyers make a start. Although not all of this segment are first home buyers, NHFIC analysis shows 75% of the FHLDS applicants are under 35 years of age. With investors gaining confidence and our aging population seeking smaller dwellings, we can expect a small surge in the ‘affordable’ market in early in 2020, a year that is forecast to be strong across the eastern seaboard anyway. And if you’re a first home buyer, this is a great opportunity to get into the market sooner so be diligent and get moving!