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Demand for home loans drops…for now
The number of new home loans has fallen for the fourth month in a row.
However, the continuing strength of employment and house prices indicates that this fall in demand will be short-lived.
Demand for new home loans dropped nearly 8% in January against the backdrop of rising interest rates and the end of the Federal Government’s more generous first home buyers grant.
In January, 51,056 loans were granted to owner-occupiers, a 7.9% seasonally-adjusted decline on December, according to Australian Bureau of Statistics data released earlier in March. It was the fourth consecutive monthly decline.
The President of the Real Estate Institute of Australia (REIA), Mr David Airey, said
- “The impact of the three consecutive interest rate increases in the December quarter of last year and the phasing out of the First Home Owners Grant Boost are clear in these figures. The number of finance commitments to first home buyers is now less than half of what it was six months ago.”
An economist at financial markets research group 4Cast, Michael Turner, agrees the decline was due to first home buyers retreating from the market, as the temporary boost to the first home owner grant was wound back.
- “It is not as though it was a massive change in policy – for purchases of established home it only dropped from $10,500 to $7,000.
That’s not huge, but it seems to have been enough, along with at least 0.75% of interest rate rises, to have taken the incentive away for a lot of first home buyers.”
Buoyant property market
The reason for the tightening of monetary policy is that the property and employment markets have bounced back so well.
House prices rose by an average of around 10% in 2009 and continue to show strong gains. As the RBA commented in its March meeting:
- “The market for established housing had been very buoyant, with auction clearance rates at high levels, notably in Melbourne. Data for housing prices suggested that nationwide prices had continued to grow at a rate of close to 1% per month in December and January. Building approvals in December and January were running at a relatively high level compared with the past year…”
Unemployment is also remarkably low, with the Australian Bureau of Statistics reporting a further reduction in February to 5.3%. This compares to nearly 10% in the USA, and is far less than was being predicted only a few months ago.
Together these figures point to a continuing strong demand for property.
Looking forward
The RBA will continue to move interest rates towards more “neutral” levels, meaning that it believes that the market stimulus given by extraordinarily low interest rates is no longer needed.
As the RBA’s March Board minutes state:
- “On balance, members concluded that the evidence that had become available recently had confirmed that it remained appropriate for interest rates to move gradually towards normal levels, and that it was timely to take another step in that direction.”
Many economists believe the RBA will put up the cash rate by at least another 0.25% to 0.50% by the end of 2010.
Conclusion
Increasing interest rates and the end of the first home buyer boost has had a temporary dampening effect on the number of home loans being taken out by borrowers.
The reason for this tightening of monetary policy is due to the buoyant Australian economy. Unemployment is much lower than other economies, and house prices rose around 10% in 2009 and continue to rise by 1% per month.
Therefore this slump in home loan borrowings is likely to be short-lived.
Buying property – research your market
For those considering entering the real estate market, there are many factors to consider.
One of the keys to success is research. You need to research the area, research the property and research the financing.
If you are looking to buy a property in which to live or as an investment, where should you begin? Quite simply, you need to do lots of preparation – after all, this is a major financial decision.
Do the research
You need to look at a variety of properties, find out sale prices, understand where the market is going, how much property is available, and how quickly property is selling.
This information can be gleaned from attending auction sales, looking at the published sales results in newspapers, talking to real estate agents and attending open inspections.
Some agents’ websites also show sales results, plus for a small price you can get pricing data from various online property data websites.
It’s easier to be more analytical and less emotional when buying investment property. Look at recent sales and rents. Do you homework on income potential, understand what your holding costs are and make allowance for some routine maintenance over the years. Local agents can provide estimates of rental value and steer you to similar properties to compare.
Be cautious about buying an investment property that requires a lot of upfront initial expenditure: similarly, be careful about choosing a property that will have future maintenance concerns.
Look at the funding you will require and make allowance for at least a couple of week’s vacancy each year.
Are inspections worthwhile?
Should prospective buyers always obtain a building inspection? That’s a definite yes, although sometimes you have a clean bill of health on a new strata building for instance, and so an inspection may not be essential for that type of property.
It’s especially important to get a building and pest inspection for an old building. This type of inspection can pick up building defects and potential pest infestation such as termites or woodworm, and inspectors can access tricky areas under floors or on roofs.
Archicentre, the building advisory serves of the Royal Australian Institute of Architects, writes about 25,000 building inspection reports a year nationally. They report that common problems are cracking in the house structure, termites, damp, plumbing defects and electrical faults.
If you’re still keen on the property after receiving the report, you can use it as a bargaining tool to negotiate the price down.
Sometimes inspectors advise not to buy a house at all. For units, check common areas too, as you may be levied with additional fees if there are problems there.
When viewing a property, you should have realistic expectations. Make a list of essentials. If a major one is missing, perhaps you can make alterations. You may be able to install a skylight or a bigger window, for instance.
Buyers’ Agents
For people who don’t have market knowledge or enough time, buyers’ agents perform a good service. They can often deliver the required property within a short period of time.
Different scales of fees apply and all will be quoted: a success fee, an up-front fee plus a percentage for success and a fixed fee. Buyers’ agents do not list or manage properties for sale.
Buying at auction
Buyers’ Agents can also bid for you at an auction, but of course many people don’t use a Buyers’ Agent and so must attend the auctions themselves, which can be a daunting prospect.
When buying at an auction you must register and prove your identity. You will be given a number, which you display when bidding. To understand how the process works, attend several auctions you are not interested in so you can watch dispassionately.
The auction price does not always reflect the valuation. If three or four people want a property, the potential sale price can be affected. So when buying at an auction ensure you have a good understanding of the market.
Research the home loans
Making sure that you have the right home loan is also key. The interest rate, the flexibility, features, etc are all important. That’s where our expertise comes in – we can help you to shortcut the research and effort to getting the best loan for you.
You must do the research
In other words it comes back to research. To purchase well you need to get to know the area well, see which types of homes are popular and sell easily, understand any potential building developments or rezoning, and inspect plenty of properties.
You also need to research the best home loan for your needs.
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As appeared on 1stStreet.com.au March 2010
