2007-2010 - FHBs - Purchasing Power

I've seen some posts skeptical of a 2009 FHB bubble, so I put some figures to paper and came up with the below:

Jane & Johnny
Income $35k pa (each), $30k net ($2500 pm, $5k net combined pm)
In all scenarios $7k will be subtracted from deposit for stamp duty/costs to borrow/pest & building inspection
Borrowing Calculator Used: http://www.aussie.com.au/home-loan/calculators/borrowing-calculator.htm
Rates Used From: http://www.loansense.com.au/historical-rates.html
25 Year Loan Term Used For Example

July 2007
Rate: 8.05%
Saved Deposit: $15k
FHOG: $7k (-$7k costs)
Total Deposit: $15k
LVR: 100%
Serviceability Allows: $347k
Deposit Allows: $N/A
Purchasing Power (Including Deposit): $362k

July 2008
Rate: 9.45%
Saved Deposit: $15k
FHOG: $7k (-$7k costs)
Total Deposit: $15k
LVR: 100%
Serviceability Allows: $312k
Deposit Allows: $N/A
Purchasing Power (Including Deposit): $327k

July 2009
Rate: 5.55%
Saved Deposit: $15k
FHOG: $14k (-$7k costs)
Total Deposit: $22k
LVR: 95%
Serviceability Allows: $429k
Deposit Allows: $418k
Purchasing Power (Including Deposit): $440k

January 2010
Rate: 6.66% (using Dec rate)
Saved Deposit: $15k
FHOG: $7k (-$7k costs)
Total Deposit: $15k
LVR: 95%
Serviceability Allows: $389k
Deposit Allows: $285k
Purchasing Power (Including Deposit): $300k

What effect would the Westpac 87% max LVR have on this couple if they were new to the bank?

January 2010
Rate: 6.66% (using Dec rate)
Saved Deposit: $15k
FHOG: $7k (-$7k costs)
Total Deposit: $15k
LVR: 87%
Serviceability Allows: $389k
Deposit Allows: $115k
Purchasing Power (Including Deposit): $130k

Some other figures:
Approximately 30% of housing finance in mid 2009 was provided to FHBs, that dropped to 20% by years end and with the FHOG reduced further Jan 1st 2010 it will continue to fall (IMO).
Approximately 50% of FHBs in mid 2009 were borrowing with LVRs above 90%.

I haven't tried to twist the figures to make them work out this way, I honestly just picked a couple of average looking wages and used the first figures I came up with. Feel free to counter them with your own if you think you can provide a more reasonable scenario...

Someone on Hot Copper mentioned the stamp duty costs were too high and that they are very low/non-existent for FHBs, so here are the 2009/2010 examples again with $3k costs:

July 2009
Rate: 5.55%
Saved Deposit: $15k
FHOG: $14k (-$3k costs)
Total Deposit: $26k
LVR: 95%
Serviceability Allows: $429k
Deposit Allows: $494k
Purchasing Power (Including Deposit): $455k

January 2010
Rate: 6.66% (using Dec rate)
Saved Deposit: $15k
FHOG: $7k (-$3k costs)
Total Deposit: $19k
LVR: 95%
Serviceability Allows: $389k
Deposit Allows: $361k
Purchasing Power (Including Deposit): $380k

Obviously the figures are a little closer in this example due to the 2009 buyers hitting the serviceability limit before the deposit limit.

Investors are going to have to do a lot of buying to fill the hole that these FHBs are leaving/have left...

How would the purchasing power look with further increase in interest rates or a 90% LVR becoming the norm as the banks tighten up their lending?? Do the figures and work it out :)
 
Westpac have decreased their LVR from 92% to 87%, adding $12,500 to a deposit on a $250k house and in turn $25k for a 500k house.

Using 50K as a deposit, a 5% change in LVR ie from 95 to 90 halves the amount you can borrow. 5% of 1,000,000 is 50k, 10% of $500,000 is 50k so going from 92 to 87 has halved peoples borrowing power. Only if they want to use Westpac.

Raising interest rates, lowering LVRs. What will they do next? Stop offering home loans completely?

The rules are tougher at Rams, Westpac's brokers who write more than 20 per cent of the bank's home loans. A spokesman confirmed yesterday that a loan through Rams must meet a loan-to-valuation ratio of 85 per cent instead of the former 90 per cent.

Tougher again are low-doc loans, where the loan-to-valuation ratio must be no more than 80 per cent instead of the former 82 per cent.
 
Westpac have decreased their LVR from 92% to 87%, adding $12,500 to a deposit on a $250k house and in turn $25k for a 500k house.
Using 50K as a deposit, a 5% change in LVR ie from 95 to 90 halves the amount you can borrow. 5% of 1,000,000 is 50k, 10% of $500,000 is 50k so going from 92 to 87 has halved peoples borrowing power. Only if they want to use Westpac.
Raising interest rates, lowering LVRs. What will they do next? Stop offering home loans completely?
Quite interesting the effect that available LVR has on ability to borrow/purchase, this little graph may also help to put it in perspective:
http://blogs.domain.com.au/lvrgraphic.jpg
 
do you know that the FHB thing was 14k (for a new build) a few years before 2008? I think around the time it came in (2000 maybe? I think it was to offset the gst). It was 7000 for an existing house and 14000 for a new house. it was there for a year or two and then it was dropped back to 7000 across the board until this latest lot came in.

I don't remember prices dropping significantly in the time after the first one dropped, in fact, we found the priced skyrocketed for a few years there . this was the period of time that we bought almost all of our properties. One of our houses went up 40% in 2003 alone (and that's on bank valuations).

I personally am expecting a few more investors in the market especially around May because of the changes to the super laws.
 
hobo-jo

I agree with your main point that the drop in LVR being offered has had a major impact on FHB price limits.

The two key assumptions are:
1. FHB have very low savings/deposit available
2. FHB affordability due to income is higher than affordability due to savings.

This second point I think will have different impact on what I guess are the two ends of the FHB market. Inner apartments vs outer houses/units. Big generalizations approaching....

From changes in LVR offered I expect a big impact on nice inner city apartments. My reasoning being that the FHB who want to buy the $500K apartments probably earn good white collar money (2 x $70K+) but might not have serious or any savings.

I think the outer suburban housing/unit market is a different category of FHBs with much lower incomes who are likely to be income limited in terms of purchase price rather than deposit limited.
 
Quite interesting the effect that available LVR has on ability to borrow/purchase, this little graph may also help to put it in perspective:
http://blogs.domain.com.au/lvrgraphic.jpg

interesting thread, which is probably why many are predicting investors will be the ones driving the housing market this year whilst FHB's drop off due to lending limitations, which means they will still be renting or more pushed into renting, it seems like the cycle continues.
 
interesting thread, which is probably why many are predicting investors will be the ones driving the housing market this year whilst FHB's drop off due to lending limitations, which means they will still be renting or more pushed into renting, it seems like the cycle continues.

There'd be less people renting due to the mass of FHBs last year, therefore increasing the vacancy rate and reducing pressure on rent increases.

Add to that investors are expected to pick up where the FHBs left off, adding more rental properties to the market and removing more pressure on rent price increases.
 
The two key assumptions are:
1. FHB have very low savings/deposit available
2. FHB affordability due to income is higher than affordability due to savings.
These are not assumptions Neophyte, while I'm sure there are FHBs that save up larger deposits, in early 2009 when the purchasing power was at it's greatest, OVER 55% of FHBs were borrowing at an LVR of 90% or greater (with over 30% specifically at 95%+).

Refer Fujitsu/JP Morgan "Australian Mortgage Industry - Volume 10"
Obtain a copy here: Link

At the same time as this high LVR FHB borrowing we also saw them making up 28%+ of all finance figures, the highest percentage of the market since the data has been collated (1991) and for the first time in the same data set that the average FHB loan far exceeded the non-FHB loan (had been crossovers before, but never by more than $5k or so). February 2009 saw the average FHB loan exceed non-FHB by $35k.

Refer ABS Finance Figures: Link

interesting thread, which is probably why many are predicting investors will be the ones driving the housing market this year whilst FHB's drop off due to lending limitations, which means they will still be renting or more pushed into renting, it seems like the cycle continues.
At this stage it is only a prediction that investors will pick up the slack, I suspect we will need to wait for the next 3-6 months figures to see if they really are.
 
There'd be less people renting due to the mass of FHBs last year, therefore increasing the vacancy rate and reducing pressure on rent increases.

Add to that investors are expected to pick up where the FHBs left off, adding more rental properties to the market and removing more pressure on rent price increases.

And due to the mass of FHBs forwarding the purchase this year their number is going to fall this year and so will the number of new home starts.
Add to that the larger deposit required and the number of FHBs in 2010 will fall even further. Since population numbers continues to increase but new home starts decrease it will put pressure on the rental market once again.
A few more .25% rate increases will further decrease the FHBs borrowing power and force them to rent for longer before they can save for that deposit.
Do you think having more people competing for less rental properties will remove the pressure on rent increases ? I think 2010 will be bad year for tenants and rents in the capital cities will go up by 15%-20% by the year's end.
Investors were expected to pick up where FHBs left off only with the low yields and only modest property price increases expected the incentive to invest in new houses is just not there. I suspect that investors who would be looking to buy at the moment are looking at buying established properties preferably at block value and with subdivision potential later on rather then buy vacant land to build rental properties on it. Maybe if rents went up 25%-50% over the next year we could see the investors regain interest . :D
 
Don't know if anyone saw the ABC news tonight. The finance guy (not Alan) put up a graph showing that housing is actually affordable and that there is no affordability crisis.

Not sure where the graph came from (who did the study) - missed that bit.

Thought it was interesting though.

Regards Jason.
 
Maybe rents will increase to appease investors, maybe prices will drop, maybe both.

Westpac asked us what we thought, and apparantly...

..... 84% of us are expecting house prices to rise in 2010, and 21% of us think it'll be by 10% or more :).

I guess you're in the 3.4% that think they'll fall.


The graph of the 2nd page of the report seems to indicate that these forecasts become a self fulfilling prophecy......
 
Rismark did the study.
So in other words, let's change the measuring stick to prove housing is affordable?

Westpac asked us what we thought, and apparantly...
..... 84% of us are expecting house prices to rise in 2010, and 21% of us think it'll be by 10% or more :).
I guess you're in the 3.4% that think they'll fall.
The graph of the 2nd page of the report seems to indicate that these forecasts become a self fulfilling prophecy......
Well I would like to see the data over a long period and on the same chart as growth, a few years in a bull market is hardly a fair sample. In general a higher percentage of people expecting something is a good contrarian indicator that it will do the opposite.

I don't know what chart you are looking at, but to me it looks like growth corresponds with lower expected outcomes, not what you've claimed...

timetobuy.jpg


Also from the article:
However, 18-24yo's are both the most optimistic and have seen the biggest increase in price expectations over the last three months.
Have to wonder if it's just a bunch of them who have just bought and are looking for positive confirmation...
 
So in other words, let's change the measuring stick to prove housing is affordable?
From the article...

The index uses the RP Data database on all property transactions made in Australia, including for detached houses and apartments in both capital cities and country areas.

It uses the Reserve Bank definition of disposable income to calculate its figures.

According to the index, real income has risen 11 per cent over the past six years, making many goods cheaper by comparison and causing disposable income to rise 44 per cent.

In the meantime, the rise in median house prices has been lower, at 41 per cent, from $270,000, to $380,000.
...seems like a reasonable measuring stick to me.

Well I would like to see the data over a long period and on the same chart as growth
So would I, but unfortunately the data isn't there.

I don't know what chart you are looking at, but to me it looks like growth corresponds with lower expected outcomes, not what you've claimed...
This plots what people were expecting & what actually happened..... seems like the forecasts correlate pretty well with what actually happened.

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This plots what people were expecting & what actually happened..... seems like the forecasts correlate pretty well with what actually happened.
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So you're going to dismiss the crowd getting it wrong for the last 8 years and only concentrate on one corresponding 9 month period...?
 
hobo-jo,

Just curious, where will you be putting your investment $ in the next 12 months (presumably not property)?
 
Just curious, where will you be putting your investment $ in the next 12 months (presumably not property)?
Gold/Silver Stocks. I drew a LOC against the property (now own freehold as sold the house) and purchased heavily around August/September last year before Gold flew past $1000.

Property was/is a great investment vehicle for a lot of reasons, I just don't think it's going to do well short to medium term.
 
So you're going to dismiss the crowd getting it wrong for the last 8 years and only concentrate on one corresponding 9 month period...?
I'm not sure what you're on about :confused:. As a short term speculator, I'd have thought you'd be interested in a 12 month leading indicator :). As I said above, I too would like to see how this indicator performs in the longer term. Maybe this time next year, someone could remember to BUMP this thread.
 
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