"Rush of first home buyers but many aren't sure they can afford payments"

[Alex P Keaton]

http://www.theaustralian.news.com.au/story/0,25197,25459204-5013404,00.html

Rush of first home buyers but many aren't sure they can afford payments

Buyers rush to get first home buyers grant
But many not sure they can make payments
First home buyers in mortgage stress


AS panicked first-home buyers flocked to property auctions at the weekend, research has found one in five new owners expects to have trouble repaying mortgages.

Auction clearance rates in Sydney and Melbourne approached 12-month highs as buyers capitalised on the federal Government's $14,000 first-home owners grant, which could be abolished from July 1, reports The Australian.

But research by market analyst Datamonitor has found 30 per cent of people who had bought their own home in the past year were suffering mortgage stress, while 21 per cent expected they would have difficulty repaying their home loans over the next five years.

Almost a quarter of all mortgage holders were experiencing mortgage stress, spending more than 30 per cent of their income on servicing loans.

If some are already in mortgage stress on these low interest rates, imagine how much **** they will be in when the IR increase. I can see a few having to sell in a couple of years!!

 

[Propertunity]

But research by market analyst Datamonitor has found 30 per cent of people who had bought their own home in the past year were suffering mortgage stress,

IRs have fallen from the RBA cash rate of 7.25% this time last year to 3.0% now and this outfit has found 30% of people who purchased in the same period, suffering mortgage stress? Gimme a break - I just find that nonsense too much to cop!

 

[BayView]

Just another example of why they need the FHOG in order to buy - no financial management/intelligence - no savings and/or real deposit.

If you have the FHOG, that's what - $24k or more?

So, this is the downpayment on their first home in many cases.

Therefore, the repayments after this should be in line with what their servicability capability is on the loan is.

It doesn't mean that they can go out and buy a property $24k or whatever it is more expensive than they can afford.

And besides; why are the lenders allowing them to still borrow too much in the first place?

Pretty simple; if you are going to struggle on repayments of say, $1k per month, then only borrow an amount that will give you repayments of say, $600k per month.

If that is a dog-box, then so be it.

 

[HiEquity]

then only borrow an amount that will give you repayments of say, $600k per month.

If that is a dog-box, then so be it.

I doubt it will be a dog box! I know some VERY nice residences that can be had for that amount...

 

[sparky23]

http://www.theaustralian.news.com.au/story/0,25197,25459204-5013404,00.html



If some are already in mortgage stress on these low interest rates, imagine how much **** they will be in when the IR increase. I can see a few having to sell in a couple of years!!

I imagine the majority of the stress came in the first half of the last year quoted when rates were much higher!

 

[BayView]

I doubt it will be a dog box! I know some VERY nice residences that can be had for that amount...

Even though it was just a number for the sake of the argument - you are correct!

But; not inner-city near the cafe set, or the 30sq 3 x 2 with an ensuite and 2 car garage.

 

[keithj]

If some are already in mortgage stress on these low interest rates, imagine how much **** they will be in when the IR increase. I can see a few having to sell in a couple of years!!

The first year is the hardest, the 26th year is the easiest... the one right after the final P&I payment. The years in between get progressively easier. It's a bit of a no-brainer that FHB are the most likely to be under mortgage stress - everyone else has had a few pay rises (& an exponential increase in discretionary income) since they fixed their repayments.

OTOH, many of that FHB demographic that don't buy in the current (almost perfect) circumstances are likely to choose to put themselves under rental stress for the next 50+ years.

 

[HiEquity]

But; not inner-city near the cafe set, or the 30sq 3 x 2 with an ensuite and 2 car garage.

Sorry to be pedantic BayView but perhaps you should take another look at the number you typed - I was thinking of another class of residence altogether!

 

[craigb]

The FHB ers have yet to experiance this new world of not eating out twice a week and now its not all about their car,hair, and dodads, it will take time for them to adjust, have freinds that see paying a mortgage as a waste , but purchased a $500 hand bag and spent $120 on her hair

My first mortgage was 95k we were realy worried, and i think back to the issues we argued about , ie new cars and our first baby, realy, odd because, the same feelings and discussions we had then we have now as the mortgage is alot larger but so is this home?
It is all a mind set? No question about it!

 

[asdlellel]

http://www.theaustralian.news.com.au/story/0,25197,25459204-5013404,00.html



If some are already in mortgage stress on these low interest rates, imagine how much **** they will be in when the IR increase. I can see a few having to sell in a couple of years!!

Yes, I totally agree with you and also, I am amazed at some of the responses. I admit I am not expert on this topic and one who is gradually learning, but I can't believe people would say this is a perfect time to buy and that this hard year will be the hardest.
If interest rates never moved, then sure, it may be the hardest, but surely they are not staying this low for so long. Not only the interest rates, but other factors could greatly influence ones abilty to pay off a mortgage.
Rents will drop, house prices will drop, unemployment will rise, criteria for a mortgage or refinancing will change and I think these and other factors will unfortunately lead to many people leaning tough lessons.
I know people spruik the housing market believing that things are and will remain perfect, but if I am right, many in the future will feel a lot of anger at this type of talk that strongly encourages people to get in while they can.
I don't think many people expect prices to rise much in the near future (in fact opposite), I wish the younger people would be patient and watch what will happen with prices in the coming 6 - 12 months and then re-assess what they will do.

 

[asdlellel]

BayView makes a good point that makes people not shoot for the stars on their first home. Maybe so many people want the best house possible rather than going about working their way up. I reckon that its wise to account for a few extra % when calculating ones mortgage. Its not a good time to be stretching oneself. Its probably a good thing that banks are starting to demand an amount of proven savings history before giving a mortgage. A good starter for the FHB.
Anyway, I was thinking about it, why get yourself into a situation of paying $400+ (or -) a week when rents are less in some cases and many are starting to drop? Renting isn't ideal, I know that, but if property prices continue to drop and you can rent reasonably low, the savings from the lower rent and the house prices dropping can result in a much better buy in a year or 2+

 

[HiEquity]

Rents will drop, house prices will drop, unemployment will rise, criteria for a mortgage or refinancing will change and I think these and other factors will unfortunately lead to many people leaning tough lessons.

WOW! Really? That's a real gift you have being able to tell the future like that - if you know all that, can you also supply next week's lotto numbers? That'd be great - ta!

Are you sure we haven't met before?

 

[BayView]

Sorry to be pedantic BayView but perhaps you should take another look at the number you typed - I was thinking of another class of residence altogether!

Nah; I got where you were with it;

I was being too subliminal again I guess - I just wanted to add that most obvious of scenarios where the FHB's are wanting the first PPoR to be the Taj Mahal, so sign up for massive loans for the massively expensive (or big - or both) first PPoR.

 

[Propertunity]

but I can't believe people would say this is a perfect time to buy and that this hard year will be the hardest.

Every year will be a hard year for you if that is what you are expecting
The reason a lot of ppl believe this is a good year to buy property is:
1. You can buy for about the same price per week as you can rent for a property around $300-350K
2. Rents continue to increase. Yes, I see a few places where rental vacany is starting to hit 5% - but lets keep it real - 5% vacancy is 2.5 weeks per year of no rent - big deal.
3. 10% unemployment = 90% employment. 9 out of 10 people have a job if they want one!
4. House prices have come off their peak in 2003/4 (on the East Coast) and are very affordable
5. The mood of the market is like yours - a bit D&G, a bit cautios, a bit wondering how we will ever make it through, the R word is coming....Seasoned investors have seen it all before. They know things always revert to trend and see this as a buying opportunity. So what if CG is slow in coming, the holding costs on property are virtually zero atm and some even are cf+

If interest rates never moved, then sure, it may be the hardest, but surely they are not staying this low for so long.

I really don't get it when ppl say IR won't stay low forever. Sure I agree. So fix 'em. Fix at 6% for 10+ years is available right now if you are that concerned about them.

Rents will drop, house prices will drop, unemployment will rise, criteria for a mortgage or refinancing will change and I think these and other factors will unfortunately lead to many people leaning tough lessons.

Rents have increased, house prices nationwide went UP last year - EVERYWHERE except WA. Perhaps this is why you hold your present view - you are in the midst of a slightly falling market where you live. But all those in the know could see what was in store for WA. At one point in the boom, the Perth median overshot that of Sydney Now it is reverting to trend. Credit is tightening and after it is finished doing that - guess what? - credit lending criteria loosens again

I know people spruik the housing market believing that things are and will remain perfect, but if I am right, many in the future will feel a lot of anger at this type of talk that strongly encourages people to get in while they can.

And if you are wrong many ppl will be angry they listened to you. Read this example of a 30 yr old man who has been waiting to buy for 15 months and now faces the very real possibility of having to pay $50K more for his property. And his current strategy is hope that prices will come down. Hope is NOT a strategy.
http://www.somersoft.com/forums/showthread.php?t=52342

I don't think many people expect prices to rise much in the near future (in fact opposite),

I'm sure of you did a street poll you'd be right. Most ppl do not expect prices to rise just like when a boom has ended, most ppl do not expect prices to fall The market will do what the market will do - and it won't be consulting you (or me) before it does it.

 

[keithj]

....I can't believe people would say this is a perfect time to buy and that this hard year will be the hardest.

Tell us what you think the perfect FHB circumstances are.

I'd say....

• low fixed IRs relative to rents
• high disposable income relative to mortgage repayments
• buyers market (espec after June '09)
• $0 stamp duty payable
• free deposit from govt (mostly anyway)
• big banks offering mortgage holidays to the unemployed
• relatively high LVRs available (90%)
• easy availability of credit for PPORs

Look back to your parents or grandparents days - did they have many or indeed any of the above advantages ?

It's never an easy time to make a big financial decision (again ask your parents & grandparents), but now is certainly one of the easier times in the cycle especially if you choose to mitigate your risk using fixed IRs & income insurance.

Most people worry about the possibility that house prices will fall. However, is that different from at any time in history ? And do you care - it's cheaper than renting anyway & you don't intend to sell.

Almost 1 million FHB have taken advantage of the grant in the last 8 years. They may not have thought it was a perfect time to buy, but they presumably considered it better than guaranteed rent increases for the next 50+ years.

 

[asdlellel]

Some great replies. Not sure if one was genuine or sarcastic, but anyway, I am not trying to stir anything, I am just honestly sharing my opinion.
Its a good point that as I say if I am right many may end up angry, but also, if I am wrong and people listened to me, they might be angry too. Fair point.

They are great points that highlight now is a good time to buy, but for me, I say its a good time to buy in some respects. It is certainly the best time to buy several years for many. Maybe here in WA things are a little different. Still very high prices here.

Anyway, appreciate the replies and nice to hear your points of view. I am just sharing my honest point of view. Appears to not be some commonly shared but I stand by it. I am expecting things to deteriorate in many respects, so that is why I hold my view.

 

[rugrat]

I would love to know where these statistics are actually coming from.

As someone who just settled on their first home 7mths ago, can I say that I am not in danger of any kind of mortgage stress. I 'may' be if rates go up to 17% in the next 12 mths and we go ahead purchasing an IP as well as our PPOR - but if things look like they are heading that way, then I will be looking at fixing rates to satisfy my SANF.

Although, I did miss out on the extended FHOG of 21k (I only got 7k), because we had signed contracts 12mths earlier.


The truth is that banks aren't in the business of lending out money in such large quantities, to people who cann't afford to repay them. It has become alot harder for first home buyers to get that initial home loan then it was previously. The point was made to me again while at the CBA yesterday, talking to someone about getting an investment loan - we didn't have to jump trough half of the hoops that FHB's have to. I would suggest that this FHOG has done more to simply bring forward purchasers who would have bought anyway, just at a slightly later date.

 

[HiEquity]

I really don't get it when ppl say IR won't stay low forever. Sure I agree. So fix 'em. Fix at 6% for 10+ years is available right now if you are that concerned about them.

And where can I get that rate Propertunity?

 

[keithj]

I would love to know where these statistics are actually coming from.

Kim actually started a v. similar thread 6 months ago Record mortgage stress ahead of rate cut.

One of the posts mentioned that the definition of mortgage stress used by some researchers is not the same as the one used by the RBA.

According to page 6-7 of the RBAs Housing Affordability in Australia Background Notes many commentators are misusing the definition of mortgage stress....

How do we square the relatively benign picture on arrears with the apparent sharp decline in housing affordability such as shown in Chart 5? The explanation largely lies in the fact that real incomes of Australian households have been rising quite strongly. This has allowed households to devote a larger proportion of their income to housing, while still maintaining their living standards more generally. For example, a typical household that in 1996 was devoting 30 per cent of its disposable income to debt servicing would today be able to devote 47 per cent of its disposable income to debt servicing while still having the same standard of living in terms of being able to buy other goods and services. This, broadly speaking, is the outcome that has occurred. It is not surprising, therefore, that some commentators who use a fixed benchmark for housing stress – such as housing repayments exceeding 30 per cent of income – are finding that more and more households are exceeding the benchmark.

I should also point out that the 30 per cent benchmark is sometimes applied more loosely than was intended by those who initially proposed it. The benchmark dates back to work done for the Australian Government’s 1991/92 National Housing Strategy. That work recommended that 30 per cent of income be adopted for the maximum level of housing costs for households in the bottom 40 per cent of the income distribution. Some commentators have since begun to apply it to all households, including those with very high levels of residual income. More generally, the rise in real incomes since the early 1990s has substantially changed the basis on which the 30 per cent benchmark was calculated.

 

[Propertunity]

And where can I get that rate Propertunity?

OK so they moved up a smigin in the last few weeks since I looked.

The best 5 year fixed rate I can find is 5.94% at Bank SA
The best 10 year fixed I can find is 6.99% at Westpac
and that's without any of the ProPack discounts etc. but the MBs on here can probably do better.