Haven't posted for a while, but this thread has me interested.
Wouldn't it be logical to see a home construction boom after the events of the last 12months.
Huge cash incentives to FHB for new homes coupled with 50years historical low IR's and a large increase in lending to the mortgage sector by the banks.
So the next 6months will see this cause show its effects, large number of new constructions. The real question is what is going to sustain this growth.
FHB have been bought forward and pent up demand released with low IR's.
So I paint this picture.
Mr & Mrs A FHB's purchase a new home in outer suburbs for $350K on %5 IR's + $20k of govnuts handouts. They more than likely purchased on %90 LVR's.
They move into their home in first quarter of 2010 and as starting to get concerned that IR's up moving up quickly.
Sept 2010 arrives and IR's are at %8.5 (not to far from the historical average) an increase of 70% on their mortgage payments. Given that the single largest household liability is paying the mortgage, this starts to hurt and they consider selling. Remembering that most people tend to borrow as much as they can.
Mr & Mrs C being from the same demographics and Mr & Mrs A start looking for a home. The only difference is that they can no longer borrow as much as Mr & Mrs A.
So they look at the Mr & Mrs A property for $350K + $17K stamp duty and concluded a few things :
1) the FHB grant has been halved reducing borrowing capacity
2) they cannot borrow enough with IR's being %8.5
3) they have the borrowing capacity but decide why pay the stamp duty and have a second hand house when they too can purchase new. This assumes that developers had inflated prices during the FHBG being increased due to increase in demand. This has been documented before that the same house and land package is now less than it was 6 months ago.
So Mr and Mrs C can get enough credit and decide they will purchase new for $350K or are willing to purchase Mr & Mrs A property but for less than $350-$17K-depreciation(second hand) = $325.
Mr and Mrs A sell and are left will nothing after expenses as they were given some free money by the govnuts. They also have a funny taste in their mouths after the experience.
Or.
Mr & Mrs C cannot borrow as much because of reduced govnut gifts and higher IR's and cannot purchase new or existing at those prices. Demand is reduced at that price level.
Mr & Mrs A start to become desperate, they have to reduce their asking price, potential placing them in negative equity. The situation has turned sour for them.
This situation then works its way up the ladder with each level having less borrowing capacity with prices having to be reduced in order to meet the market.
Yes, I can see a construction boom lasting the first half of next year, 2010. Just when interest rates are starting to peak, what will feed demand after that I cannot see but there is the chance than many FHB on new homes find themselves in falling prices and rising IR's.
This is a simple story and does not take into account many other variables such as :
- Government action in the way of added grants
- Credit tightening further
- Government Stimulus here and around the world
- Unemployment
- Inflation/Deflation
- Immigration
- The bankers lied and we face GFC V2 but now the increased level of debt is shared by private and the public purrse
2010 for all investment classes will be interesting and property will be no different.
I will be looking at purchasing later next year again when IR's have at least got to the historical average and above. The FHB market is the one I will be watching for the first signs of weakness.
Cheers
