Is the Aussie First Home Buyer headed for extinction?

Darren Moffatt

In this age of global warming and climate change, it seems every other month we hear of some exotic species biting the dust. Extinction in the animal kingdom is (sadly) a thriving business. But today I'm making a new call: those of us in the local real estate industry need to add the humble First Home Buyer to the endangered list. Now. Before it's too late and Gen Y home buyers join the Dodo in the big house in the sky. 

Yes, it's that bad. Look at the data: according to today's REIA report the number of loans to First Home Buyers in the December quarter fell to an eight year low, with a whopping decline 9.1 percentage points. Which actually means it fell 34 % from the previous quarter, in spite of lower interest rates and improved affordability.

And in NSW - the most populous state - the situation is dire. First home buyers fell from 11,117 in Dec 2011 to just 4,459 in Dec 2012.

What's going on here?

Well, thankfully we can lay some of the blame at the feet of our politicians (phew, I feel better already). Barry O'Farrell & Mike Baird from NSW in particular must be feeling the heat from the property lobby over these latest figures. Their decision in last year's state budget to axe the NSW First Home Owner stamp duty concession (except for new property) has savaged the first home buyer market. In the parlance of economists it was a highly 'efficient' piece of public policy in that it produced TWO outcomes for the price of one.

First, many of those young people who were getting close to entering the market late last year 'brought forward' their purchase to beat the deadline for the end of stamp duty concessions. It was no secret in the mortgage industry that many borrowed family money and rushed like a horde of stampeding bulls into the market to buy something - anything - before December 31. And who could blame them? On a purchase of $500,000, the stamp duty savings on pre-existing property are around $18,000. For your average working couple with no kids, that would take at least 6-12 months to save. So, it had the effect of sucking a lot of future first home buyer activity from 2013, into 2012. 

Secondly, this decision made it doubly hard for the remaining 2013 first home buyers to buy because now they have to save that extra $20,000 or so for stamp duty (unless of course they purchase brand new property as the government and developers want them to to, but early signs are there is still a cultural reluctance to this, and in any event there's not enough new stock to go around). 

So now that Messrs O'Farrell & Baird are to blame for this mess, we can all give them a good kicking, right?

Not so fast. There were (and remain) very sound reasons for abolishing these stamp duty concessions, not least of which is the drain on public finances they represent. In addition, perhaps the most sensible bird-watching economist there ever was, Ken Henry, has made compelling arguments that the whole stamp duty regime for real estate transactions is seriously flawed and should be replaced with an annual land tax. According to the Henry Report (which presumably is gathering dust somewhere in Wayne Swan's office), if we get rid of stamp duty we can also get rid of First Home Owner grants and concession that distort the property market.

What's the likelihood of this happening? Two words for you: mining tax. It's inconceivable any government will introduce an annual land tax in the current political environment. We're stuck with stamp duty for the foreseeable future. Which means that we'll see far fewer first home buyers in the market during 2013. Traditionally they've been a key driver of transactional volume, so with less buyers active it's very possible we're in for both lower property prices, and reduced stamp duty revenue for government. You've heard of win-win? Well this is kind of lose-lose.

Some might argue this malaise is largely constrained to NSW and is in any case, merely 'cyclical'. I agree that first home buyer activity is likely to improve off this low, at least temporarily. However, there are signs a cultural shift in our housing market is also underway which might make a return to the good old days far from assured.

For instance, demographer Bernard Salt and others have identified an emerging 'co-buying' trend amongst Gen Y home buyers. It makes total sense: you're young and you want to buy, but your expensive taste in property, lavish lifestyle and - until recently - poor housing affordability preclude you from purchasing the home you really want. Past generations would have compromised on the property, or waited longer. Not Gen Y. They're adapting their purchasing structure instead, and increasingly two, three or even four friends band together and buy an awesome pad they could never afford on their own. Neat trick. Not so good for buyer demand and stamp duty receipts though - three or four possible purchases become one. Oops. If this trend gets going, and Gen Y love a good trend, it could have a profound impact on the property market.      

In one sense It's understandable why most property owners don't realise the importance of the first home buyer to the market. They're 'just kids', afterall. But like nature, everything is connected. Australian real estate is a delicate ecosystem; if we don't manage it properly then individual species might be the first to pay the price, but sooner or later it affects everyone. 

Just ask the Dodo.