Getting Home Loans and off the Property Waiting Game?

Reader Shafiq Akbari asks Dr Shane Oliver about his thoughts on this.

What advice would you give first home buyers playing the waiting game with the property market and putting off getting a home loan? Is it a case of ‘What goes up must come down’?

We’re constantly hearing speculation in the media about a crash in Australian house prices. But major falls have only really occurred on a few occasions, like the 1930s. The more recent falls during the GFC and 2011-12 were pretty modest—on average around 8%ⁱ.

More substantial falls can happen in the higher end suburbs around Australia and in individual properties, but otherwise, there have tended to be relatively modest falls in other areas – for example, in Western Sydney, where house prices fell 10% or so after the surge in 2003-04ⁱ.

It’s very difficult to time the property market. While prices could come down, I don’t see a collapse on the horizon and any fall back could come from higher levels. So while it’s tempting to hold off, there are also many reasons to buy a place.

You may be able to take advantage of home loan incentives like the first home buyers grant (in some states), negative gearing if you go in first as an investor. That’s how I got into the housing market—I bought my first house using negative gearing and rented somewhere cheap in order to get my mortgage down.
You can take advantage of today’s record low interest rates. You may be able to lock in a rate of around 4.7% for five years at the moment. The Reserve Bank will probably wait until next year before raising rates, despite the recent decline in the value of the Aussie dollar.
You’re buying a ready-made savings plan. Renters often end up financially worse off than owners because they don’t save as much.

But what about waiting for a change in the legislative landscape to make the market more favourable for first home buyers?

At the end of last year there was a lot of media focus on the Financial System Inquiry. This report, by former Commonwealth CEO David Murray, highlighted a number of ways the government could take the heat out of the property market by removing certain tax breaks.

Let’s turn to Shane on Home Loans.

Self managed super funds investing in property. It’s worth noting that SMSFs can gear into property while regular super funds typically can’t. If SMSFs continue to grow in number this could possibly create distortions in the market. So the government may come to the view there’s a case to reform this to create a level playing field.
Capital gains concession for investments held beyond 12 months. This concession has some merit, as it discourages short-term speculation. But it does perhaps encourage individuals to focus more on attaining capital gain than on income. So the government may look at removing it.
Negative gearing. The ability to write off the costs of investing seems perfectly reasonable. Despite what you might read, it’s not the reason why we have expensive property in Australia—that’s more to do with a lack of supply. And if you remove it or restrict it for property, what about other investments? In any case, there would be a political outcry if negative gearing were removed so I think this is in the too hard basket.

But remember, these are suggestions only at this stage. If implemented, the Murray Report could take some of the heat out of home loans but there’s no guarantee if and when this will happen.

And some final words from Shane about getting on the property ladder…

It’s tempting to get discouraged when you’re trying to get on the property ladder and start seeing things in terms of ‘insiders’ and ‘outsiders’. But that’s not a very helpful way to view the property market.

I would focus on other things like:

Are you buying in the right area?
How can you use the current tax concessions and grants to your advantage?
How secure is your job? If you’re worried about losing your job and not being able to service the loan, then this could be a reason not to buy right now. But you can take out income protection insurance against that happening.

Overall, provided you have a regular and secure income, you could lock in a pretty low interest rate and offset any potential savings you might make by waiting in the hope of lower prices.

i On AMP Capital estimates disclaimer