First home owner hangover

For the second month running the percentage of first home buyers taking on new loans has fallen, now at 25.7 per cent of the market, down from it's peak of 28.5 per cent last May.

While this is well above the longer run averages of around 21 per cent, we are starting to see the withdrawal of first home buyers from our housing market. This will continue in the months ahead as the first home owners' grant is scaled down.

At a macro level, it is likely that first home owners will be replaced by other buyers who have been waiting for them to leave the market, before entering. So, hopefully, we should not see too much of a change. After all our housing market has proved extremely robust, with mortgage arrears remaining at relatively low levels and prices actually increasing throughout this year.

What is more concerning is what will play out on the ground, at a micro level, in areas such as Gosford-Wyong, Western and South-Western Sydney, the Illawarra, outer suburban Melbourne and South-East Queensland.

These are areas where the mortgage industry is already saying that there is rising stress from under employment and unemployment, with unemployment in excess of 7 per cent in some areas. These areas have also been places where first home buyers have had the opportunity to get into the market.

With rising interest rates being factored into the equation, these stress levels will only increase and the risk of arrears and delinquencies will also rise, forcing distressed properties onto the market in these areas.

With the absence of the FHOG boost to shore up sales volumes, these areas are likely to fare worst from the lapsing of the scheme, with the risk of many new first home buyers facing declining values and potentially even negative equity.

In these areas the replacement of new buyers is also less likely to emerge immediately – as such buyers will wait for prices to fall by typically up to 15 per cent before they enter the market. They will welcome the distress.

This is why the spending versus interest rates debate occurring in Canberra this week is so important. Rising interest rates will add fuel to the fire for those people with mortgages in these areas.

Real interest rates in Australia are still higher than most of the developed world. It can also be argued that the significant size of our stimulus boost prevented the Reserve Bank from reducing rates even further than they did. The Rudd government must now choose between reducing spending or allowing interest rates to rise.

I do not buy the softening up argument being run by the Treasurer and the Prime Minister, that rates must rise, any more than homeowners would like to see them to rise. The government has an alternative: reconsider their spending.

If Labor believes more 'stimulus' is needed in the economy, then let that stimulus continue through lower interest rates, rather than continued government spending.

In seasonally adjusted terms, housing finance approvals are down in July. Building more public housing won't change the situation for the private housing market, which historically accounts for 97 per cent of residential construction. And building more school halls will certainly not help us build more houses in the private sector.

Lower interest rates is what we need to assist new housing construction, especially after the withdrawal of the FHOG, not more government spending.

The other issue in the housing finance statistics is that competition for new mortgages remains at historically low levels. The banks account by value for around 92 per cent of the market. Under the coalition, the average was 80.1 per cent.

With rates rising, mortgagees will want to know they have some choice to keep their fees down and the rates low. Banks are already charging mortgage rates a full one percentage point higher than the movement in cash rates has been since the beginning of the global financial crisis.

With rates rising, only greater competition can protect the interests of mortgagees.

Scott Morrison is the federal Shadow Minister for Housing and Local Government