In the last two months it has become apparent that the current generation of first home buyers is different from the generations that have dominated post-war Australia.
The lower interest rates are not causing them to rush into new dwellings.
Australia’s largest apartment builder, Meriton’s Harry Triguboff, says that he has never experienced anything like it and admits that he has been caught by surprise, as have many other builders and developers.
In the past, when interest rates were low and housing affordability increased first homebuyers moved into the market. Now Meriton's research is discovering that most will not buy a dwelling until the repayments are less than what they are paying in rent. And that first home buyer view covers most forms of dwellings.
For example, in outer suburbs house prices are usually lower than city apartments but outer suburban rents are also lower. If Triguboff and Meriton are right it means that as the mining investment boom subsides next year we are going to be looking at much lower interest rates.
In Triguboff’s view reducing interests rates by one quarter or half a per cent will have no effect on first home buyers. It may boost the spending of consumers with mortgages but it will also cut back what retirees can spend. In Triguboff’s view it will take a 1 per cent fall in rates to take repayments on mortgage loans below the rent levels – in other words, to where buying the first home is cash positive.
When the Reserve Bank meets tomorrow it will be debating whether or not it lowers rates a quarter of a per cent. On the basis that there are more mortgage consumers than retirees a rate cut will help consumer spending. It will also encourage investors to buy houses because as interest rates come down so the gap between rents and interest in borrowing is narrowed. The lower rates can also encourage people to upgrade their housing. But the big driver of new dwelling construction are first home buyers and they will not be motivated by a 25 basis point rate cut.
By late 2013 Australia will face a catastrophic fall in mining investment and we are going to need dwelling developments to fill at least fill some of the gap. Triguboff is supported by anecdotal evidence around the country.
Mirvac has confirmed it's refunding off-the-plan deposits for a 263 apartment development in Hamilton Brisbane and a 71 apartment development in Townsville. In Brisbane even though the apartments were priced from only $345,000 The Courier Mail reports that only three had been sold.
In Melbourne’s outer suburbs, particularly in the north and west, there has been a dramatic rise in the number of people who have agreed to buy land but then cancelled.
In the apartment markets in Sydney and Melbourne there are still Chinese buyers but when they wake up to the vulnerability of the Australian dollar they may subside.
As a result, the attitude change by first home buyers hangs over the market. This generation has a lot of ways to spend cash and saddling themselves with a very large mortgage does not seem a priority unless it saves them money and gives them more cash to spend.
Therefore in time interest rates are likely to come down the 1 per cent Triguboff says is necessary.
I believe the Reserve Bank is increasingly coming to understand what is coming in mining but is unlikely to understand what is happening among first home buyers – until now.