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The entry-level housing market was Australia’s saving grace during last year’s global financial crisis, thanks to a combination of record low interest rates and the increase in the Federal Government’s first-home owner’s grant.

While the rest of the market took a substantial hit, it was entry-level properties (those valued at $500,000 or less) that kept the property industry afloat.

In fact, by the middle of last year, 30,000 new home buyers had entered the property market since October 2008, when the first-home owner’s grant was first increased. This is statistically the biggest proportion of first-home buyers since 2001.

But now that the Federal Government has reduced the first home owner’s grant back to the original $7000, what will happen to this market and who will fill the void left by the first-home buyers?

According to the Australia Bureau of Statistics and recent activity in the Sunshine Coast market, it looks like investors will become the main driving force of the property market this year, following the decrease in first-home buyer activity.

The latest data from the bureau shows the total value of loans taken for investment purposes climbed by 2.1 per cent. During last year, the number of investment loans taken out increased by 26.1 per cent, the best showing in more than two years.

“The improvement in economic conditions – particularly in the labour market – should improve the investor sentiment in the housing sector,” CommSec chief economist Craig James says. “Stronger population growth and rising rents will ensure the housing sector plays a key part in the economic recovery.”

In contrast, the number of first-home owner loans has already plunged. The number of first-home buyers entering the market decreased by 5.9 per cent in November to its lowest level in 10 months, and that came after a two per cent fall in October. First-home owners account for 22.1 per cent of the total market, down from 26 per cent in October.

Craig says that despite recent weakness, housing finance is up by more than 14 per cent in annual terms and, recently, construction loans have surged by more than 100 per cent compared to a year ago.

“In the mid-term, as the economic recovery becomes more concrete, budding home buyers are likely to feel more confident about the future outlook and move forward on planned purchases,” he says.

“It’s normal to see sales softening when a whole category of buyers has less incentive to purchase,” Keith says. “However, I think smart residential investors will more than take up the slack.

“Most importantly, we believe the majority of properties currently for sale on the Sunshine Coast – any kind of property – can be purchased for less than their replacement cost once the land, building, approval costs and government charges are taken into account.
 

“I believe investors will definitely fill the void left [by first-home buyers], if in fact one is created. We have already seen investor demand increase amongst our own clients and across the market. In fact, we encouraged many to act during the recession if their income and/or investments were not destabilised by the GFC.

“Many people secured high-quality, bargain properties at below replacement prices and are still comfortable to buy additional properties as rents rise and interest rates [remain] affordable.”

PRDnationwide research director Aaron Maskrey recently said he expected to see investors fuel the majority of activity in the property market throughout this year. “I don’t think we can expect to see the high level of capital gain experienced in 2007, but I can say that the pain experienced in 2008 is over,” he said. “So, it is all good news from here.

Director of Coast mortgage brokerage Complete Finance, Tony Gray, says initial first-home owner interest has dropped since January 1, but he remains confident that market demand will increase in 2010.

“The lure of the Aussie dream of buying and owning a house is too strong for most.”

Tony, who has been lending for more than 13 years, adds that he was kept busy last year thanks to the Federal Government playing Santa and increasing the grant.

“We had a mad rush last year prior to the first decrease at the end of September and continued through to January 1 for first-home owners.

“There will always be a demand for first-home owners in the entry-level market. However, the requirements for banks are now tougher.

“Applicants now need to save more of a deposit or use other alternatives that are acceptable to the banks. But that’s not
just for first-home owners; it’s for anyone wishing to borrow more than 80 per cent of the value of the property.”

As banks tighten their lending criteria, Tony advises prospective first-home buyers to save for a sizeable deposit and readjust their expectations.

“You definitely need to be working, either for an employer or your own business, which must have been trading for a minimum of 12 months,” he says.

“Savings is also a definite advantage as most banks require applicants to have five per cent of the purchase price saved now, but there may be options available if they don’t.

“I think first-home owners just need to find something that they are comfortable living in and realise that it is just a stepping stone for them – they are probably not going to be able to buy or build their dream home with their first property purchase.

Mike says the recent reduction of the federal grant does not affect his decision.“In all honesty, I did not know the grant was dropping until I made enquiries this year about home loans,” he says. “I don’t think I would have tried to do anything faster.

“I feel if you are ready to do anything you should be able to do it yourself and not rely on handouts.”

Along with his 10 per cent deposit, which took him two years to save, and a long-term employment history, Mike still has to seek a guarantor on the loan.

“I am in a family of five and with my price bracket it is going to be a hard slog to find something that does not need a lot of money put into it,” Mike says. “I am staying optimistic that I will find that place that just needs some love and elbow grease.

“If I look hard enough I will find something.”

The view of many, it seems, is that not only will investors return to the Sunshine Coast market – with the lure of strong rental prices and a growing rental market – but they will still be joined by a steady flow of first-home buyers who have planned and saved harder than they may have had to this time last year in order to ensure they get their foot on the property ladder. As a result, forecasts are for a strong and healthy entry-level market on the Sunshine Coast for the rest of the year.