How property investors can cash in on the first-time home buyer surge

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Richard Wakelin| Australian Financial Review| 21 August 2018

https://www.afr.com/personal-finance/how-property-investors-can-cash-in-on-the-firsttime-home-buyer-surge-20180820-h147ii

Simplicity is often the hallmark of successful investors. They take an approach to asset selection that, in hindsight, can seem obvious and unremarkable. But they of course have other talents, not least the courage to act quickly and decisively when they see an opportunity.

Property investment is no exception to this formula. Success depends on identifying where future demand will be strong, persistent and always a step or three ahead of its dogged pursuer, supply.

The thoughtful property investor will therefore routinely monitor drivers of supply and demand to check whether significant shifts in behaviour are emerging.

The return of the first home buyer (FHB) over the past 12 months is one trend that deserves attention. As of June 2018, first home buyers secured 18.1 per cent of all housing finance commitments, according to the ABS. That’s a strong recovery from the 12.9 per cent nadir of October 2015 and the best outcome since October 2012.

Strong first home buyer activity appears to be driving prices higher for assets that sit in the typical FHB budget range. CoreLogic’s May 2018 Decile Report showed that prices for capital city properties overall was flat across the 12 months to April 2018. But properties valued between $437,000 and $655,000 recorded annual growth above 3 per cent.

The resurgence of FHBs has, in great part, been orchestrated by state governments who have improved stamp duty terms for this cohort over the last year or so. And with benefits applicable for properties sold up to $750,000 in Victoria and $800,000 in NSW and no sunset clause in place, it may well be the case these budgetary measure will act as a stimulus for this sector for a further two to three years.

A further two to three years of beating overall market capital growth by more than three per cent would be an enticing prospect.

What the data shows

Moreover, who knows what else state or federal governments might do? The times of really high FHB finance commitments – 31.4 per cent in May 2009; 26.1 per cent in July 2001 and 24.5 per cent in May 1997 – eventuated after the federal government provided further largesse to FHBs. And yes, these previous highs were all followed by strong growth in property prices.

State governments make it easy to execute on an investment strategy that mimics first home buyer behaviour. Most of them release detailed statistics on the top suburbs where first FHB grants were deployed in greatest numbers.

But this is where the strategy comes unstuck for me. The data shows that FHBs tend to buy in city-fringe locations. Places like Liverpool in NSW or Tarneit in Victoria. That’s understandable from a lifestyle perspective. But it is unlikely to be an effective investment strategy in the long-term.

Unfortunately, while today’s city-fringe area may feel like a frontier into the bush, by next decade it is just another outer suburb. And that lack of scarcity of this property type will hold prices back over the long-term.

But there are benefits for investors who are mindful of the renewal of the FHB. Not all FHBs go to the fringe. There are some to be found wherever there is property in their budget range. It only takes a few FHBs to be active in a place where volumes are low to move prices upwards. So if you have less than say $750,000 to deploy, keep looking for those scarce assets. Simplicity works.

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