Despite an economic downturn and unstable job market, a report released this week claims houses are the most affordable they’ve been in seven years.
According to the Housing Institute of Australia and Commonwealth Bank of Australia’s Affordability Report, low interest rates and a stable market combined to create a 14 percent improvement in housing affordability for the first quarter of this year. Home loan repayments also fell by 11 percent, with further drops expected next quarter. Add to this the extension of the First Home Owner Grant (FHOG) until September 2009, followed by a continued phase-out until the end of 2009, and for many buyers, it seems like the ideal market.
Still, many in the industry are divided on the outcome of the grant extension in this financial climate.
Greg Costello, head of the Perth-based Curtin Business School department of property studies, told The Sunday Times the biggest threat to first-time buyers was rising unemployment.
“The biggest risk to housing market stability especially for first home owners will be what happens with unemployment over the next two years,” he said.
With banks clamping down on credit and general market instability still prevalent, it’s a tough call. Here are a few important questions to answer, before you make the big purchase.
Is the FHOG inflating prices?
Although many first home buyers are delighted with the federal and state governments’ handouts and dropping house prices, there is reason to tread carefully.
Many experts believe the FHOG is propping up the market, and it will not fully bottom out until the grant expires and related price inflation drops back to the true market value.
There are early signs that the increasing utilisation of the grant has caused a stir at the lower end of the housing market, raising prices for first-time home buyers. This may especially be true for new builds, which are the main target of the grant, and a key factor in the grant’s extension.
Although there is still much research needed into the true effect of the grant on the market, it is certainly a crucial factor to consider when deciding when and where to buy.
One thought is to weigh the benefits of purchasing with a grant. The grants are intended to work as part of a deposit for those first-time buyers who might not have a 15-20 percent down payment. If you already have enough saved for a deposit, then talk to an expert about your choices. In some cases, once the housing grant expires, housing prices may drop more than the amount of the grant, making it better to buy later.
Will interest rates rise?
As the economy begins a slow climb to recovery, the next half of the year will be a critical time for the housing market, and related credit.
If the stock market improves, so will interest rates, and you may feel the pinch when it comes to mortgage repayments. For first home buyers who stretched their resources when purchasing, this could mean financial trouble.
One solution is to lock into a fixed-interest mortgage. While a fixed interest rate might cause larger payments today, it could mean you are cushioned against interest rate rises in the future. Talk to an expert to understand your options.
Is it better to buy new or used?
The FHOG is intended to bolster the new home industry, making it more affordable to build new homes, and encouraging construction and development.
In some areas, housing shortages make buying new a smart choice for first home buyers. Many states are putting forward supplementary grants which make the offer even sweeter. For example, NSW is adding $3000 to the $14,000 grant for newly built homes, up to a total of $24,000,000 — a hefty help for many first-time buyers.
Contrastingly, the amount is halved at $7000 for those buying older homes, which can seem a harsh difference at the lower end of the market. As many first-time buyers around the country tend to opt for established homes, the federal government hopes the continued grant will entice people to buy new or build. It’s not a choice without risks, however.
New builds have higher chances of structural problems and unstable property values, which make it a riskier venture for first home buyers.
Weigh it up
Considering all the factors involved, it’s likely there will never be a perfect time to buy. The economy, jobs, the housing market and even construction material costs all come into play when buying. What is most important is weighing up your options and making an educated choice that works for you. Talk to an expert, and do your research.
Check out our First Home Buyer’s Checklist and our price mapping tool for property prices and suburb reports. Being well-informed and prepared is always the best way to buy.