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Bubble and squeak as first home buyers feel the heat

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  • Bubble and squeak as first home buyers feel the heat

    Bubble and squeak as first home buyers feel the heat


    March 13, 2010
    A SIGN at the front of the sprawling Central Park estate in Melbourne's outer west reads ''Grow with us''.
    The slogan appeals to buyers like Matthew Tregent and Sarah Zajac, both 20, who were among the many young couples to take advantage of last year's historic interest rate cuts and unprecedented first home buyer grants to move out of their parents' homes and into the Deer Park estate.
    ''Grow with us'' implies progress, wealth, and maturity. For a young couple, it might also carry hopes of a growing family and the promise of financial security based on the value of the family home.
    Last year, those dreams seemed to be inching closer. In Deer Park, the median house price surged by almost $30,000 in the first nine months - the exact amount offered to those first-timers building a home.
    But the couple have already noticed a change. Tregent believes that at least five homes sold in his part of the estate since October were forced sales. Vacant blocks are being resold privately.
    ''I think it must be because of interest rates, because it just wouldn't be profitable to sell that quick,'' he says. ''Some of them just a month after their house was built.''
    As Melbourne real estate boomed late last year - exemplified by Elwood, Elsternwick and Malvern East reaching a million-dollar median for the first time- Deer Park prices bucked the upward trend. The median house price in Deer Park fell by $4000 in the last three months of 2009, according the Real Estate Institute of Victoria. Some residents can no longer afford to ''grow with us''.
    Melbourne is experiencing its own ''two-speed economy'', as investors and well-off owner-occupiers drive the inner and middle-suburban markets thanks to a growing confidence that Australia has escaped the worst of the global recession relatively unscathed.
    Perversely, however, the euphoria of record-breaking prices for prestige real estate is only one symptom of the improving outlook. Surging home prices have resurrected concerns about huge personal debt and potential inflation.
    Interest rates have already climbed four times in almost as many months and are forecast to go up by another full percentage point or more this year.
    Higher interest rates mean Tregent and Zajac's repayments have already gone up by $300 a month. Like many borrowers, they have cut back on eating out, shopping for clothes and socialising on Saturday nights.
    They are hardly alone. According to the Fujitsu Mortgage Stress Report this week, more than 40 per cent of the 255,000 first-time buyers who entered the market in the past 18 months are experiencing a degree of mortgage stress. By December, the report forecasts, the figure will rise to half.
    Fujitsu's Martin North says the average loan size has grown way out of proportion to incomes. This gap is made worse by a cultural drift towards credit cards and ''interest-free'' shopping.
    ''Australians have an amazing drive to own property,'' he says. ''But the truth is we have an affordability problem and, by people being forced to borrow more than they want because house prices have shot up, we are laying the seeds for potential difficulty later.''
    The increased financial pressure is no doubt further evidence to doomsayers that Melbourne's house prices are headed for an extreme correction.
    If they are right, it will happen first in the outer west, east and south-east. First home buyers control up to 80 per cent of new estates and are the most sensitive to rate movements, typically having small deposits, modest incomes and large mortgages.
    While some already owe more than their home is worth - the result of prices initially boosted by first home buyer grants, but which fell when the grants were removed - so far,

    prices have mostly held steady on the estates. This is in no small part because developers have limited the supply of blocks in recent months.
    Of course, the idea of a house price bubble is hotly contested. While there may be bubbles frothing at the fringe, it is a different story closer in, where buyers have more equity and so borrow less.
    In inner suburbs like Brunswick, the landscape is much more diverse. Private investors already control about half of housing there. They are insulated from interest rate movements by negative gearing and also have discretion over rents.
    The remaining half belongs to owner-occupiers, only some of whom owe money on their homes.
    Matthew Armstrong of Property Planning Australia says a very small section of Brunswick is exposed to interest rate movements. ''If there are any forced sales or people under cash pressure, there will be a strong influx of investors to come in and underpin the value of real estate, whereas they won't be interested in the outskirts,'' he says.
    Evidence is mounting that property investment is headed for a spurt. Investors made up 37.2 per cent of new Victorian mortgages in February, compared with 24.1 per cent a year ago, according to the Australian Finance Group.
    Australians have long had a psychological bent towards property, but this has evolved further in recent years as even young earners pour money into properties instead of superannuation.
    Ironically, the financial crisis sparked by dodgy home loans has made Australian property appear about the safest place in the world to incubate a nest egg.
    Valuer Perron King of Herron Todd White says investors - with their buying power and tax breaks - are formidable competition in the crush to secure limited inner and middle-Melbourne real estate. ''For inner and middle suburbs, the market is red hot and I can't see it slowing down,'' he says. ''You'd probably need interest rates to rise another 75 basis points … and that could be six months away.''
    In middle and inner-Melbourne - within 14 kilometres to the west and north, and 20 kilometres to the south-east - the real estate game has never been busier. Agents are hungry for more, with agents including Bennison Mackinnon placing ''housing wanted'' advertisements. While industry players predict further price growth in Melbourne this year, albeit more slowly than last year, King is one of the few predicting a minor correction. He believes there will be a glitch of 5-10 per cent and then a plateau, based on what happened in the cycles that peaked in 2003 and 2007.
    Property adviser Monique Sasson Wakelin says the inner markets most vulnerable to softening are suburbs like Cremorne and Burnley, which are next to premium addresses like East Melbourne and Richmond, but do not have the same consistency of architecture.
    ''A place like Cremorne has benefited from the general market lift but it borders busy roads, doesn't have a nice shopping strip and still has some light industry,'' she says.
    The luxury market is also worth watching because, just like the first home buyer belt, it is reactive. Since the equities market rebound that began early last year, Melbourne businessmen have dropped eye-watering amounts for trophy homes in Toorak and Hawthorn ''There could be some softening for homes over $5 million, depending on how the US and UK economies track,'' Wakelin says. ''But I don't see evidence of a major correction in that market at the moment.''
    So while sub-markets may languish this year, only property observers at the extremes are still predicting a US-style crash. This is largely because the fundamentals of middle and inner markets are as simple as supply and demand.
    Interest rate strategist Rory Robertson of Maquarie Bank dismisses the ''Chicken Littles'' as increasingly irrelevant.
    ''Australia has a very low mortgage default rate,'' he says. ''Those who have stretched to buy the best house they can afford have already committed to sacrificing a significant proportion of their income. They will cut back on anything rather than lose their house.''
    He names four factors that will keep pushing prices skyward. ''It's somewhat mechanical,'' he says. ''Extraordinary levels of immigration, flat trends in new home building, low interest rates and a good economy all add up to upward pressure on home prices and rents.''
    About 300,000 people migrated to Australia last year, mostly to Victoria. But just 150,000 dwellings were built. Added to this is home grown-demand from a wealthy population.
    The fact that new home building has dropped off in the outer suburbs speaks volumes about where Victorians would rather live.
    But it will not all be smooth sailing for those who can afford to buy inside the middle ring. The Docklands price collapse of some years ago proves that any market with a huge tilt towards one type of buyer can be volatile.
    Off-the plan developments and property spruikers will most likely make a big return this year, but poor-quality development at Docklands, St Kilda Road and Southbank are all potential money pits.
    But a high-rise dog box could not be more removed from the single-storey house that Tregent and Zajac share on the Central Park estate.
    The couple are comfortably settled into their new furniture and three bedrooms.
    ''We're still coping fine with our repayments,'' Tregent says. ''We know there's a risk they'll go up but we can downgrade the internet connection or cut back on TV services if we need to.
    ''It has been so exciting moving into our own place, especially because we have never rented privately. I guess it's just the feeling of freedom you get when you drive home into your own driveway.''

    As middle and inner-Melbourne property prices soar and interest rates climb, first home buyer areas are feeling the pressure.
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx