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First home buyers brace for tougher yearFirst home buyers will find it harder to get a foothold in the residential property market this year as supply dwindles and interest rates begin to bite, analysts say.
Interest rates are still expected to increase by at least one percentage point this year, despite this week's pause by the central bank, economists say.
Established house prices are expected to continue strengthening and the generous government first home buyers grant has been wound back.
The Reserve Bank of Australia (RBA) on Tuesday surprised financial markets by leaving its key cash interest rate unchanged at 3.75 per cent.
Economists say the respite for borrowers is likely to be short-lived, with many predicting four separate 25-basis point increases in the coming months.
Citigroup economist Joshua Williamson expects housing finance for owner-occupied homes to drop slightly in value in the first half of the year, after a fall of 3.9 per cent in November.
"We do expect the RBA to keep increasing interest rates, which is going to increase the cost of servicing a mortgage and also we're seeing established house prices rise, so it (housing affordability) probably will decrease a little bit further," Mr Williamson said.
Population growth is expected to be boosted by a large skilled migration intake, placing more demand on housing, he said.
"There will be people coming to Australia with reasonably good to high-paying jobs and they'll probably have some cash as well, so it'll also put some pressure on some areas of the market.
"For first home buyers to get a foothold in the market, they are probably going to have to go further away from the main CBD in order to secure themselves a home."
Mr Williamson said the next six months would be tougher than the past six months for first home buyers.
"You might see more first home buyers decide to rent for longer or stay with family and friends."
However, the news is not all bad.
Higher wage growth and an expected interest rate easing at the end of 2010 would make 2011 a more favourable year for first home buyers, Mr Williamson said.
"Hopefully, global financial conditions will actually improve, so wholesale funding costs will come down."
The RBA on Friday said it was waiting to assess the economic effect of three consecutive rate hikes in the final quarter of 2009 and accompanying rate increases by commercial lenders, before deciding whether to lift rates again.
The RBA also said that underlying inflation - its preferred measure, which strips out the effect of volatile items - would rise faster than previously expected from the second half of this year.
National Australia Bank chief economist Robert Henderson said the cash rate would need to rise to more than 4.5 per cent by the end of the year, if underlying inflation began to rise faster than previously expected.
Interest rate comparison website RateCity chief executive Damian Smith also said this year would be a difficult time for first home buyers.
"First home buyers in particular will find it tough in 2010 as many have missed out on the federal government's first home owners boost, which expired on December 31," Mr Smith said.
"Tight lending conditions and higher house prices will also contribute to a more difficult year ahead for the first home buyer market."
Mr Smith said a one percentage point interest rate rise by December this year would cost the average home owner with a $275,000 home loan an extra $173 a month in repayments.
He said there were still some incentives on offer to lure first timers into the market such as the $7,000 first home owners grant, stamp duty exemptions and first home buyer savings accounts
Source: Sydney Morning Herald
Posted: 05.02.2010