FEATURE ARTICLE 2: HOUSING FINANCE - SUBSIDIES FOR FIRST HOME BUYERS
The housing market has long been recognised as having a significant impact on the Australian economy. With one of the highest home ownership rates in the developed world, Australia has had, in recent years, a number of government policies implemented to stimulate the construction industry and the housing market when under threat of decline.
In the last decade, there have been two periods of change in the housing market when grants for first home buyers have been made available. The first initiative, the First Home Owner Grant (FHOG) was for owner-occupied housing and commenced in July 2000, coinciding with the Commonwealth government's introduction of the Goods and Services Tax (GST). The FHOG was introduced to offset the additional cost of building a home, due to the GST, through a one-off payment of $7,000 to eligible first home buyers. This grant program was then adopted by all states and territories through their respective treasury and finance departments.
The second initiative commenced in November 2008, when the global economic downturn caused many Australians to be unsure of where to invest their money. To reduce the impact of the Global Financial Crisis (GFC) the Commonwealth Government introduced the First Home Owners Boost (FHOB) for homes purchased after 14 October 2008 (and before 30 June 2009). With an emphasis on stimulating construction of new dwellings, this boost was then extended to 30 September 2009, when it was halved until it ended on 31 December 2009.
In Western Australia, as in other jurisdictions, the FHOB was additional to the State Government's provision of the FHOG and the reduction of stamp duty for eligible buyers. The additional funding assisted many Western Australians entering the housing market for the first time, with up to $21,000 being available for those wishing to build. The FHOB was one of the Commonwealth's responses to the GFC, reflecting concerns about the likely effect of reduced residential building activity on the economy.
The provision of first home buyer grants is only one of several factors which may impact on the housing market at any given time. Bank interest rates on home loans are one of the critical factors, with lower interest rates enabling home buyers to service relatively larger loans. Since the official cash interest rate is set by the Reserve Bank of Australia (RBA) and housing loan interest rates are set by the various lending institutions, these are outside the direct control of State and Commonwealth Governments. As shown below, the movement in interest rates in late 2008 was different from that in 2000 when the first home buyer scheme was implemented.
This article presents an analysis of the impact of first home buyer grants on the Western Australian housing finance market over the last decade, while highlighting some other factors such as changes in loan interest rates. The data used in this article are monthly owner-occupied commitments data from Housing Finance, Australia (cat. no 5609.0) for the period from January 2000 onwards. Although seasonally adjusted and trend data on first home buyers are available at the national level, comparable data for the states and territories are not and, therefore, original data only are used in this analysis.
BACKGROUND TO THE HOUSING MARKET
In the past decade, there has been a significant growth in mortgage loans due to factors affecting both supply and demand. The growth in the supply of mortgage loans was the result of innovation in the financial markets and competition between mortgage providers. The most significant innovation was securitisation, whereby lending institutions remove mortgages from their balance sheets by selling them to special purpose vehicles (usually a trust), which finance purchases by issuing debt. The cash proceeds from the sale are then used by the original lending institution to make additional lending. The growth in securitisation resulted in an increase in the number and type of institutions involved in financing home loans beyond traditional lenders, which contributed to a greater variety and flexibility of loan products on offer and increased competition between lenders.
On the demand side, average mortgage loan size has increased markedly due to an increase in housing prices, especially in Perth and other capital cities, where sustained economic growth during the period of the resources boom continued until 2007. In addition, incentives offered by the Commonwealth and State and territory governments, in the form of the first home buyer scheme and a series of stamp duty concessions for first home buyers, increased demand for owner-occupied housing, while borrowing for investment housing was stimulated by tax incentives, such as depreciation allowances and lessening of capital gains tax. These incentives, along with an economic climate of relatively low interest and unemployment rates, contributed to households' willingness to significantly increase their indebtedness.
FIRST HOME BUYERS
Number of Loan Commitments
One way of assessing the impact of first home buyer grants is through a comparison of the number of housing finance commitments (loan approvals) in the months before and after the introduction of the grants. The table below shows an increase in the number of new commitments following the introduction of each grant. In Western Australia, the implementation of the grant in July 2000 was followed by a 91% increase, from the previous month, in the number of commitments to first home buyers, while the November 2008 grant was accompanied by a much smaller increase (6%).
The difference in the size of these two increases in first home buyer loans can, in part, be related to the economic climates prevailing in 2000 and 2008. In July 2000, the impact of the GST on the cost of new residential building appears to have been mitigated by the $7,000 grant to new home buyers. By contrast, the global financial downturn of 2008 initially brought about a crisis of confidence among home buyers, which continued until the government stimulus packages and lower interest rates took effect. This manifested in many would-be home buyers deciding to postpone their entry into the housing market despite the further boost in the grant to first home buyers.
Source: Housing Finance, Australia (cat. no 5609.0)
Average Loan Size
First Home Buyer Commitments, Western Australia, 2000 and 2008
|Housing Loan Commitments|
|Average Loan Size ($'000)|
The average housing loan commitment size is determined by both the number of commitments and the size of the aggregate value of the loan commitments. While commitments to first home buyers might be expected to decrease, on average, by an amount equivalent to the grant received, this assumes no other mitigating circumstances such as changes to the tax system (e.g. GST), interest rates or house prices due to rises in building costs or changes in buyer demand. Following the introduction of the FHOG in July 2000, a small decrease (2%) in the average loan size of first home buyers did occur in Western Australia, notwithstanding the introduction of the GST. It is noteworthy that the average home loan interest rate remained steady at 7.80% in the month the FHOG was introduced. (While interest rates did increase slightly in the following months,
there was a corresponding decrease in the average loan size. By October 2000 the number of first home buyer commitments had reduced to 1,204 and the average loan for these borrowers was $107, 200.)
In contrast, the introduction of the FHOB grant in late October 2008 was associated with an increase in average loan size. This increase was particularly pronounced in Western Australia, where the average size of the first home buyer loan rose immediately by almost 6% to $281,700. At the same time, the average interest rate dropped between October and November from 8.35% to 7.75% and continued to fall for a further seven months, reaching a record low of 5.75% in April and May 2009. This would be expected to have some impact on the borrowing capacity of first home buyers.
The following graph shows average home loan interest rates over the last decade and is based on average standard variable rates offered by the four major lending institutions in Australia.
NON-FIRST HOME BUYERS
Number of Commitments
Among non-first home buyers, the number of new home loan commitments in Western Australia fell by 13% in July 2000, the month in which the FHOG was introduced, with a similar pattern of a fall of 15.7% occurring in 2008 with the introduction of the FHOB.
Source: ABS publication, Housing Finance, Australia (cat. no 5609.0)
Average Loan Size
Non-First Home Buyer Commitments, Western Australia, 2000 and 2008
|Housing Loan Commitments|
|Average Loan Size ($'000)|
The average loan size for non-first home buyers increased marginally by 1.4% in 2000 after the introduction of the FHOG. In contrast, after the introduction of the FHOB in 2008 the average loan size decreased by 4.4%, which perhaps reflects the impact of the GFC on the mind set of the non-first home buyer.
COMPARISON OF FIRST HOME BUYERS AND OTHER BORROWERS
Proportion of Loan Commitments
One consequence of government intervention in the housing market in the last decade appears to have been an increase in the number of loan commitments to first home buyers as a proportion of the total number of commitments. The graph below shows this proportion over the last 10 years, with pronounced peaks in the 2000-01 and 2008-09 financial years at both the state and national level. For example, in the first six months after the introduction of the government grant in November 2008, the proportion of loans to first home buyers (excluding re-financing) in Western Australia grew from just over 30% to a record 43%. During both periods (2000-01 and 2008-09) the steep growth in the proportion of first home buyers can reasonably be assumed to be a direct consequence of the grants available at the time and the knowledge of their systematic wind-down by December 2009.
Loan Size Comparisons
In March 2008, the average loan size for first home buyers was $234,400, compared with $239,800 for non-first home buyers. Since that time, these figures have shown an increasing divergence, with loans to first home buyers outstripping those of non-first home buyers. By March 2009 the average loan of first home buyers had increased by 25%, to $293,900 while, for non-first home buyers, it had increased by less than 14%, to $272,900.
If the effects of re-financing are removed from the non-first home buyer series, a different story emerges. While the average size of a first home buyer commitment has typically been smaller than that of a non-first home buyer, the implementation of the FHOB appears to have had the effect of increasing the average first home buyer commitment to a similar or higher level. In November 2008 the average size of a first home buyer commitment exceeded that of the non-first home buyer commitment for the first time since April 1992.
In 2008 there was also a notable increase in re-financing loans as a proportion of all non-first home buyer loans. In January 2008, re-financing loans accounted for 42% of all Western Australian non-first home buyer loans. By January 2009 this proportion had risen to 48%. Given the RBA's move during the global financial downturn to lower interest rates, it is likely that a significant proportion of non-first home buyers re-financed their home loans to take advantage of lower interest rates, which fell from an average of approximately 9% in January 2008 to 6% in January 2009.
Not unexpectedly, this increase in the number of re-financed loans, together with the relative small size of these loans, had an impact on average loan size for non-first home buyers and contributed to the disparity in average loan size between these borrowers and first home buyers.
Both the 2000 and the 2008 grants had a positive impact on the number of housing finance commitments among first home buyers and thereby achieved their primary purpose of stimulating residential building activity. However, due to other market forces, these government interventions did not have the same impact on average loan size. While the FHOG in 2000 was followed by a decrease in the average loan size of first home buyers, the average loan increased in 2008 following the introduction of the FHOB.
In 2008-09, the combination of low interest rates, grants of up to $21,000 and state initiatives including reduced stamp duty, enabled an increase in the amount eligible first home buyers could borrow from lending institutions. In November 2008, the average loan size of first home buyers exceeded that of non-first home buyers for the first time. In addition, declining interest rates between November 2008 and June 2009 enabled other home buyers to re-finance their existing home loans, with a consequential downward effect on the average loan size of non-first home buyers.
While government initiatives such as the FHOG and the FHOB clearly influenced the housing market, grants to first home buyers have now been phased back. On 1 October 2009, the total grant was reduced to $14,000 for new homes and to $10,500 for established homes. On 1 January 2010, the grant was further cut back to pre-2008 levels ($7000 for both new and established homes). These reductions in the grant have been accompanied by a drop in new housing loan finance commitments. In November 2009 total commitments in Western Australia fell by 3.6% in original terms (which translates to a fall of 2.5% in seasonally adjusted terms). For first home buyers the comparable fall was 10.8% in original terms (with seasonally adjusted figures not being available).
Although movements in interest rates will impact on the demand for housing loans in 2010, the prevailing economic conditions, as well as the introduction or reduction in government initiatives, will have a significant impact on trends in housing finance.
Housing Finance, Australia, 2009 (ABS cat. no 5609.0)
Financial Markets (F Tables), Indicator Lending Rates, Australia 2009 (Reserve Bank of Australia, Table F5) http://www.rba.gov.au/statistics/bulletin/index.html