What is best for buyers

When the pandemic first hit our shores in March of last year, the mood in the real estate market quickly deteriorated.

In just a few weeks, a bull market had been reversed, with numerous reports of properties being sold at prices significantly below asking prices.

Then came the predictions of big losses for homeowners, as housing analysts and banks launched price drop forecasts of up to 32% in quick succession.

Now that we look at these market conditions through the lens of the fastest-paced price increase since the late 1980s, March 2020 appears to be a whole different world.

Since the start of the year, house prices in the country’s five largest capitals have risen 9.5%, led by Sydney with a price increase of 11.9%.

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For the 66% of households who own their home or have a mortgage, arguably resulted in the largest increase in household net wealth in such a short time in Australian history.

But since some of these lucky Australians are enjoying their big capital gains, for those who don’t own their own homes, things are a little different.

According to a report by Field, potential buyers have seen the required size of real estate deposits skyrocket since the start of the year.

“Anyone in Sydney who saved a 20% deposit on the median price of a house in December but failed to buy a house must have saved an additional $ 20,614 since then (through March 31) to maintain its deposit at 20% of the current median price of real estate.

While Sydney is certainly an outlier, between January 1 and March 31 the required deposit (20%) to buy a median home increased by $ 9,706.

It’s important to keep in mind that these necessary savings don’t bring potential buyers any closer to their dream of homeownership than they previously were. Instead, they simply maintain the purchasing power that their deposits previously had before prices took off.

As prices continued to move away from potential early buyers, many turned to their parents for help entering the market.

According to figures from research firm Digital Finance Analytics (DFA), the number of first-time homebuyers seeking help from their parents rose from 8% in the first quarter of last year to over 60% in March 2021.

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The average help provided is not exactly what parents provide a little more to the bond of their adult children.

In March, the average amount of help parents provided to their first homebuying children with their deposits was almost $ 90,000.

Despite a relatively strong price increase until the end of last year, early buyers have generally not been deterred by this additional hurdle to enter the market.

DFA figures show that a record 34% of potential first-time buyers were looking to enter the market in the next 12 months at the start of this year.

That figure has since fallen to 23% in the largest non-Covid month-long change in the index since the record began in 2013.

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As deposit requirements soar to the stratosphere and prices skyrocket out of the reach of many potential first-time buyers, it is perhaps not surprising that so many have chosen to forgo trying to buy a house, at least for now.

Over the past few decades, this may have started to dampen a real estate boom as potential buyers exit the market and price growth begins to slow down as a result.

In the United States, rising prices have already translated into the largest monthly drop in home purchase intentions in 54 years that records have been set.

But as the theme of so many financial industry presentations and backyard barbecue conversations, Australia is truly different.

Thanks to the forces of the negative gear and the growing perception that the government will not allow prices to drop significantly, we may only see the first stage of the rocket which is the current price boom in the world. real estate in the country.

In the words of real estate research company SQM Research managing director Louis Christopher:

“They [the federal government] will never let a real estate crash happen in this country.

As the number of off-market first-time home buyers continues to increase, the potential capital gains on offer have seen the number of investors looking to enter the market or buy more properties leaving as a market. rocket.

In a survey in January, few real estate investors were looking to transact, with just 1% of those DFA defines as “portfolio investors” stating they intended to buy in the last 12 months. next months.

By the arrival of April, the situation had been completely transformed by the hottest real estate market since the late 1980s.

In April, 16% of individual investors and 21% of the portfolio were suddenly looking to enter the market.

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To put these numbers into perspective without the distortions due to the pandemic, in February 2020 only 7% of individual investors and 14% of portfolio investors intended to buy a property in the next 12 months.

While soaring prices are disastrous for first-time buyers who find themselves increasingly excluded from the market, for real estate investors, rising prices have the opposite effect completely.

Rising prices are an incentive to enter the market, to take advantage of what they hope will be another long-term period of very strong house price growth.

It is not known where the real estate market will stand in the long term, as worrying signs of weakness begin to appear in the global economic recovery.

But in the short term, there are two things we know with relative certainty.

Investors will likely re-enter the market to seek capital growth, in what is perceived to be the country’s safest asset, and first-time homebuyers will continue to be shut out of the market.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommenter

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