First Home Buyers: Don’t Rush In

Many in the media are saying that the latest interest rate cut makes property more affordable for first home buyers. I disagree.

Let us remember this is the lowest interest rate in over 30 years. Rates are artificially low to stimulate the economy short term. This is not normal or even an average.

So it is fair to assume that over the 25 to 30 year loan term that interest rates will go up again. If you can’t afford the repayments when interest rates go back up (as they will) then buying a house now is a recipe for future financial stress.

The current interest rate only makes a home more affordable if you can fix your rate at current levels for 30 years.

If you still buy even though you can only just afford the repayments now then you are betting that your income will increase quicker than interest rates. Start praying that it does.

The only thing that makes the house more affordable is free cash in the form of the First Home Owners Grant.

House prices will perhaps stop decreasing so rapidly. Lower interest rates reduce the pressure on would be sellers so they will be less inclined to drop the price of their house. It is suddenly more affordable for them to hold on.

Of course you could be really creative and just buy a less expensive house that you could afford.

TIP: calculate your affordability based on the repayments if interest rates are 3% higher than they are at the time of purchase. Then make repayments at that level right from the start.

Housing affordability an urgent problem, but who’s to blame?

Housing affordability is an urgent problem, even at crisis point if you read the continuous media coverage over the past year. And within the first couple of days of the current Australian Federal Election campaign the politicians had jumped on the bandwagon with policies for our housing affordability crisis. Interest groups have also been cramming the inboxes of journalists with the latest research and opinion pieces of who is to blame and what should be done about it.

Much of the consumer research I have read has been self-interested and tailored to push the particular barrow of the group financing the research. One piece of data that is more robust is the Housing Affordability Index jointly published by the HIA (Housing Industry Association) and the Commonwealth Bank. It’s more robust in its methodology, but not necessarily in the conclusions drawn from the research.

Released today, the September quarter HIA/Commonwealth Bank First Home Buyer Housing Affordability Index showed that mortgage repayments account for 31.7 per cent of total first home buyer income. (Anything above 30 per cent is considered unaffordable and stressful.)

Commenting on the data Ron Silberberg, Managing Director of HIA noted “it is unacceptable that a typical first home buyer would have to place themselves in mortgage stress to purchase a home.” (Read the media release here.)

Mr Silberberg, everyone has choices; no one HAS TO place themselves in mortgage stress . You don’t need to buy a house that you cannot afford. You can choose to buy a lower cost house that is affordable. To do so probably requires some compromises. Perhaps you need to lower your expectations of the age of the house, the current quality, the proximity to the CBD or water or other nice amenities. But all of these are choices.

It is a choice to borrow an extra $100,000 rather than accommodate an extra 15 minutes travel to and from your places of work and play. (Is that 15 minutes really worth an extra $122,000 in interest over 25 years? Maybe or maybe not – it’s your choice.)

The real housing affordability crisis is one of a crisis of expectations!

What we can interpret from the HIA/Commonwealth Bank First Home Buyer Housing Affordability Index is that first home buyers are choosing to place themselves under more mortgage stress rather than further lower their expectations.