House prices are rising faster at the bottom end of the market than the top, as competition among first home buyers intensifies following the introduction of the federal government’s 5 per cent deposit scheme.
Dwellings with values below the government’s expanded first home guarantee scheme rose by 1.2 per cent nationally, while property prices above the scheme’s caps increased by 1 per cent in October, according to an analysis by Cotality.
The data provider undertook the analysis to assess the initial impacts of the first home buyer scheme which came into effect on October 1. The government has raised the price caps for eligible property purchases and scrapped income limits to allow an unlimited number of first home buyers to enter the market with a 5 per cent deposit without having to pay lenders’ mortgage insurance.
The price caps are $1.5 million in Sydney, $1 million in Brisbane and Canberra, $950,000 in Melbourne, $900,000 in Adelaide, $850,000 in Perth, $700,000 in Hobart and $600,000 in Darwin.
Cotality’s head of research, Eliza Owen, said the gap between the price growth of homes below the caps and that of homes above the cap was unusually strong when compared with data going back to 2009.
“We can’t quite definitely say there’s a causal relationship here but … it probably doesn’t help to have the additional fuel to the fire that is the expanded 5 per cent deposit scheme,” Owen said.
“There were some interesting regional and sub-market results. The inner east of Melbourne through October showed values below $950,000 increased by 1.7 per cent. That’s more than four times the rate of growth we saw for property values above $950,000.”
Sydney’s eastern suburbs showed the biggest difference in growth in NSW, with homes below the caps outperforming those above the caps by 92 basis points.
In the smaller capital cities, homes in Brisbane’s north below the cap grew by 1.9 per cent while those above grew by 1.3 per cent in October. Inner-city Perth had a 97 per cent basis point difference in growth. Homes below the cap in Adelaide’s north had a 24 basis point difference.
Hobart and Canberra were the outliers as property price growth in those areas has been slower overall, Owen said.
The bottom end of the market has been growing more quickly for the past two years, as home values have been rising up to 10 times faster than wage growth, forcing more buyers into the lower end of the market and increasing competition.
Owen said it was still too soon to completely link the October growth to the expanded first home buyer scheme but pointed out that buyers will get less for their money if everyone keeps bidding up prices to the thresholds.
Home prices grew 1.1 per cent nationally in October, the fastest monthly pace in two years. Market momentum has been building since the first February rate cut, and the guarantee came into effect when housing supply is at a record low.
“I do expect this to continue. Affordability constraints and the expansion of the 5 per cent deposit scheme will continue to skew purchases to the lower end of the property market. I also think the higher end could potentially underperform,” Owen said.
“This is why economists have been saying for a very long time that the way to address housing affordability is not to increase money concessions, grants for purchasing homes. It’s probably reducing the amount of money that goes into the housing market to bring prices down and one of the ways that you can do that is by limiting investment incentives for property.”
Suburbs with opportunity for first home buyers
In Sydney, Parramatta in the city’s west, Castle Hill in the north-west and Marrickville in the inner west are proving popular with first home buyers, according to analysis of mortgage inquiries by credit tracking agency Equifax.
Those suburbs are close enough to city centres and still affordable, according to Equifax’s chief solution officer Kevin James.
“I think what you’re seeing is capacity to borrow is not quite getting them into the [more popular] areas,” James said. By contrast, favoured suburbs in Melbourne are still accessible for new buyers.
In the Victorian capital, inner-city Richmond and Southbank on the CBD fringe are winning the most attention from first home buyers. In south-east Queensland, Pimpama and Southport on the Gold Coast and West End in Brisbane’s inner south are the most popular areas for first home buyer mortgage applications.
But, the Equifax analysis also underlines how rising house prices are forcing first home buyers to consider purchasing further out from the CBD. Those suburbs are broadly within 60 kilometres of central Sydney, Melbourne, Brisbane and the Gold Coast, the analysis of September quarter mortgage inquiries shows.
The outer suburbs can suit people working locally but pose a challenge for those commuting to the CBD, James said. The strength of first home buyer demand in such suburbs is likely due to people taking advantage of work-from-home arrangements or it is coming from rentvestors – buyers who purchase property for an investment and continue renting closer to the city – according to James.
Among the more popular outer suburbs in Sydney’s south-west is Leumeah, 37 kilometres and more than an hour’s train ride from the CBD. In Melbourne, Melton South in the city’s west is 34 kilometres and just under an hour’s train ride from the CBD. Brisbane’s Chapel Hill is only six kilometres from the city, but at least 45 minutes away by public transport.
“What we have seen is a lift in inquiry volume of the new home buyers. What we’re not seeing is the same amount of lift on mortgages that are opened,” James said.
“There might be people who now believe that they can get into the market. So they do an inquiry. They get their mortgages prepared and then they go looking but they haven’t bought yet.”
He said those mortgage applications could come through in the next quarter’s data, which will take October into account when the first home buyer scheme came into effect, or it could indicate that borrowing capacity is a challenge.