As property prices continue to grow, some first-home buyers may think they cannot afford to buy unless the market crashes.
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First-home buyers shouldn’t wish for a price crash. Picture: Getty
Housing affordability is an issue particularly in places like Melbourne and Sydney where those earning a median income cannot afford a median priced home without going into mortgage stress.
Currently, we do need price growth to moderate or even come back a little in the most unaffordable inner-city markets.
But what we don’t want is a market collapse as it removes all buyer confidence. Here’s why that’s an issue even for first-home buyers.
All buyers are stung by a crash
For prices or a market to collapse, there is usually one or more major economic triggers such as a recession and or widespread unemployment.
This means very few people including first-home buyers would be in a position to make a purchase. The economic repercussions of this can often last for many years.
When prices crash, the finances of buyers can take a hit. Picture: Getty Images
A recent example of a market collapse was the global financial crisis (GFC), which occurred in 2008.
The impact on Australian property was small, and growth again occurred quite rapidly, but it was a very different situation in the US and Europe as many economies crashed severely.
In the US, prices are only now back to where they were a decade ago and in Italy, prices are still below where they were before the GFC.
In both of these places, few people were confident about the market for a very long time, even first-home buyers.
The end of the mining boom also caused prices to fall dramatically.
Not so long ago mining towns were seen as a great place to buy. But as soon as the boom ended, demand declined.
Houses in mining towns are now very cheap, but there is no buyer confidence to take advantage of it.
Banks limit finance
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Getting a loan can be difficult if prices crash. Picture: Getty Images
When the market collapses or prices crash potential buyers will struggle to get finance.
This is because lenders will assess the risk each loan represents in terms of that borrower’s capacity to repay when economic times are tough, as well as the overall value of that property in the market.
Often, lenders are more cautious about lending in tough times.
Some buyers looked to markets like the US following the GFC, but often transactions didn’t occur because the finance was very hard to access.
Are you trying to buy your first home? The struggle is real.
Lower prices don’t always help first-time buyers
Take Perth as a real-world example. Right now, the market isn’t collapsing but it is dropping, so you would think that first-home buyers would be rushing in.
In reality, we’re actually seeing the numbers decline.
This is in part due to changes to the First Home Owners Grant, which could be further reduced in this month’s state budget.
Also, with mortgage stress in WA growing as a result of the end of the mining boom and the economy in general not looking great, some first-home buyers may wish to be in a much stronger economic position before making an offer.
The bottom of the market
The other problem with a market collapse is that it can be difficult to predict the bottom of the market.
Perth is starting to show some signs of recovery, but it could be a couple more years before the entire market is strong again. We won’t know for a few years yet if now is very the bottom of the market in Perth.
In the US, those who bought following the GFC in 2009 often paid too much, with prices continuing to fall in some locations for quite a few more years.
Price moderation
A situation where buyers disappear and prices collapse won’t help anyone, not even first-home buyers who appear hungry for it to happen.
But a stabilisation of prices or even a moderate decline would be welcome in some markets right now.
Sydney, in particular, is far too expensive and is a potential economic problem in terms of attracting people in a wide variety of occupations to the Harbour City if they cannot afford local housing.