People call me repetitive, and it’s not forgetfulness (really!). It’s because on this subject, I need to drive my point home more than once. So here I go again – first home buyers, now is your time to buy!
I seem to be having this conversation a lot lately. First home buyers are calling me, wondering if they should wait a bit longer for conditions to improve. The thing is, conditions are about as good as they’ve been for years, and that window isn’t going to stay open forever.
I get it. After the hammering people have taken over the last couple of years, with interest rates shooting up to over 7% and house prices at levels that made buying feel impossible, it’s natural to be cautious. But right now, three major factors are converging in a way we haven’t seen for some time, and if you’re serious about buying your first home, you need to pay attention.
1. Interest rates have fallen – significantly
Over the past year, interest rates have dropped by a full 2.5%, with one-year fixed rates now sitting around 4.5%. That’s massive. And the OCR is currently at 2.50%, with another expected cut likely in November.
For first home buyers, this difference in interest rates can mean the difference between a $50,000 increase in borrowing capacity – which is often enough to go from red to green, from ‘no’ to ‘yes’ in terms of meeting a particular purchase price.
The mistake people make is thinking these rate drops will continue indefinitely. They won’t. The Reserve Bank will be naturally cautious about doing any more OCR reductions once the momentum builds in the economy. In fact, there’s a school of thought emerging that suggests this time next year, they might start to reverse because inflation will come through as people have more money and start spending.
2. House prices are still soft – but not for long
Property prices remain relatively soft across most of the country, which means you’re still buying at a favourable point in the cycle. But you can start to sense it turning. The window on that opportunity is beginning to close. It’ll be open for a while, but it is beginning to close now.
When interest rates fall and borrowing becomes easier, people can borrow more, which means they can pay more. If more people can pay more, demand goes up, and then you’ve got price pressure again. It’s like turning the steering wheel on an oil tanker – it takes time for the effect to show, but once it starts moving, it’s hard to stop. You’ve probably got a 12-month window before that pressure builds significantly.
3. The LVR changes are a game-changer
People often ask me what the loan-to-value (LVR) ratio means, so let me break it down.
The LVR is how much you’re borrowing compared to what the property is worth. A lower LVR means a larger deposit and less risk for the lender, while a higher LVR means you’re borrowing a larger portion of the property’s value, but it means more risk for the bank.
LVR regulations are basically a mechanism used by the Reserve Bank to restrict high lending and dampen down the housing market and inflation.
How do the LVR restrictions work? The amount of low-deposit loans a bank can provide is set as a proportion of the high-deposit loans it provides. Currently, that proportion is 20%.
In September, the banks lent $8B in total of which no more than $1.6B would be available to folk with low deposits but from 1st December the proportion increases to 25% which would be $2B to low deposit borrowers.
It might not sound like much more but if the average house price is $1M, then it means another 400 houses could be funded. Or your ability to get funding for the same number of houses will become easier.
If you’re serious about buying your first home and you’ve been held back by deposit requirements, now is the time to get your application in front of a bank. The rules have shifted in your favour, and that doesn’t happen often.
The perfect storm (in a good way)
When you put all three factors together – lower interest rates, soft house prices, and easier lending restrictions – the conditions are optimal for first home buyers.
Previously, I was saying it’s a great time for first home buyers to buy because prices were really soft – you could buy 20% more house for 10% less, that sort of thing. That pretty much still applies now because prices are still soft. But now we’re adding increased lending capacity to the mix.
If there was ever a time when you’d be able to buy a house for decent money and lending is about to become more freely available, now is the time. It really is.
Take action
Contact me to have a chat about your situation, and I’ll give you an honest appraisal of what you can borrow and how to make the most of this opportunity.