In the first of our three-part series exploring the various life stages of borrowers, The Adviser tackles the growing affordability issues facing first home buyers. Brought to you by La Trobe Financial.
HOUSE HUNTING has changed, CoreLogic CEO Lisa Claes says. It’s no longer an enjoyable way to spend a Saturday morning. These days, house hunting is an endurance test.
As loan-to-value ratios steadily drop, the average deposit amount climbs. Meanwhile, wage growth is at a record low, rising by just 1.9 per cent over the year to 31 March 2017 (ABS) while CoreLogic numbers show housing prices across the capital cities grew 12.9 per cent in the same period.
At the same time, the official interest rate is at a record 1.5 per cent low and Domain’s annual first home buyers (FHB) report identified Gosford, a suburb 65 kilometers from the Sydney CBD, as the city’s most affordable for houses. In Melbourne, the most affordable suburb is 70 kilometers from the CBD.
James Hickey, partner at Deloitte, says that a critical part of the challenge for FHBs is scraping a deposit together. Pointing to the housing market in city centres, he says: “There’s always going to be a degree of pressure put upon housing within a close proximity of where the workplace is.
“What we’re seeing around property prices is the impact of demand and supply playing out, so the challenge of FHBs… is clearly saving up money for the deposit whilst at the same time, property prices are moving — and in some cases — moving by a greater amount than what the returns are that they’re able to generate on the savings that they’re accumulating.”
What’s being done?
Federal government measures introduced in the 2017/18 budget that enable FHBs to salary sacrifice up to $30,000 towards a deposit were met with shrugs by the industry. Mortgage Choice chief executive John Flavell has labelled the measures an “ineffective spray of pops and fizzles”, while Mr Hickey also questions how far $30,000 will go in the capital cities.
However, Mr Hickey praises measures brought in by the Australian Prudential Regulation Authority (APRA) to curb investor lending: “That seems to be a far more effective, targeted policy to impact some of the investor end of the market.”
State government resolutions to slash stamp duty on certain FHB properties have also met mixed responses. The NSW government’s decision to slash the tax for FHBs buying homes under $650,000 and to grant concessions for homes under $800,000 was described by Starr Partners CEO Douglas Driscoll as a means of pushing FHBs into apartments.
However, Cory Bannister, vice president and chief lending officer at La Trobe Financial welcomes the concessions. He sees stamp duty as one of the biggest barriers to the property market.
Downsizing disincentives are another hurdle in releasing property to the market, Mr Hickey says. The family home is exempt from the pension asset test, so he asks why seniors looking to downsize would do so when the money released would count against them in the asset test.
“We need to look at all aspects,” he suggests.
Creating relationships with FHBs is a way to create lifelong customers, Mr Bannister says, and brokers should be actively pursuing them.
“I would suggest that brokers, if they can, [should] help someone to get their first loan. That’s… one of the more emotional decisions in someone’s life.”
Mr Hickey adds that there is increasing scope for brokers to be involved earlier in the process, even two to three years before buying a FHB is in a place where they can buy a home.
Connecting with FHBs on social media and promoting financial literacy are ways brokers can build relationships earlier, Mr Hickey says.
A helping hand
Bernard Salt, special adviser at KPMG and founding father of the smashed avocado debate, says there is a great opportunity for the Baby Boomer generation to share wealth with their children in their 20s and early 30s;through the pledging of funds and by passing down knowledge.
“The Boomers have benefited enormously from the growth of Australia… and of Australian cities, and the prosperity of the last 2030 years or so has converted into housing wealth and more. I think many parents in their 60s would look at ways of transferring that wealth to the next generation,” he said.
The demographer predicts 2018 to be a period of settling; adding that with strong population growth, particularly in Sydney and Melbourne, discrepancies of supply and demand should be ironed out.
For now though, Mr Salt says most parents see that transferring wealth is a way of giving their kids a leg up.
For Mr Bannister, this intra-generational transfer of wealth was a crucial factor in the development of La Trobe Financial’s Parent to Child (P2C) loan product.
Introduced in 2014, P2C is aimed at FHBs otherwise depending on the “Bank of Mum and Dad”.
With P2C, the parents choose the loan amount and stipulate the interest rate and then deposit their investment into the La Trobe Financial Australian Credit Fund, an externally rated managed fund. The child pays back the loan to La Trobe Financial, while the parents receive a monthly return on investment.
“It became apparent to us that there’s a real option here,” Mr Bannister says. “We look at the transaction based on parents’ need to protect their investment and we were able to provide the facility to do that; they can invest it via our credit fund. They’re a registered investor protected by a registered mortgage and [the money is] then lent out to the children who… make monthly repayments. Often serviceability isn’t an issue, it’s just coming up with the deposit,” he says.
“Prior to this option, parents… had to guarantee the child’s loan or co-purchase the home with the child and in essence place their own home and retirement savings at risk. This also meant that that the child missed out on the first home owners grant or stamp duty concessions.”
In the future, Mr Bannister sees the P2C loan being used in a number of ways, from employer to employee, builder to home buyer or vendor to purchaser. “We have already begun to see demand from builders assisting home buyers through financing the final 5 per cent or 10 per cent required to complete the purchase, and as a result are generating healthy returns on those invested funds secured by property they ultimately know well and trust.”
Broker Q&A: Nicole Cannon
director, Pink Finance
How do you approach
conversations with FHBs?
I assume they know nothing. I go from
the beginning and say: “I’ll explain the
process and if you know what I’m
explaining, just tell me.” I take them
through the basic stuff and what
Why is the hand-holding aspect of
a broker so important for FHBs?
Having someone guide you along the way
is absolutely critical and often we get
feedback saying: “You were more than
our broker, you were also our councillor.”
In times of unrest, financial security
and ethics are qualities that are going to
stand out and put people’s minds at rest.
What can brokers improve on
when working with FHBs?
Don’t dismiss the time that a FHB may
take in terms of applications and make
sure you have a constant connection
with them; they’re the ones that are going
to speak to other people and that’s how
you grow your books.
Partner message: La Trobe Financial
YOUNG ADULTS are living at home longer than ever, finding it harder and more costly to get onto the property ladder. La Trobe Financial’s Parent to Child - P2C® loan looks to address the affordability gap between house prices and median income multiples, now at a staggering five times income. P2C® loan is a combined credit and wealth management product designed to assist young Australians onto the property ladder and protect families with intergenerational wealth transfer. P2C® enables children to enter the housing market without asking mum and dad to put their wealth at risk through bank guarantees. P2C® is specifically designed to protect the parents from such instances without exposing their assets or credit profile. Parents can assist in full or in part of the loan, possibly saving their children tens of thousands of dollars in Lender’s Mortgage Insurance premium.
Cory Bannister, chief lending officer
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