Toowoomba City: Keep an Eye on This Investment Destination in Queensland
03.11.2023
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Last week it was announced that the government is planning to expand the Home Guarantee Scheme, which allows first-home buyers to purchase with a deposit of as little as 5%, rather than the usual 20% necessary to avoid lenders mortgage insurance (LMI).
In the 2022 Federal Budget, the government announced it would expand the number of places in the Home Guarantee Scheme to 35,000 a year, up from 10,000. Given that the deposit hurdle is the largest barrier for first-home buyers and this scheme reduces the amount of deposit needed, it helps some first-home buyers purchase a property sooner than they otherwise could have.
Though given the still limited places, the scheme falls short of the potential demand from first-home buyers. For context, there were more than 160,000 mortgages given to first-home buyers last year.
However, at the time the budget was released, not only were there limitations on the number of places and income eligibility criteria, but there were existing caps on how expensive the property purchased could be.
PropTrack Economist, Angus Moore crunched the numbers and found fewer than half of homes in each of our capital cities fell under the price caps - a major constraint for first-home buyers wishing to take advantage of the expanded scheme.
However, from July 1 the price caps will be lifted by up to $250,000 in some areas.
Now the thresholds have been raised, more homes are eligible, meaning more choice for first-home buyers in every capital city.
So, we know the eligible share of all dwellings under the raised price caps has increased in every capital city. But how many extra suburbs are now in the mix for first-home buyers that weren’t previously?
The proportion of suburbs where the median house price is within the price cap limit will almost triple from a low base in Hobart, and almost double in Adelaide, where the share of suburbs now with houses within the $600,000 price cap will surge to 138.
When it comes to the absolute number of suburbs with a median house within the price caps, the most suburbs have been added in Sydney and Adelaide.
The share of suburbs where units were within the prior price caps was unsurprisingly already a lot higher, but the raised caps will still see a lot more units now eligible, giving first-home buyers a lot more choice.
This is particularly the case in Hobart, where again the share of suburbs where units are within price cap limits has almost tripled from a low base.
In Canberra, the proportion of suburbs where the estimated value of a median unit is within the raised price cap limit will more than double to include 97%* of suburbs in the capital.
When it comes to the absolute number of suburbs with a median unit inside the price caps, the most suburbs have been added in Melbourne, Sydney and Canberra.
The share of suburbs with units that are now eligible is higher in every capital city than that of eligible houses.
This means, while first-home buyers will certainly have more houses to choose from, when it comes to units, there will be a lot more choice. As a result, it’s likely this will add to unit demand.
The apartment market has been subdued throughout the pandemic as the experience of lockdowns made apartment living relatively less attractive for some, and investors were less active in the market.
However, that picture is changing as COVID-normal is underway and cities return to life. We’re already seeing demand for units returning.
The volume of unit enquiry on realestate.com.au is 46% higher year-on-year, when comparing the year ended March 2021 with the year ended March 2022. That’s primarily because demand for units is making a comeback this year. Enquiry volumes have surged 21% in the first quarter of 2022 compared to the same period in 2021.
The premium of house prices over unit prices reached record highs with the pandemic driving one of the biggest shifts we’ve ever seen when it comes to housing preferences.
But with credit conditions tightening, and a normalisation of migration placing renewed pressure on inner-city rental markets, the share of apartment enquiry is increasing as prospective buyers look for more affordable options.
The expanded Home Guarantee Scheme is likely to be another driver of demand in the apartment market.
The cornerstone of the Home Guarantee Scheme means that first-home buyers are taking out higher loan-to-valuation ratio (LVR) mortgages, meaning the buffer against price falls is reduced.
This hasn’t been an issue in recent years with the extraordinary turn of events that have combined to see housing prices surge Australia-wide.
However, residential property price growth is expected to temper as the housing market cycle winds down from its peak and higher mortgage rates weigh on buyer demand and property prices.
Purchasing a property with a small deposit can result in negative equity. With high LVR mortgages the risk of homeowners falling into negative equity, where the value of their property is lower than the balance remaining on the home loan, is increased. If you owe more than your home is worth, your mortgage is considered ‘underwater’.
For example, say you purchase a home for $600,000 with a 5% deposit, your mortgage would be about $570,000 ($2,252 per month principal plus interest mortgage payments with a 2.5% per annum interest rate).
However, if the value of your property reduced by 6%, it would be worth $564,000, which is less than the mortgage, putting you into negative equity.
According to the RBA’s financial stability review, "estimates using a model of the housing market that takes into account historical relationships between interest rates and both demand and supply factors suggest that a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15 per cent over a two-year period".
With housing price growth slowing in Sydney and Melbourne, the risk of falling ‘underwater’ has become more pronounced. But is countered by the fact that the labour market is tight, and job security high, with strength in the labour market being fundamental to whether people can keep paying their mortgages.
Looking ahead, with interest rates set to climb, mortgage repayments will also increase.
The bigger the mortgage, the more repayments will increase.
This means a first-home buyer with a 5% deposit will have a larger loan than if they had bought with a 20% deposit, all else equal.
That same $570,000 loan amount would see repayments increasing $308 per month if the mortgage interest rate climbed to 3.5% per annum. And for someone who bought a $750,000 home with a 5% deposit and loan amount of $712,500, repayments would increase by $384 per month if the mortgage interest rate climbed from 2.5% to 3.5% per annum.
So, though the raised price caps will certainly give eligible first-home buyers a lot more choice, the trade-off is likely to be a larger mortgage, just as the cost of servicing that mortgage is set to rise with interest rates headed higher.
Source: realestate.com.au
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