Targeting Australian First Home Buyers 2007

Table of Contents

• Overview
  • Catalyst
  • Summary
• Executive Summary
  • Market context of first home buyers in Australia
    • First home buyers have been returning to the mortgage market since a low point in 2003
    • Slowing house price growth since 2003 has facilitated first home buyers' return to the market
    • Housing affordability continues to present a challenge to first home buyers
    • There are a number of Government initiatives aimed at helping first home buyers
  • Competition and products for first home buyers in Australia
    • Mortgages requiring little or no deposit have become a common occurrence in the market
      • 100% LVR products have become more common
      • Some products have an LVR over 100%
      • High LVR products have enjoyed strong growth in recent years
    • Honeymoon rate mortgages have become less popular among first home buyers
      • There are currently a large number of lenders that offer honeymoon rate mortgages
      • Although still ubiquitous, honeymoon products have become less popular for first home buyers
    • An increasing number of products based on family support are becoming available
      • These products have become more popular in recent years
      • The five major Australian banks are well positioned to offer family support options
      • Some smaller banks and non-bank lenders offer family support mortgages
    • Shared equity mortgages offer a new solution to first home buyers
      • Shared equity mortgages reduce monthly payments at the expense of future capital gains
      • Adelaide Bank was the first to launch a private sector shared equity mortgage product
      • In March 2007 St. George launched a similar product partnering with property developer Australand
      • Public perception will be key in determining the future success of shared equity mortgages
    • There have been a number of other developments in the first home buyers mortgage market
      • Professional package products are now used by many mortgagors
      • Longer loan terms are being offered
  • The future role of first home buyers in the Australian mortgage market
    • In Datamonitor' s view, first home buyers will continue to return to the market
      • Total lending commitments will increase to AUD$316.3 billion in 2011
      • First home buyers' share of owner-occupier lending commitments will increase to 20.5% by 2011
    • The lack of affordability for first home buyers is nevertheless a long-term issue
• Table of Contents
• Table of figures
• Table of tables
• Market context of first home buyers in Australia
  • First home buyers are an important customer base for lenders
    • First home buyers are an important part of the housing and mortgage markets
    • First home buyers are also an important upsell opportunity
  • First home buyers are returning to the mortgage market after a number of years
    • 2003 was a low point for first home buyer participation in the mortgage market
    • Since 2003, first home buyers have gradually been re-entering the mortgage market
      • A number of factors can account for the re-emergence of first home buyers
    • The average loan size of first home buyers is now greater than other borrowers
      • The historic gap in loan size has reversed in most states and territories over the last five years
  • Housing affordability continues to present a challenge to first home buyers
    • Tight housing supply and interest rate rises have made for record low levels of affordability
    • Even innovative mortgages cannot overcome a lack of affordability
  • There are a number of Government initiatives aimed at helping first home buyers
    • The First Home Owner Grant was introduced in 2000 but ultimately contributes to higher house prices
    • All states and territories have some form of Stamp Duty concessions, but they have little long-term effect
    • A couple of new suggestions have been made that could affect first home buyers to a greater degree
      • The Opposition has suggested changes to investor taxation and negative gearing
      • Many feel that reform of local Government taxation and land releases is necessary
• Competition and products for first home buyers in Australia
  • There is now a wide range of products that are targeted at first home buyers
    • Lenders have modified their product offerings to serve the needs of first home buyers
  • Mortgages requiring little or no deposit have become a common occurrence in the market
    • First home buyers now have smaller average deposit sizes
    • As a result, a significant number of lenders offer high loan-to-value ratio mortgages
      • Three of the five largest Australian banks now offer 100% LVR mortgages
      • Many non-bank lenders offer 100% LVR products
      • Some products have an LVR over 100%
    • High LVR products have enjoyed strong growth in recent years
      • On a side note, high LVR products are entering the mortgage securitization market
    • Because of the higher risk they carry, such products nonetheless need to be priced and managed carefully
      • This risk is particularly important given the crisis of sub-prime mortgage lending in the US
  • Honeymoon rate mortgages have become less popular among first home buyers
    • Honeymoon rate mortgages offer a low introductory rate at the beginning stages of the mortgage term
    • There are currently a large number of lenders that offer honeymoon rate mortgages
    • Although still ubiquitous, honeymoon products have become less popular for first home buyers
    • These mortgages could be risky in an environment of rising interest rates, as the situation in the US demonstrates
  • An increasing number of products based on family support are becoming available
    • Products based on family support use the accumulated property equity of family members or friends
    • These products have become more popular in recent years
    • The five major Australian banks are well positioned to offer family support options
      • All five major Australian banks now offer a family guarantee option on their mortgage products
    • Some smaller banks and non-bank lenders offer family support mortgages
    • Mortgages based on family support nevertheless continue to cause concern
  • Shared equity mortgages offer a new solution to first home buyers
    • The Government has supported the development of shared equity mortgages
    • The private market has started offering shared equity mortgages
      • Adelaide Bank was the first to launch a private sector shared equity mortgage product
      • In March 2007 St.George launched a similar product partnering with property developer Australand
    • Nevertheless, shared equity mortgages pose a number of drawbacks
      • Public perception will therefore be key in determining the future success of shared equity mortgages
    • Shared equity mortgages are also making a slow comeback in the UK mortgage market
    • Joint mortgages are a related form of product being introduced in the UK
  • There have been a number of other first home buyer mortgage developments
    • Professional package products are becoming more common among first home buyers
    • Longer loan terms are being offered
• The future role of first home buyers in the Australian mortgage market
  • In Datamonitor' s view, first home buyers will continue to return to the market
    • Datamonitor uses its in-house model to forecast the mortgage market and first home buyers' role in it
    • Total lending commitments will increase to AUD$316.3 billion in 2011
    • First home buyers' share of owner-occupier lending commitments will increase to 20.5% by 2011
  • The lack of affordability for first home buyers is nevertheless a long-term issue
    • Australian first home buyers will have to be more open about location
    • The Government must do more and will be under pressure to alleviate first home buyers' difficulties
    • Australian attitudes must catch up with product development in the mortgage market
    • Ultimately, lenders must strike a delicate balance
• APPENDIX
  • Supplementary data
  • Methodology
  • Further reading
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Tables
    • Table 1: A large number of lenders offer honeymoon rate mortgage products, July 2007
    • Table 2: Datamonitor uses projections of macroeconomic variables to forecast total lending commitments, 2006-2011
    • Table 3: Datamonitor' s forecasts of first home buyer and total owner-occupier lending commitments, 2007-2011
    • Table 4: First home buyer proportion of owner-occupier lending commitments, 1992-2006
    • Table 5: Price index of established homes in capital cities, March 2002-March 2007
    • Table 6: Total lending commitments split by owner-occupier and investment lending, 1992-2006
    • Table 7: Lending commitments for owner-occupiers split by first home buyers and non-first home buyers, 1992-2006
    • Table 8: Average loan size for first home buyer and non-first home buyer owner-occupiers, 1992-2006
    • Table 9: Average amount lent to first home buyer owner-occupiers in excess of non-first home buyer owner-occupiers, 2006
    • Table 10: Affordability index for first home buyers, December 1992-December 2006
    • Table 11: Datamonitor' s forecasts for total lending commitments, 1992-2011
    • Table 12: Datamonitor forecasts of first home buyer lending commitments, 1992-2011
  • List of Figures
    • Figure 1: In 2003 first home buyers accounted for just 13.7% of owner-occupier lending commitments, but they have made a slight comeback since, 1992-2006
    • Figure 2: Lending commitments are forecasted to increase to AUD$316.3 billion in 2011, 1992-2011
    • Figure 3: First home buyers' share of owner-occupier lending commitments will increase to 20.5% in 2011, 1992-2011
    • Figure 4: In 2003 first home buyers accounted for just 13.7% of owner-occupier lending commitments, 1992-2006
    • Figure 5: First home buyers' proportion of owner-occupier lending commitments has grown since 2003, 1992-2006
    • Figure 6: Since 2003, house price growth has been relatively flat, March 2002-March 2007
    • Figure 7: Owner-occupier lending has increased since 2003 and investment property lending has leveled off, 1992-2006
    • Figure 8: First home buyer owner-occupiers now have a higher average loan size than non-first home buyer borrowers, 1992-2006
    • Figure 9: The average loan size of FHBs is now greater than that of non-FHBs in most Australian states and territories, 2006
    • Figure 10: First home buyer owner-occupier average loan size has grown particularly strongly in Tasmania since 2003, January 1992-April 2007
    • Figure 11: Housing affordability for first home buyers has reached a low point, December 1992-December 2006
    • Figure 12: By having a family member guarantee part of a mortgage, the LVR can be reduced and lenders mortgage insurance avoided, 2007
    • Figure 13: The Adelaide Bank Equity Finance Mortgage (EFM) entitles lenders to a portion of eventual capital gains, 2007
    • Figure 14: Datamonitor forecasts total lending commitments to increase to AUD$316.3 billion in 2011, 1992-2011
    • Figure 15: First home buyers share of owner-occupier lending commitments will increase to 20.5% by 2011, 1992-2011