In 2009 – just two years after the global financial crisis – first home buyer activity was frenzied, with first timers swept into the market by federal government incentives.
First home buyer commitments, as a percentage of total owner-occupier housing finance commitments, reached an all-time high of 28.5 per cent in May 2009.
In May 2011, the story is somewhat different.
First home buyers now account for just 15.2 per cent of all new home loans written, which gives context to the drop in actual buying activity in markets across Australia
In March this year, activity slumped to its lowest level in six years.
All available data suggest this slump is unlikely to be turned around any time soon, as affordability constraints continue to plague buyers.
According to the Real Estate Institute of Australia’s latest Housing Affordability Report, it now costs an average Australian family approximately 35.3 per cent of its income to service a home loan – up from 34.8 per cent in September 2010.
The cost of living, which continues to rise, is only compounding the negative sentiments of first home buyers.
Mortgage Insurer Genworth Financial’s Home Buyer Confidence Index found that 66 per cent of Australians believe the rising cost of living, rather than interest rate hikes, will stop them from meeting their mortgage repayments – up from 51 per cent in September 2010.
Consumer prices are being pressured by factors that include higher energy costs due to Middle East unrest and rising food prices resulting from the widespread flooding in Queensland. From July, increases to household electricity bills will also play a role.
Between September and December 2010, food costs went up by 2.2 per cent and the rise is having a noticeable impact both on households and on consumer confidence generally. In summary, pressure on first home buyers is high.
Still there, still strong
Of course, it’s not all bad news.
While first home buyer activity remains subdued, rents are expected to increase by approximately 5 per cent in the coming year, forcing new buyers into the market sooner rather than later.
According to Australian Property Monitors’ (APM) latest rental price report, national unit rentals rose sharply by 2.3 per cent in the three months to April 2011.
APM senior economist Andrew Wilson says if rents continue to rise, first home buyers will look at getting their foot on the property ladder.
“Everything is cyclical,” he says. “We saw a great number of first home buyers race into the market off the back of the federal government’s boosted home owners’ grant.
“Those who otherwise would have purchased in 2010 or 2011 decided to take the plunge earlier, which is why activity is currently low. But everything changes.
“First home buyers will eventually come back into the market. Perhaps not to the extent we witnessed in 2009, but they will return.”
Ian Graham chief executive officer of mortgage insurer QBE LMI agrees and says first home buyer activity will eventually head back towards the long-term average of 18 per cent.
“All the first home buyers we surveyed as part of QBE LMI’s lmiBAROMETER Report said they are intending to make their purchase in the next five years,” Mr Graham says.
“Compared to other segments, first home buyers are significantly more eager to enter the market, with some 22 per cent looking at buying within the next six months and 50 per cent planning to purchase within the next 12 months.
“The results indicate there is still strong sentiment towards getting on the property ladder; however, borrowers are being cautious with [rises in] interest rates on the horizon and a number of survey respondents perceiving property to be currently overpriced.”
Eighty-three per cent of first home buyers consider prices to be overvalued, 42 per cent of which consider properties to be “significantly” overvalued.
Nevertheless, 74 per cent of respondents say they intend to purchase in the next five years, with 29 per cent intent on making the move by the end of 2011.
“This could be due to a sense of urgency amongst respondents to get in and buy property before any potential price rises,” Mr Graham says.
Client for life
Despite the forces currently discouraging first home buyers from entering the market, opportunities still exist for agents that effectively service this sector.
According to David Cotton, co-principal of Raine & Horne Mossman, first home buyers should be a key focus for agents as they are an important driver of market activity. Moreover, service them well and agents can create clients for life.
“First home buyers offer turn-over of property, they help the economy run, they help the bottom end of market move along and importantly help keep the sales keep going,” he says.
Teresa Dichiera, residential sales associate of Realmark in Leederville WA reinforces the importance of this market sector. She says that first home buyers are key to agents because they buy lower priced property that enables the seller to buy up and stimulate the market place.
“Obviously when we have properties in the first home buyer price range they move a lot more quickly when first home buyers are active in the market,” she says.
“When first home buyers were out in full swing a couple of years ago following the introduction of the increase First home Owners Grant we really concentrated on moving some of those properties that became stale on the bottom of the market.
“For instance I had eight blocks of land that I hadn’t been able to shift for about 12 months; within the span of a six week period those 8 blocks sold to first home buyers.”
Connect on their level
Like most target demographics, first home buyers have their own particular quirks and agents should be mindful to ensure their communication and approach matches.
“When dealing with first home buyers it is important to befriend them and get them going socially. You need to create a friendship and assist them with where they’re heading, without giving them too much and without pushing them too fast or hard,” Mr Cotton says.
“In fact don’t push them at all; you should never push a first home buyer in my opinion.”
Mr Cotton believes the most effective way to build a relationship with first home buyers is to give them support and guidance and help to alleviate any uncertainties or fears they have.
“You definitely have to assist them into where they’re going to buy and how they are going to buy by giving them good advice.
“Now, they don’t necessarily want to listen to you, so you offer them professional advice by recommending bank lenders, mortgage brokers, accountants, lawyers and help point them in the right direction so they feel comfortable with where they are heading.”
Ms Dichiera says getting first home buyers comfortable with the buying process is also important, allowing them to develop confidence to offer a price, while ensuring they are not paying too much for a property.
“This can be done by giving recent sales prices in the area with similar prices to what they are buying, so that makes them comfortable. Support them through the sales process; that’s the best advice,” she says.
Support pays dividends
So why should agents take the time to build rapport with first home buyers and hold their hand through the buying process?
Mr Cotton says the answer is very simple: First home buyers offer the opportunity to secure a listing in the future.
Raine and Horne looks to capitalise on this dynamic with a program titled Compass.
Using this program, Mr Cotton’s clients will receive anniversary cards on the date of their purchase.
“As well as that, Compass gives previous buyer’ market up dates, local market trends and conditions, and will help the FHB know what their property is worth in the future, so when they sell they’re not going to forget the agent that sold them the property. It helps keeps us front of mind.
Ms Dichiera’s estate agency has a similar program called Portplus.
“All buyers and sellers are installed into the system; we categorise them and keep information on all our past clients as to when they bought and how often we would contact them.
“We communicate with our clients in a number of ways, including an in-house magazine that we send to particular clients at certain times and stay in constant touch with them.
“Eventually when they do become a potential seller we have been in contact with them, and overall this system is pretty successful to secure their listing,” she says.
Not only can an agent secure a future listing should they provide the buyer a good experience, for those first home buyers that choose to rent out their property as they seek to build an investment portfolio, agents are well positioned to build their rental roll.
The best client for an agent is one they can secure for the long haul. Provided agents treat their first home buyer clients with respect and are responsive to their needs, they can turn them into that holy grail of customer service: the client for life.