Targeting Australian First Home Buyers 2007

Despite record lack of affordability, first home buyers are gradually returning to the mortgage market. Mortgage providers have launched a range of products in order to target them better. Still, catering to first home buyers remains a difficult but important task.



Report Highlights
In terms of value, lending commitments to first home buyers of owner-occupied housing have increased from AUD$17.1 billion in 2003 to AUD$29.2 billion in 2006. This corresponds to a compounded annual growth rate (CAGR) of 19.6%. One of the main target segments for shared equity mortgages are first home buyers struggling with lack of affordability, as monthly mortgage repayments will be lower than if borrowing for a property with a small deposit. It is Datamonitor's opinion that supply side solutions are likely to be most important in improving housing affordability, given that the current tight housing supply translates higher demand into higher prices.


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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
Market context of first home buyers in Australia 2
First home buyers have been returning to the mortgage market since a low point in 2003 2
Slowing house price growth since 2003 has facilitated first home buyers' return to the market 2
Housing affordability continues to present a challenge to first home buyers 3
There are a number of Government initiatives aimed at helping first home buyers 3
Competition and products for first home buyers in Australia 3
Mortgages requiring little or no deposit have become a common occurrence in the market 3
100% LVR products have become more common 3
Some products have an LVR over 100% 3
High LVR products have enjoyed strong growth in recent years 4
Honeymoon rate mortgages have become less popular among first home buyers 4
There are currently a large number of lenders that offer honeymoon rate mortgages 4
Although still ubiquitous, honeymoon products have become less popular for first home buyers 4
An increasing number of products based on family support are becoming available 4
These products have become more popular in recent years 4
The five major Australian banks are well positioned to offer family support options 4
Some smaller banks and non-bank lenders offer family support mortgages 4
Shared equity mortgages offer a new solution to first home buyers 5
Shared equity mortgages reduce monthly payments at the expense of future capital gains 5
Adelaide Bank was the first to launch a private sector shared equity mortgage product 5
In March 2007 St. George launched a similar product partnering with property developer Australand 5
Public perception will be key in determining the future success of shared equity mortgages 5
There have been a number of other developments in the first home buyers mortgage market 5
Professional package products are now used by many mortgagors 5
Longer loan terms are being offered 5
The future role of first home buyers in the Australian mortgage market 6
In Datamonitor's view, first home buyers will continue to return to the market 6
Total lending commitments will increase to AUD$316.3 billion in 2011 6
First home buyers' share of owner-occupier lending commitments will increase to 20.5% by 2011 6
The lack of affordability for first home buyers is nevertheless a long-term issue 7
Market context of first home buyers in Australia 11
First home buyers are an important customer base for lenders 11
First home buyers are an important part of the housing and mortgage markets 11
First home buyers are also an important upsell opportunity 11
First home buyers are returning to the mortgage market after a number of years 11
2003 was a low point for first home buyer participation in the mortgage market 11
Since 2003, first home buyers have gradually been re-entering the mortgage market 12
A number of factors can account for the re-emergence of first home buyers 13
The average loan size of first home buyers is now greater than other borrowers 15
The historic gap in loan size has reversed in most states and territories over the last five years 16
Housing affordability continues to present a challenge to first home buyers 18
Tight housing supply and interest rate rises have made for record low levels of affordability 18
Even innovative mortgages cannot overcome a lack of affordability 19
There are a number of Government initiatives aimed at helping first home buyers 19
The First Home Owner Grant was introduced in 2000 but ultimately contributes to higher house prices 19
All states and territories have some form of Stamp Duty concessions, but they have little long-term effect 20
A couple of new suggestions have been made that could affect first home buyers to a greater degree 20
The Opposition has suggested changes to investor taxation and negative gearing 20
Many feel that reform of local Government taxation and land releases is necessary 20
Competition and products for first home buyers in Australia 21
There is now a wide range of products that are targeted at first home buyers 21
Lenders have modified their product offerings to serve the needs of first home buyers 21
Mortgages requiring little or no deposit have become a common occurrence in the market 21
First home buyers now have smaller average deposit sizes 21
As a result, a significant number of lenders offer high loan-to-value ratio mortgages 21
Three of the five largest Australian banks now offer 100% LVR mortgages 21
Many non-bank lenders offer 100% LVR products 22
Some products have an LVR over 100% 23
High LVR products have enjoyed strong growth in recent years 23
On a side note, high LVR products are entering the mortgage securitization market 23
Because of the higher risk they carry, such products nonetheless need to be priced and managed carefully 24
This risk is particularly important given the crisis of sub-prime mortgage lending in the US 24
Honeymoon rate mortgages have become less popular among first home buyers 24
Honeymoon rate mortgages offer a low introductory rate at the beginning stages of the mortgage term 24
There are currently a large number of lenders that offer honeymoon rate mortgages 24
Although still ubiquitous, honeymoon products have become less popular for first home buyers 26
These mortgages could be risky in an environment of rising interest rates, as the situation in the US demonstrates 26
An increasing number of products based on family support are becoming available 26
Products based on family support use the accumulated property equity of family members or friends 26
These products have become more popular in recent years 27
The five major Australian banks are well positioned to offer family support options 27
All five major Australian banks now offer a family guarantee option on their mortgage products 28
Some smaller banks and non-bank lenders offer family support mortgages 28
Mortgages based on family support nevertheless continue to cause concern 28
Shared equity mortgages offer a new solution to first home buyers 29
The Government has supported the development of shared equity mortgages 29
The private market has started offering shared equity mortgages 29
Adelaide Bank was the first to launch a private sector shared equity mortgage product 29
In March 2007 St.George launched a similar product partnering with property developer Australand 30
Nevertheless, shared equity mortgages pose a number of drawbacks 31
Public perception will therefore be key in determining the future success of shared equity mortgages 31
Shared equity mortgages are also making a slow comeback in the UK mortgage market 31
Joint mortgages are a related form of product being introduced in the UK 31
There have been a number of other first home buyer mortgage developments 32
Professional package products are becoming more common among first home buyers 32
Longer loan terms are being offered 32
The future role of first home buyers in the Australian mortgage market 34
In Datamonitor's view, first home buyers will continue to return to the market 34
Datamonitor uses its in-house model to forecast the mortgage market and first home buyers' role in it 34
Total lending commitments will increase to AUD$316.3 billion in 2011 35
First home buyers' share of owner-occupier lending commitments will increase to 20.5% by 2011 36
The lack of affordability for first home buyers is nevertheless a long-term issue 37
Australian first home buyers will have to be more open about location 37
The Government must do more and will be under pressure to alleviate first home buyers' difficulties 38
Australian attitudes must catch up with product development in the mortgage market 38
Ultimately, lenders must strike a delicate balance 38
APPENDIX 39
Supplementary data 39
Methodology 47
Further reading 47
Ask the analyst 47
Datamonitor consulting 47
Disclaimer 47

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Table 1: A large number of lenders offer honeymoon rate mortgage products, July 2007 25
Table 2: Datamonitor uses projections of macroeconomic variables to forecast total lending commitments, 2006-2011 34
Table 3: Datamonitor's forecasts of first home buyer and total owner-occupier lending commitments, 2007-2011 37
Table 4: First home buyer proportion of owner-occupier lending commitments, 1992-2006 39
Table 5: Price index of established homes in capital cities, March 2002-March 2007 40
Table 6: Total lending commitments split by owner-occupier and investment lending, 1992-2006 41
Table 7: Lending commitments for owner-occupiers split by first home buyers and non-first home buyers, 1992-2006 42
Table 8: Average loan size for first home buyer and non-first home buyer owner-occupiers, 1992-2006 43
Table 9: Average amount lent to first home buyer owner-occupiers in excess of non-first home buyer owner-occupiers, 2006 43
Table 10: Affordability index for first home buyers, December 1992-December 2006 44
Table 11: Datamonitor's forecasts for total lending commitments, 1992-2011 45
Table 12: Datamonitor forecasts of first home buyer lending commitments, 1992-2011 46


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 2
Figure 2: Lending commitments are forecasted to increase to AUD$316.3 billion in 2011, 1992-2011 6
Figure 3: First home buyers' share of owner-occupier lending commitments will increase to 20.5% in 2011, 1992-2011 7
Figure 4: In 2003 first home buyers accounted for just 13.7% of owner-occupier lending commitments, 1992-2006 12
Figure 5: First home buyers' proportion of owner-occupier lending commitments has grown since 2003, 1992-2006 13
Figure 6: Since 2003, house price growth has been relatively flat, March 2002-March 2007 14
Figure 7: Owner-occupier lending has increased since 2003 and investment property lending has leveled off, 1992-2006 15
Figure 8: First home buyer owner-occupiers now have a higher average loan size than non-first home buyer borrowers, 1992-2006 16
Figure 9: The average loan size of FHBs is now greater than that of non-FHBs in most Australian states and territories, 2006 17
Figure 10: First home buyer owner-occupier average loan size has grown particularly strongly in Tasmania since 2003, January 1992-April 2007 18
Figure 11: Housing affordability for first home buyers has reached a low point, December 1992-December 2006 19
Figure 12: By having a family member guarantee part of a mortgage, the LVR can be reduced and lenders mortgage insurance avoided, 2007 27
Figure 13: The Adelaide Bank Equity Finance Mortgage (EFM) entitles lenders to a portion of eventual capital gains, 2007 30
Figure 14: Datamonitor forecasts total lending commitments to increase to AUD$316.3 billion in 2011, 1992-2011 35
Figure 15: First home buyers share of owner-occupier lending commitments will increase to 20.5% by 2011, 1992-2011 36

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