What’s behind the latest surge in Australian property prices? And why are economists, such as those working in the Big Four banks and the two leading property portals, predicting average prices will continue to rise through 2026?
There are a number of factors, including strong immigration numbers, construction shortfalls, a shortage of available properties and stamp duty levels that dissuade owners of family homes to downsize, thus contributing to the lack of supply.
A new factor is now at play – the Home Guarantee Scheme (HGS).
Rewritten and relaunched last October, the Federal Government will now underwrite 15% of a first-time buyer’s deposit to help them avoid the stinging, five-figure charge of Lenders Mortgage Insurance (LMI) – a levy that protects lenders in the case of a default.
The Government has set a series of price caps for the HGS that reflect the respective values of entry-level property in each state.
The leading real estate researcher, Cotality (formerly CoreLogic), says in a new report that since last September “lower-priced homes – that is, those under the expanded HGS price caps” – have recorded stronger growth than higher-priced homes.
It says its data shows “growth in home values has diverged based on whether properties fall under or above the scheme’s price caps”.
The value of homes under the price caps rose 3.6% in the December quarter, compared with an average rise of 2.4% for properties above the HGS ceilings.
Cotality’s research director, Tim Lawless, said: “The expanded 5% deposit guarantee has sharpened demand at lower price points, with under‑cap markets outperforming across almost nine‑in‑ten regions.
“We’re seeing a clear shift in momentum, with buyers increasingly targeting homes that fall under the new price caps, especially in Sydney, where the value gap is most pronounced.”
Cotality says the scheme has probably “brought forward demand” from first-time buyers who were prepared to spend the next couple of years saving a substantial deposit.
Value increases in the entry-level sector of the market have drawn a response from investors. They’re jumping in before prices climb excessively and dampen potential capital gain.
Cotality says investors were 41% of mortgage demand in Q3 and annual investor credit growth “is rising at the fastest rate since December 2015”. Their success, or otherwise, against HGS-supported first-time buyers will have a profound effect on the rental market in the medium term.
In this environment, here are five tips for first-time buyers:
Leverage HGS – Nothing lasts forever, and the HGS is an expensive policy. A government of another persuasion may say it is too costly and serves only to push prices higher. So, as they say, make hay while the sun shines.
Price caps – If prices continue to power ahead, your ideal entry-level property could break through the HGS price cap, and that’s bad news for you. So, research the market continually. If you believe the cap for your state is about to become obsolete for your target properties, don’t delay and move forward with a purchase.
Smart search – Prioritise your searches so you’re looking only for properties under the HGS state-based price caps.
Be competitive – With investors making up 41% of mortgage demand, you’ll likely find yourself in a bidding competition. So be “contract ready” with a mortgage pre-approval and also verification that you will be able to leverage the HGS.
Get on the property ladder – Since housing inventory remains low, don’t wait for the perfect home to appear. In this environment, buying your way into the market is more important than finding a forever home. Look for properties with “good bones” that you can improve over time.