Loss of stimulus hits home

THE Reserve Bank has blamed the strange behaviour of Australia's housing market in recent months partly on the end of federal government stimulus for first home buyers.

Trying to explain the housing market in 2010 when housing prices have soared yet home lending has plunged an article in the Reserve's quarterly bulletin says at least part is due simply to the sharp fall in sales to first home buyers.

The article, by researchers Paul Bloxham, Daisy McGregor and Ewan Rankin, does not explore the role of foreign investors, who have been widely blamed for driving house prices upwards, especially in Melbourne, when finance to local buyers was shrinking.

But they point to a different explanation.

The big change in the market this year, they say, was the fall in purchases by first home buyers once the boost to the federal first home buyers grant ended on December 31.

In 2009, when federal grants for buying existing homes temporarily doubled to $14,000, first home buyers borrowed as much as 25 per cent of all money lent for home purchases. That shrank to just 12 per cent in March and April.

The researchers say 90 per cent of first home buyers take out a mortgage, whereas only 65 per cent of existing home owners moving home do so.

As first home buyers retreat from the market, that explains much of the fall in lending.

Moreover, they say, first home buyers tend to buy cheaper houses. That means that when their share of the market shrinks, the median price of homes rises even if the underlying trend is flat.

"As the composition of housing turnover normalises, the more typical relationship between housing price growth, loan approvals and auction clearance rates is likely to be re-established."

This explanation ignores the central role of housing investors, who on average borrow 40 per cent of all finance for home purchases.

Investors tend to be even more heavily geared than first home buyers.