First Time Home Buyers in Australia Getting in Over Their Heads

Well you read it here first. Last week I posted that I was concerned that Australian first home buyers were getting in too deep. Now there are news reports are that Commonwealth Bank’s CEO, Ralph Norris, believes that the generous government grants could lead to a residential property bubble if its extended past the 30 June deadline.

In contrast to most other lenders, brokers and real estate agents, Norris is quoted as believing

“I think the first home buyer grant has provided quite a stimulus to the market,” he said.

“But we’ve got to be careful this doesn’t become an open-ended offer.

“If you look back to the sub-prime issues earlier in this decade they were largely brought about by people being encouraged to borrow who couldn’t afford to borrow.”

Gee that sounds kinda familiar – where have I heard that before – America maybe

According to the Australian Bureau of Statistics in January the percentage of loans approved to first home buyers was up to 26.5% – the highest since they started recording the figures in 1991.

Financial planners are starting to be concerned about the sense or urgency many people have of securing a house – and the lack of safety net if anything goes wrong.

If borrowers don’t have a substantial deposit than the $21,000 grant for a new home only represents 7% of a $300,000 loan- and that may not be enough to keep borrowers out of negative equity territory if the market falls further.

In the year ended December 2008 Australian house prices, on average, fell 6.2%, in the worst affected state, WA, the drop was 12.2% – it makes you think doesn’t it? I hope.

Even if the house holds its value how with the family budget be if someone loses a job, overtime or the interest rate goes up 3%.  Think before you leap first home buyers!