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Panic buying: Is it safe for first home buyers to leap in?

Nicole Pedersen-McKinnon
·4-min read
Australian property prices are going gangbusters. Source: REUTERS
Australian property prices are going gangbusters. Source: Reuters

‘Panic-it’s-a-pandemic’ interest rates and rampaging property prices are persuading tens of thousands of first home buyers into the market before they’ve saved the deposit they want.

Now, normally I’d say that the time to buy is when you’re ready not when you’re rushed.

But with the average prediction of 39 experts and economists putting property price increases at 12 percent over the next two years, perhaps that doesn’t hold true in these extraordinary economic times.

What first home buyers are doing

More than half of aspiring first-time buyers are jumping on the ladder earlier than they had planned.

Finder’s first home buyers report, a survey of more than 1000 home buyers, found 53 percent are bringing forward buying, while only 35 percent said they were already planning to buy their first home at this time. Twelve percent were unsure.

And this is certainly reflected in the data. Loans to first home buyers are up an enormous 62 percent year-on-year.

Apparently, according to Finder’s research, men are more influenced by the emergency interest rate setting than are women – 60 percent versus 47 percent.

Meanwhile, Generation X is the most likely generation to say it’s all about borrowing costs, 61 percent.

And there’s no doubt FOMO is playing a part. 

So is that justified?

What experts are saying

A separate survey by Finder, its monthly cash rate survey of those 39 experts and economists above, suggests interest rates are going to stay low for a long time.

Just six of the 39 experts and economists surveyed expect a cash rate rise before the end of the year.

Indeed, the Reserve Bank itself has confirmed rates will not be raised until inflation reaches its target 2 to 3 percent band. That’s unlikely to happen in the next 12 months.

Meanwhile, 74 percent of the experts Finder surveys predict that first home buyers will be priced out of the market, not in a year, but within the coming months.

That’s certainly an indication that time is of the essence for first home buyers.

But it's far from the only consideration.

What you should do about it

Regardless of what’s happening in the market, safety is key, particularly when it’s your first property purchase.

A 20 percent deposit is usually my preference, as it gives you a buffer if prices fall, access to the best interest rates and also exempts you from paying extortionate lenders’ mortgage insurance.

However, right now you need to weigh that up against the fact that a 12 percent increase in values over the next two years is going to require an awful lot higher deposit.

The more important safety measure, at the moment, is probably to limit your borrowings such that your repayments are below one-third of your before-tax salary or salaries.

Any more is classified as mortgage stress.

But the good news is that no imminent rise in interest rates means the usual stress test of this amount that I would recommend, is probably unnecessary. In ordinary times, I’d say to allow for rates to go up 2 percent, just in case.

Instead, all you need to do is straight-up calculate one-third of your monthly income and then jump on a mortgage repayment calculator and see what loan amount this monthly repayment would afford you today. 

Don’t forget the money you would need for costs although there are generous first-time buyer concessions that differ by state.

If your current income is insufficient to cover repayments on the property type you want, you may need to look at reducing your expectations the calibre or size of the property, or its location.

Or don’t be worried about simply waiting.

The buying frenzy we are seeing now will not last. They never do.

And prices will respond accordingly.

Nicole Pedersen-McKinnon is a Yahoo Finance columnist and long-time ‘money’ commentator around the country. Follow Nicole’s progress on Facebook, Twitter and Instagram.

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