Latest NewsInvestors to Spearhead Double-digit Price GrowthThursday, 03 November 2016

The property pundits have been gazing into their crystal balls once again, and the outlook for the next few years appears rosy.

A recent report from QBE Lenders Mortgage Insurance projects double-digit growth in median house prices for all capital cities until June 2012.

While first home buyers are often heralded for spurring this kind of growth during the "up" phase of a property cycle, their role may not be as significant as many people think.

Yes, first home buyers tend to enter the market in greater numbers when interest rates are low and affordability is higher.

However, these buyers account for less than 10 per cent of all purchasers, so they don't have the critical mass required to influence price growth significantly.

In addition, first home buyers are extremely price-sensitive.

They don't have as much equity as returning home buyers, so they are often forced to borrow a sizeable percentage of the purchase price and live on a tight budget.

When rates begin to rise again, as they are doing now, many first home buyers become concerned that they won't be able to meet mortgage repayments, and the burst of activity begins to peter out.

First home buyers usually purchase at the lower end of the market, so even when the value of their property rises substantially, it doesn't contribute much to overall median price movements.

If a first home buyer purchases a $300,000 house, and the property's value increases by 7 per cent a year, it will be worth $21,000 more after one year — barely nudging the wider median price.

By contrast, investors are more consistent participants in the property market, because their cash flow is boosted by rental income and negative-gearing tax breaks.

They also account for a higher proportion of buyers at any given time; about 30 per cent.

Additionally, they tend to buy around the middle of the market, so their properties exert a stronger influence on median values.

If an investor purchases a $500,000 property that grows at 7 per cent a year, the asset will be worth an extra $35,000 after one year.

Multiply that kind of increase across the investor market, and you'll see where a major driver of median price growth really lies.

The other major contributors to median price growth are returning home buyers seeking to upgrade or downsize.

They're a bigger proportion of the market than first home buyers or investors — about 60 per cent.

They also have plenty of equity from their previous home, and tend to buy at the middle to upper levels of the market.

If a returning home buyer purchases a property for $800,000, and that property grows at 7 per cent a year, it will be worth $56,000 more after one year.

That's almost three times as much price growth, in dollar terms, as their first home buying counterparts can achieve from a $300,000 property.

In short, returning home buyers influence median price growth far more than newcomers because they're a bigger mass with more buying power.

Right now, first home buyers are on their way out of the property market because rising interest rates will lessen affordability.

At the same time, investors are on their way into the market, buoyed by the knowledge that rising rates signal a stabilising economy.

Investors will compete in the market until rates rise to unsustainable levels, while first home buyers will lie low.

Returning home buyers are more risk-averse than investors, so they'll wait until they feel certain that the economy has recovered.

The property market will peak when investors and returning home buyers are active at the same time.

It is expected that investors will come back to the market first, followed by returning home buyers about 12 months later.

This activity will drive competition — and in all likelihood push median price growth to the levels predicted by QBE LMI.