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When $14k is better than $21k

When $14k is better than $21k

 

The First Home Owners Grant (FHOG) serves two purposes. The first is to stimulate the economy through the creation and support of jobs. There are many workers involved in the purchase of a property, including agents, solicitors, bankers, inspectors, etc. There are even more people involved in the construction of houses, which is why the FHOG is larger for new houses. The other purpose for the grant is to help first home buyers to purchase their first home. In the majority of cases the serviceability of the loan isn’t what is holding them back as much as being able to save up for the deposit. If you want to buy without the need for Lender’s Mortgage Insurance, then you will need to save in most cases 20% of the purchase price plus a little extra for other costs. That can easily be $80,000 plus that you need to save. This is one of the reasons why the FHOG also applies to second hand dwellings.

Competition is hot! 

While the grant has helped a number of people get into their first home, it does have its negatives. There is no doubt that prices have been artificially increased as a result of competition between first home buyers. Just recently Investigate Property witnessed 22 groups inspect one particular house late on a Friday afternoon and saw at least 4 parties filling out offers to purchase forms. Competition was fierce! We don’t know what the property sold for, but undoubtedly there is a good chance it sold for more than the asking price. Would this have been the case if there weren’t 22 groups through the property? What is likely to happen when the grant stops?

A bargain will always be a bargain...

A point to note : Many commentators are saying that there is limited value and opportunity to buy a bargain below $500k because of the first home buyers and that investors who seek a bargain should try to stick well above this price bracket. We agree,  bargains are more likely to be found at a higher price point, however, if a home is being advertised for $470k that is clearly worth well above $500k, isn’t it still a bargain, even if competition is fierce? This was actually the case with the example described above – the property was a bargain, hence one of the reasons the interest was high. Who said first home buyers were uneducated?

The grant is having an opposites effect 

We have been speaking with a number of developers and agents and one recurring comment they made was that they (the developers) were not buying sites right now, nor have they for a number of months, because of the threat of the FHOG being abolished. What they have said is while the market is hot for well priced units and townhouses at the moment, this won’t continue without the grant. The trouble, unfortunately, is that the timeframe to source a site, come up with a design, get development approval and then market the property (let alone build it) is too long for them to be going through this process now or in recent months.

So, while the purpose of the FHOG is to stimulate jobs through the creation of houses, the threat of abolishing the grant and the uncertainty over it in the months leading up to the recent budget  has meant the grant has had the exact opposite effect to what it was suppose to have. That is, because of the threat of the end of the grant, very few developers have been buying or building in the last 3 or more months.

When is $14k better than $21k? 

One other issue with the grant is the $21k grant for new dwellings versus the $14k grant for second hand dwellings. As mentioned, this is because the government wants to create more jobs and there is no doubt that new dwellings create more jobs than old dwellings. Unfortunately what the government aren’t telling first home buyers is that they may be worse off by buying a new house instead of an old house. This isn’t going to be the case in every instance, but it certainly is the case more often than not. A lot of the time the new dwellings are located in outer suburbs where capital growth has historically been lower than closer to the CBD. Also, because the dwellings are new they have a higher value placed on the dwelling than on the land (i.e. if it costs $400k to buy a new house on land, and $200k to build that house, then the land is worth $200k also and the land to purchase ratio is 50:50). Trouble is, as most investors know, is that for the majority dwellings depreciate in value and land appreciates in value. So for the first few years, while the land increases in value the dwelling significantly decreases in value and you are left with minimal capital growth in the new property. Your neighbour, however, who owns a 40 year old house may have bought their property for $70k less, but the value of their land will increase at the same rate as your land, but the difference is their older dwelling is not going to depreciate nearly as quickly. In fact, they have an opportunity to value add to their second hand dwelling. It is hard to value add to a brand new house though! Here we have answered the question ‘when is $14k more valuable than $21k?’.

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Ensure that you buy well by employing an expert. Investigate Property are buyer's agents for quality investment property. Even if you are in the market but don't want to use a buyer's agent, as a member you can contact us about properties that you locate to verify the potential or risks, at no cost. Conditions apply: refer to 'Buyer's Assistance' located on the Members Benefits page or contact us for more information.

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