- Homebuyer confidence dipped 1.5% in the six months to March - Take out Queensland, and it rose 0.8% - Cost of living concerns are now outweighing interest rate concerns

By Greg Peel

Genworth Financial, Australia's leading mortgage insurer, published six months ago the first edition of its Homebuyer Confidence Index in association with strategic research house RFi. Yesterday it launched at a media gathering in Sydney the second edition of what is now a biannual survey and index measurement.

The measurement draws upon an archive of Genworth data and a survey of those having recently purchased a home or have plans to purchase a home in the next twelve months. Genworth set the base of the index at 100 in 2007 – pre-GFC – and has since tracked the variation in confidence levels before first making public the results in September last year.

Homebuyer confidence fell 1.5% in the period September to March, according to the index measurement, having fallen 0.3% in the previous six months. What is interesting, nevertheless, is that Australian homebuyer confidence had recovered all of its GFC dip by 2009, as the following graph shows:

Clearly the recovery in confidence owes a lot to the Rudd government's stimulus package which included substantial first homebuyer grants, and the RBA's 3% emergency cash rate, but credit must also be given to the fact Australia did not fall into recession, let alone depression, and unemployment peaked at a mere 5.8% before falling again. Average house prices only dipped briefly.

The honeymoon was over, however, when the RBA first raised rates again in October 2009 and continued to do so until November 2010, settling for the time being at 4.75%. The banks also raised their variable rates by a greater premium. The trimming in confidence to September 2010 can largely be attributed to ongoing rate rise fears.

Now that rates appear to be on hold until at least later in the year, this issue has waned as a concern. What is now worrying homebuyers most is the sharp rise in the cost of living (noted in the earlier survey but not quite as fundamental then) as reflected in food and petrol prices as well as utility and other costs.

Yet as sharp as these cost increases have been, eating into a family budget already stretched by mortgage repayments, the reality is Australian homebuyers would have actually been 0.8% more confident, rather than 1.5% less confident, if the “Queensland factor” is removed. Indeed as the following graph shows, without the “Sunshine State” Australian homebuyer confidence would have returned to the 2007 base level of 100:

There were floods in Victoria and New South Wales, and floods and bushfires in Western Australia, but nowhere was the devastation as severe and relentless as in Queensland. And we can throw in Cyclone Yasi for good measure. Genworth offers hardship concessions as part of its insurance policy and in early 2011 hardship requests rose 70%, with almost half related to natural disaster.

Of the respondents to the survey affected by natural disaster, 60% expected to “recover” in two months or less. Another 20%, however, did not see recovery ahead for six months or more. The government hardship packages had a three month limit.

The September survey noted that 27% of all Australians (and 33% of first homebuyers) were directing half or more of their monthly income to the repayment of debt. This includes mortgages but also all other debt such as credit cards and other loans. The sudden increase in Australia's savings and debt repayment rates – a stark contrast from the heady spending frenzy pre-GFC – has warmed the hearts of the RBA board members and become a fundamental factor in the central bank's current “on hold” stance. It hasn't warmed the hearts of retailers nevertheless, with that sector facing a “recession” possibly more significant than the general recession of 1992.

The March survey found no change to the 50% plus debt servicing level, but did find an increase in the level of “difficulty repaying mortgage”. Again, it appears natural disasters have been an undeniable influence here, given “expected difficulty” ahead measure dropped slightly. But the level of comfort in borrowing on a property at a greater than 80% loan-to-value ratio has also dropped:

Genworth will insure approved mortgages up to an LVR level of 95%. Having tempered their ways in the immediate wake of the GFC, banks are now back offering such LVRs. It is of no great surprise that in Genworth's experience most 95% LVR loans are taken out by first homebuyers – those champing at the bit, keen to get started in property but short on savings for a decent deposit – whereas latter buyers feel more comfortable with lower LVR loans. Clearly the drop in the confidence index to March reflects a shying away from LVRs over 80%, but again a lot can be put down to disaster.

Not only are flood-impacted homeowners in Queensland, for example, constrained in their capacity to make mortgage payments, they are also worried about the downward pressure on house prices as devastated owners move away from flood plains, as demand for houses in the region falls, and as the once healthy tourism dollar comes under threat. Genworth had also noted previously, floods aside, that the once booming housing market in the mining states of both Queensland and WA had already peaked and dipped after a solid run. Disasters only compound the weakness.

One important point Genworth did make was that the fear of Rudd-financed first homebuyers blowing themselves up on the first rate rise has proven unfounded. The insurer has found no differing trend in the delinquency figures amongst those buying a home on this basis in 2009. In fact, this segment actually responded with a high level of confidence.

For all that was negative in the survey results, a clear offsetting positive was the “good time to buy a home” response. Of the respondents, 38% thought 2011 is a good time to buy a home, up from 25% six months ago. Cost of living issues aside, no doubt respondents are happy about the current stalling of house prices and the current stalling of RBA rate hikes.

Genworth expects the disaster factor to continue to impact on its confidence index in the next survey. However, the most pervasive conclusion of the survey is that everyone else is feeling a bit better about the housing and mortgage market.

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