Low rates, high risk? Is it time for first home buyers to enter the market?

With record low interest rates, a flattening housing market and repeated assertions from RBA governor Philip Lowe that a rates rise is not on the horizon, this may be the right time for first home buyers to strike.

Following the August Reserve Bank (RBA) meeting, interest rates remain at 0.25% for August. As recently as July, RBA governor Philip Lowe reasserted that "there has been no change to the board's view that negative interest rates in Australia are extraordinarily unlikely."

First home buyers looking at those low interest rates as well as government stimulus incentives, and a property market whose rise has been curtailed by COVID-19, may well be thinking the time is right to enter the market. Of course, making the call on home ownership should be based on personal financial circumstances as well as market ones. Here's what to understand about the current environment if you're deciding whether to take the leap into the housing market.

The big picture

Right now interest rates are at a record low, and the RBA has made repeated assertions that a negative rate is off the table. It now means that for many looking to buy their first home, paying off your mortgage may look more attractive than paying rent.

House prices have decreased 2% from mid-April nationally according to the Domain House Price Report. However, experts say measures such as bank mortgage deferrals and borrowers using government stimulus, such as JobKeeper and JobSeeker, could be keeping that figure lower than expected.

Such government stimulus initiatives are scheduled to be wound back but the ongoing COVID pandemic and the length of financial recovery may put further financial pressure on those whose employment is affected.

Clearance rates are also lower in Sydney and Melbourne. They have fallen from 77% in February to 63% and 61% in those capital cities respectively - which might be an indication of buyers exiting the market.

"The low rate, low competition environment and government incentives might make for a very tempting market, but that's only one side of the story."

The downturn and potential for further drops points to a buyer's market. But there's more to a decision to buy than just house prices.

Take advantage of stimulus

The current property landscape is unique because of the many incentives designed to stimulate the economy, especially those targeted at first home buyers. Some were designed to address the impact of COVID-19, but others were introduced before the pandemic.

Across the country a range of first home buyer stamp duty concessions that existed before COVID-19 are still in place, and being expanded. In NSW, the state government recently announced a pause on stamp duty on new homes under $800,000 for first home buyers - $150,000 more than the previous threshold. Every state has different stamp duty concessions, some for building new homes, others for off-the-plan or existing homes.

There are also federal government schemes that target first home owners. The HomeBuilder program provides eligible owner-occupiers - including first home buyers - with a grant of $25,000 to build a new home or renovate an existing home this year.

Another federal scheme, the First Home Loan Deposit Scheme, lowers the amount needed for first home buyers to enter the market. Under the scheme, first home buyers may be eligible for a loan with a 5 per cent deposit. The government then lends the remaining 15 per cent, removing the need for lender's mortgage insurance. The 2020-21 financial year allocation of 10,000 has just opened, meaning a new opportunity to take advantage of the popular scheme.

There is also the option to withdraw money from your super to go towards your deposit, under the federal government's first home super saver scheme provided you are over 18 and have never owned property in Australia.

Is it a (first home) buyer's market?

The market commentary suggests the COVID-19 economic downturn has led to less investment buyers squeezing out first home buyers. Before the onset of COVID-19, first home buyers represented 19 per cent of owner-occupiers. That's the highest that proportion has been since the start of 2012. More recently, the data shows that while loans to investors fell 0.3 per cent in May, loans to owner-occupiers - around a third of which are first home buyers - are growing, by 0.5 per cent.

We're also entering the Spring season, which traditionally sees strong demand. Over the past 30 years, over a quarter have sold in September, October and November.

The other side of the coin

The low rate, low competition environment and government incentives might make for a very tempting market, but that's only looking at one side of the first home buyer story. The low interest rates and government stimulus schemes are a reaction to the increased levels of unemployment, with the current rate at 7.4 per cent, according to the ABS. That's just shy of one million Australians out of work, and the worst rate since October 2001.

Buying a house is an expensive and long term commitment, and the losses in wages can easily offset reductions in house prices. Finder's recent RBA Cash Rate Survey found that only 35% of experts said in July that now is the time to buy, recommending caution as the market is yet to settle.

If you're looking to enter the property market, and have the cash on hand, now might be the right time to make your move. The first step is talking to a broker who can advise you on what's possible.

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