Will you buy a property because of #FOMO?

Information verified correct on December 9th, 2016

As rising property prices coincide with falling interest rates, first home buyer (FHB) activity may sky-rocket due to the crippling Fear Of Missing Out (#FOMO)

Following the Reserve Bank’s decision to lower the cash rate by 25 basis points to 2.00% in May 2015, the RBA is walking a precarious tightrope as they attempt to stimulate economic activity.

With this trend of easing monetary policy, the official cost of borrowing is at a historic low, as illustrated below.

What lenders are passing on the RBA cut and how much are they passing on?

With a bubbling housing market, property prices will only be fuelled further, with industry forecasts predicting that the median price for a house in Sydney will exceed $1 million by June 2017, this median price was reached in June 2015. In the 12 months previous to the interest rate decrease, Sydney housing prices increased by a staggering 14%.

Australian Cash Rate and 90 Day Bill Yield

Housing Prices

As first home buyers are drawn to the property market to take advantage of low rates, and to avoid soaring house prices in future, they may start entering the property market sooner than what they originally anticipated.

Industry experts predict that rising rent and price growth will continue to attract investors into the market this year as lower mortgage rates will grant FHBs with increased borrowing capacity.

#FOMO will be instrumental in changing the behaviour of FHBs eager to get into the property market quickly. According to the Australian Bureau of Statistics (ABS), the decline in interest rates plays a vital role in improving first home buyers’ access to the Australian property market, as it did throughout the GFC.

During the GFC, the RBA eased monetary policy by cutting the cash rate by 425 basis points over just eight months from 7.25% to 3%.

In the below graph, we can see a huge spike in the number of FHB loans as a percentage of total owner occupied loans in January 2010. This is a result of low interest rates of 3.75% that shaped the government’s post GFC macroeconomic strategy.

graph3

Similarly, the value of FHB loans increased dramatically in November 2008 during the government’s stimulus post-GFC initiative.

graph4

So what does this mean for today’s market?

As we witnessed low interest rates stimulating FHB activity in the past, it’s likely that we will see a rise in FHBs activity in the months to come. The 2.00% cash rate, if passed on by their lender, will change the mindset of FHB to get in now, before it’s too late.

Further, as consumer sentiment increases, the Australian economy has witnessed an upward trend of the amount of both owner-occupied and investment financing in the face of increased confidence.

That is, FHBs are investing now, rather than later.

The First Home Owner’s Grant (FHOG) and certain stamp duty exemptions have also given rise to the incidence of #FOMO driving purchasing behaviour among first home buyers.

Over the next few months, we wait with bated breath to witness changes to Australia’s housing market and the extent to which #FOMO will drive FHB investment.

Housing loan approvals

Read our top 8 tips to buying your first home

Belinda Punshon

Belinda is a journalist here at finder.com.au. Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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