The first home buyer policy is luring people into properties investors know to avoid

When Australia’s biggest underwriter of lenders mortgage insurance rules a line through an entire asset class of property then investors should take note.  

Recently Genworth announced that from December 19, 2013 they would no longer accept off-the-plan or new properties as security when purchased in self-managed super funds. The announcement reads:

“Off-the-plan purchases and new properties that have been completed for less than 12 months are no longer acceptable. A “new property” is defined as being any property (including any house, unit, villa or townhouse) that has been fully completed for less than 12 months and/or has not been previously sold since construction (i.e. the vendor is a developer/builder or a related party of the developer/builder).”

Genworths’ role in the finance world is to ensure a bank does not lose any money if a borrower cannot meet their loan repayments. If the bank is forced to sell the property and is still left short the mortgage insurer fills the gap.  

Lenders mortgage insurers are very conservative by nature and they are sending a clear signal that they do not see a positive capital growth outlook for these types of properties.  

Genworth is looking to protect its own bottom line and are ruling out allowing their SMSF clients to invest in properties they think are risky investments. While the main reason for this is self-preservation it does provide a level of protection for these investors.  

At the same time that Genworth is waving a red warning flag to wealthy SMSF investors the government is still encouraging first homebuyers to buy this exact kind of property.  

Our government knows how important the building industry is to our economy so they are making it appealing for first homebuyers to invest in new properties only.  

For example a payment of up to $10,000 is available for eligible first home owners in Victoria for contracts entered into on or after July 1, 2013 to build or purchase a new home valued at up to $750,000.  In NSW the grant is currently $15,000 for first home buyers who build or buy new property.  

The government is leading first home buyers to focus on one particular type of property. Again the focus is to underpin the building industry but the byproduct is many first home buyers are in danger of being placed in a dangerous position.  

This is because new properties tend to have a low land to asset ratio meaning most of the value is tied up in the building not the land. It is land that appreciates in value and buildings depreciate. The result is capital growth that is more likely to fall behind the rest of the market. In addition new homes and apartments tend to be clustered together and can often be located in areas where there is an over supply of similar property.  

The current first home buyer policy solves a short-term problem by creating jobs in the building sector. However in the long run it is likely to place young first home buyers under financial pressure. The policy fails to acknowledge the dynamics of the property market and lures them into buying properties that well educated investors are avoiding.