The rush of first-home buyers is being driven not only by government grants, but by the best affordability since 2002.

Average mortgage repayments for first-home buyers have dropped by a third since September to $1831 a month, a saving of almost $1000. The lower rates and the increased government grants have brought an influx of first-home buyers who might otherwise have put off the purchase of their first home for years. They are seeking the cheapest property in the market, and as a result, the median price of a property sold to a first-home buyer has come down from $418,100 in september last year to $383,800 in March, according to the housing affordability study compiled by the Commonwealth Bank and the Housing Industry Association.

The study shows that mortgage payments consume 17/1 per cent of first-home buyer income, well down from 28.3 per cent a year ago.

The influx of first-home buyers has changed the profile of the market for new homes, with many as a quarter being sold to people buying their first home, compared with a historic average closer to 15 per cent.

HIA chief executive Chris Lamont said there was an influx of generation X and generation Y home buyers who would not otherwise have purchased their first home for several more years. However, he said, the surge would not last indefinitely.

Purchases by people selling their first home and trading up to a new home remain depressed by insecurity about work, he said.

"Trading up is a descretionary decision. We don't expect any recovery in that end of the market in 2009, and that is reflecting the general economic outlook and employment."

About 155,000 new homes were required annually to meet the demand of rising population, he said. Activity at the moment was consistent with annual housing construction of about 130,000 or 135,000 units. Mr Lamont said the Government's housing investment programme would help, but it would not offset the weak trade-up and investment demand.

"The best we could hope for would be a return to 150,000 annual starts, and that would not be this year or next," he said.

Research by RBS economists Kieran Davies and Felicity Emmett shows that house prices are more responsive to rises in unemployment that they are to lower interest rates. This explains why real house prices (after allowing for inflation) have fallen by 10 per cent from their peak despite a 3.8 percentage point fall in interest rates while unemployment has risen by 1.5 points.

Their research showed that the level of housing supply, housing construction costs and real household income have little influence on house prices. They found that the biggest influence on house prices was the "momentum" in the market - when house prices were rising, they kept rising regardless of what was happening with employment or interest rates.

"With a self-reinforcing dynamic at play, prices may fall further, independently of what happens to unemployment. If prices continue to decline, irrespective of supportive fundamentals such as seemingly tight supply and low mortgage rates, then it would put a further dampener on spending and lead to a more sever drop in GDP this year," their study concludes.

Source: The Australian May 29