Ah, they were simpler times. Back when myriad Government grants would allow a 19-year old couple, with no savings and poor work history, to purchase a sprawling McMansion in an outer suburb paying a meagre interest rate of 5%. Oh, wait, those times were less than two years ago where The Age in Melbourne produced a feature on a couple who used Government handouts and record low interest rates to pursue the great Australian Dream.

The couple featured by Fairfax were 19-year-old Foxtel employees Matthew Tregent and Sarah Zajac. The pair couldn’t believe their luck, with Tregent noting that he didn’t “really expect it to happen so easily” while Zajac, offering sage advice to others who may be considering a lifestyle change that she “didn’t want to rent”. She shrewdly opined that renting involves “wast[ing] my money going nowhere just to live somewhere”. Perhaps no one bothered to tell Zajac that you need to pay interest on borrowings and that interest rate tends to go up as well as down.

Twenty months later and a wiser, far more mature (20-year-old) Zajac appears to have re-cast her views, telling The Age that the couple are “planning on moving is because we’ve been taken over by investors predominantly. It’s becoming, I guess, less desirable to live here”. Apparently, Zajac and Tregent are now “much surrounded by renters now. Other streets in the estate are as well”. It appears that her neighbours didn’t share Zajac’s views on rent money being wasted.

Interestingly, in Deer Park, where Tregent and Zajac bought their dream home, you can rent a brand new three-bedroom house for about $18,000 a year.  If you were to buy a similar property, the finance costs alone would be about $30,000 annually, using a 90% loan — before maintenance costs and rates are even considered. Paying double as much to own a home rather than rent it would appear to be the more wasteful option — but you won’t hear that from a real estate agents or developers.

Since the end of the first-home-owners grant (a program originally created by the Howard government after the introduction of the GST and that was doubled by Rudd government in October 2008) the first-home-buyer sector of the market has collapsed. From a peak of about 28% at the height of the first-home-owners grant, the proportion of finance being lent to first-home buyers has dropped to about 12%.

Perhaps the Financial Review’s property expert, Robert Harley, wasn’t looking hard enough when he questioned last week “it’s very hard to see what would cause a catastrophic collapse. It will not be unemployment … it will not be over-supply … and it will not be poor lending with the big banks dominating the market and tightening loan criteria”.

The stressed recent first-home buyers are likely to be the first front in any housing collapse. A similar situation occurred in the US where the sub-prime sector started the rout but property prices fell across the board when owners realised the current price of the property was very different to the actual value of that property. With generous loans (worth upwards of 95% of the property price) and government grants, thousands of buyers such as Zajac and Tregent have used borrowed money to pay far more than the intrinsic value for properties. And far from tightening loan criteria, several of the large banks this year actually weakened LVR requirements. In April, ANZ increasing the amount it would lend to 95% of the property price (although it has reconsidered its stance in recent weeks and returned to 90%).

Naïve couples such as Zajac and Tregent were convinced to buy property buy myriad self-interested parties. Developers seeking to profit from the sale of stock, state governments seeking stamp duties, banks seeking quick (and apparently easy) profits, mortgage brokers looking for trailing commissions and the federal Government desperate to ensure that the housing market remains high to ensure they got re-elected.

What will cause a catastrophic collapse? More people such as Zajac and Tregent realising that the property they bought isn’t really worth what they paid (or what someone else is still willing to pay right now). And it is falling property prices that usually causes unemployment, not the other way around — which then leads to further falling prices.