First home buyers: Housing affordability dilemma as prices climb

Posted: 12 May 2021 9:52 am
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Finder's First Home Buyers Report delves into the housing market for first time buyers in Australia through a survey of 1,028 first home buyers. It explores what they want, how they are financing their homes, and how the pandemic has changed what they are looking for.

A pandemic-proof property market

Australians are enamoured with property. When we're not talking about the housing market, we're watching renovation shows, scrolling through photos of luxurious homes or planning what to buy next. Houses are our absolute pride and joy, and the events of 2020 only reinforced our infatuation. While experts predicted a historic market crash as the economy began to tumble, the outcome was the opposite. Monetary policy contributing to historically low interest rates has resulted in record rates of borrowing, particularly among first home buyers.

While the number of first home buyers looking to enter the property market was 7% prior to the pandemic, Westpac research has found this figure has more than doubled to 16%. After several consecutive months of record-breaking borrowing, owner-occupier home loans hit a new high of $21.4 billion in March this year, according to ABS data. First home buyers borrowed an aggregate $7.0 billion over the same period.

At the same time, property prices have exploded. According to CoreLogic, as of February 2021, the total value of sales is up in all capital cities, with the largest year-on-year increases in Brisbane (107%), Adelaide (86%) and Perth (76%). With GDP projected to rise 3.5% through 2021 and 2022, consumer confidence returning and the cash rate remaining low, it's likely prices will continue to increase over the next year, particularly if we see investors start to re-enter the market.

The entry price for first home buyers is rising

The average first home buyer takes out a loan of $431,525. A buyer with a typical loan-to-value ratio (LVR) of 80% would pay an average deposit of $107,881. Since 2019, this figure has climbed 15% nationwide, comfortably exceeding inflation over the same period. That increase has been greatest in New South Wales (20%) and the ACT (18%), while Western Australia has seen the smallest change in the average loan and deposit (9%).

In comparison, the average loan for all owner-occupier buyers is $511,612, implying an average deposit of $127,903. Compared to first home buyers, the national average loan for all owner-occupier buyers has grown at a slightly faster rate over the past two years (19%). This trend is historically consistent: since 2003, first home buyer borrowing has grown by 143% compared to 165% for all owner-occupier buyers.

StateAverage first home buyer loanAverage first home buyer depositIncrease since 2019
NSW$525,261$131,31520%
ACT$472,414$118,10418%
QLD$389,380$97,34517%
VIC$448,475$112,11914%
TAS$340,072$85,01813%
NT$390,840$97,71013%
SA$340,112$85,02810%
WA$365,956$91,4899%
Australia$431,525$107,88115%

Incomes are not keeping up with house prices

But while the housing market continues to boom, property affordability is of increasing concern. In Sydney, the median house price is a staggering $1,000,000, while Melbourne is slightly behind at $810,000, with growth slowed in part due to the city's longer lockdown period last year. Real home prices have increased by 150% since 2000, while wages have grown by less than a third, and at the same time, home ownership levels have fallen from 70% to 65%. Rising land values, access to finance, low levels of government involvement in housing and low interest rates have all proliferated the explosion of Australian property prices over the past few decades.

The chart below shows how house price growth has outstripped salary growth across the country. Leading the priciest housing market is Sydney, where the median house costs 11 times the average salary, up from 8 in 2002. In second place is Melbourne, with house prices greater than incomes by a factor of 8, up from 6 in 2002. In Hobart, the house price to income ratio has more than doubled from 3 to 7 since 2002.

Mortgage stress is overwhelming homeowners

Finder's Consumer Sentiment Tracker shows more than a quarter (27%) of Australians struggle to pay their mortgage or rent, and one in three (33%) say mortgage or rent payments are one of their most stressful expenses. General financial stress has been on the rise since mid-2020, with 26% of Australians reporting they are very or extremely stressed with their financial situation.

Experts generally recommend homeowners dedicate no more than 30% of their income towards their mortgage, but Finder's First Home Buyers Report found a worrying 53% of first home buyers are spending more than 30% of their income on their home loan repayments.

Analysis of CoreLogic data reinforces that mortgage affordability is a very real issue, particularly in the larger cities and particularly with houses. The median homeowner in Sydney pays $3,156 on their mortgage each month, amounting to 42% of the average income in New South Wales. For those set on purchasing a house in Sydney, monthly mortgage payments increase to $3,660, or 48% of average earnings. Following Sydney's expensive market is Melbourne, where the average mortgage makes up 34% of earnings. On the other hand, buyers in Darwin spend just 20% of their income on home loan repayments.

Capital cityMedian property priceAverage monthly mortgage paymentAverage full-time monthly earningsMortgage to earnings ratio
Sydney$862,500$3,156$7,59242%
Melbourne$710,000$2,598$7,64834%
Hobart$520,000$1,903$6,66629%
Canberra$640,000$2,342$8,31728%
Brisbane$500,000$1,830$7,25025%
Adelaide$448,375$1,641$6,86524%
Perth$467,500$1,711$8,26821%
Darwin$427,500$1,565$7,69920%

The good news is that while property prices are increasing, adjustments to the cash rate over the past year have meant that the average mortgage to earnings ratio has not increased through the pandemic. If anything, mortgage repayments have decreased in relation to incomes. In 2017, for example, Sydneysiders were spending on average 64% of their income on house mortgages, while Melburnians were spending 46%, and these figures were even higher at the peak of the property bubble of 2007-8. For homeowners who are experiencing mortgage stress, cutting your expenses, finding new sources of income or refinancing your mortgage should be the first ports of call. Hardship assistance schemes and repayment holidays are also available.

Should we all just rush in to buy then?

Not necessarily. Finder's First Home Buyers Report found 53% of first home buyers are buying sooner than they had previously planned to due to the low-interest rate environment. Buying while rates are low could save buyers up to hundreds of thousands of dollars in the long run, but it's also a matter of personal circumstance and chance – after all, the property market is notoriously unpredictable and not guaranteed to continue growing at the current rate. In fact, Finder's latest RBA Cash Rate Survey found 47% of economists believe the recent house price growth is unsustainable.

Assuming owner-occupier lending continues to grow at its historical linear rate, the average loan in 2026 will reach approximately $489,000, about 13% more than today's average of $432,000. And although future changes to the cash rate are unknown, assuming just a 1% increase in the average discounted variable interest rate by 2026 will see homebuyers worse off. Waiting five years could set buyers back $548 in their monthly repayments, or a total of $211,616 over a 30-year mortgage period.

Purchase nowPurchase in 5 years
Interest rate3.65%4.65%
Loan size$431,525$489,085
Deposit$107,881$122,271
Monthly repayments over a 30-year period$1,974$2,522
Total costs paid$818,540$1,030,156

However, this doesn't take into consideration the financial stress from potentially taking on a mortgage before you're ready or missed or late payments on other expenses and bills in your life in order to meet your mortgage repayments. And what can't be measured is quality of life – sure, you could take out a mortgage as a single 22-year-old on a $60,000 salary, but are you prepared to give up weekend trips, eating out and your daily latte just to get a little bit ahead in the property market? Or is it better to wait until you can comfortably pay off your home without feeling guilty about a spontaneous getaway or bottle of wine with a friend?

The bottom line

It isn't now or never for first home buyers – and it never will be. While the fear of escalating house prices and the anxiety of missing out on low interest rates might make it feel like now is your only chance to jump onto the property ladder, it's important to take a step back before rushing in to buy. The property market – like other investment markets – will always move through seasons of boom and bust. Rather than buying into the hype and giving up everything to own immediately, consider whether you actually want to take on the responsibility of a home right now. If you think you're financially ready, the best things you can do are to budget wisely, do plenty of research on the suburbs you're searching in and be ruthless in getting a competitive rate from your lender.

  1. Finder Consumer Sentiment Tracker

  2. ABS, Lending Indicators, March 2021
  3. ABS, Average Weekly Earnings, November 2020
  4. ABS, Residential Property Price Indexes: Eight Capital Cities, December 2020
  5. CoreLogic, Capital City House Prices, February 2021

Finder's Insights Blog examines issues affecting the Australian consumer. It appears regularly on finder.com.au.

Picture: Getty/Shutterstock

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