Are First Home Buyers Locked Out in the Eastern States?

Are First Home Buyers Locked Out in the Eastern States?

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The next generation of first homebuyers are now in their 20’s and 30’s, and are coming under criticism of Baby Boomers as they’re taking longer to make that first property purchase.

Is it all because of smashed avo?

Bernard Salt got Australia’s attention with his article in the Weekend Australian Magazine of October 15-16, 2016 where he criticised Gen Y for spending $22 on a breakfast of smashed avocado and crumbled feta on 5 grain toast, instead of putting the money towards their first home deposit.

ME Bank responded with an ad offering you the chance to have your smashed avo and eat it too.

However, with Sydney's housing being rated less afforable than both New York and London, it opens the question that changes need to be made if the next generation are to have a chance at the Australian dream of owning their own homes.

We look in detail at where home ownership is achieveable in Australia, why it's not practical for Gen Y, and why saving that first home deposit has become so difficult.

10+ years of saving for a first home deposit

As property prices continue to rise much faster than wage growth, many young Australians are giving up on the goal of homeownership.

The main reason for this is that the 20% deposit they’ll need to avoid paying LMI has now become into a 10+ year savings commitment - and that’s before they even get the mortgage!

In fact, recent Corelogic data shows that if you save 5% of the average annual income of $80, 0000, it'll take 40 years or more to save the deposit you'd need to buy a home in Sydney.

Since June 2012, property prices across the Australian capital cities have grown by 38.3% (61.3% in Sydney alone, and a huge 42% in Melbourne over this time period.

By the end of 2016 CoreLogic data shows that home prices in Sydney had risen 15.46% on the previous year, and in Melbourne by 13.68%.

Hobart and Canberra weren’t left behind with property prices growing by 11.24% and 9.29% respectively.

Wages not keeping up with property prices

In Sydney home prices are now 8.3 times higher than annual household incomes, with each household dedicating on average 44.5% of their income to service a mortgage (CoreLogic Housing Affordability Report).

This figure is based on the average discounted variable mortgage rate of 4.75% and an 80% loan to value ratio.

The average house price is now six-and-a-half times the average wage. This has more than doubled in 20 years.

It's not just central Sydney that's affected. While Sydney was the second least affordable city (next to Hong Kong) out of the more than 400 cities across 9 countries examined by the Annual Demographia International Housing Affordability Survey, NSW areas Wingcaribee and Tweed Heads came in at 8 and 9.

In order to afford a median mortgage without being under housing stress (defined as spending over ⅓ of income on a mortgage) here’s what a home buyer needs to earn each year, according to Rate City, in these capital cities:

  • Melbourne: $96, 706
  • Brisbane: $80, 866
  • Sydney: $135, 000
  • Canberra: $97, 756

The average wage to buy in Australia’s capital cities is $90, 824 - and remember these salaries have been calculated with a record low interest rate of 4.74.

It may not be a surprise that nearly 50% of new mortgage demand is coming from investors (ABS Data). This is encouraged by the current low interest rates, and contributes to maintaining property prices for now.

Are young Aussies giving up on home ownership?

Broadsheet (the go-to website for foodies) research revealed that young people are eating out around 9 times per week, so Bernard Salt’s criticism doesn’t seem too far fetched.

But when the options are buying a home far from where you work, or spending a long hard decade scrimping and saving to get 20%, you can hardly blame them for choosing to live now and focus on other goals.

In September 2001, it would take 86% of the average household income to scrape together a 20% home deposit. Fast forward to September 2016, this has increased to 139% (data by CoreLogic in collaboration with ANU).

Adding to this, renting is only very slightly more affordable than an 80% mortgage, requiring around 29% of an average income (ABS Data).

So it's no surprise that the average age of a first home buyer is gradually shifting higher. According to ING data, in 2015 the average age of home buyers had grown to 37.7 years nationally.

What about NSW new Stamp Duty Concessions?

On 1st July 2017 the NSW government will extend stamp duty exemptions to apply to first home buyers purchasing established as well as new homes with price of $650, 0000 or less, with a sliding scale reduction applying to first homes up to $800, 000.

This change is in response to the CoreLogic Housing Affordability Report which identified stamp duty as being one of the most significant pain points for would-be home buyers.

It remains to be seen whether this will push prices even higher by stimulating demand in the already expensive NSW property market.

Where are the affordable homes?

The most affordable housing is found where jobs are scarce, land is plentiful, and buyer demand is low.

On Tasmania’s West Coast you'll find some of the most affordable homes in Australia.

The trade off is that these properties are located at least 150 km from the nearest capital city, and there's little economic diversity, with focus on mining, agriculture or tourism.

To buy a home with median price of $432, 282 near Sydney the closest you can get is a full 90 minute drive from the central business district in the suburb of Tregear.

This is still out of budget for many first home buyers, with the average loan commitment on November of 2016 sat at just $323, 900.

Even Tregear is a long commute for a young person to commit to each day, spending upwards of 3 hours a day in traffic or on public transport brings an 8 hour work day to 11 hours.

This doesn't leave a lot of time to enjoy the home they're making sacrifices to purchase.

Is an apartment a more affordable option than a stand-alone home?

In the 2016 financial year, apartments accounted for 13.5% of total home sales.

The number of units that have sold for at least $2 million has increased by 248% from 2006 to 2016 (and 4696% from 1996 to 2016).

The last 20 years have witnessed a huge change in the living preferences of Australians.

As Australia’s population ages there's increased demand for luxury apartments in prime locations.

Rather than staying in their family homes, or moving to retirement homes, retirees are downsizing to easier to maintain apartments close to amenities and entertainment, keeping prices of apartments high.

The median price for a 3 bed unit in Melbourne’s CBD is now $960, 000, but only 28% of these apartments are now owner-occupied.

In Sydney apartment prices are over $1 million, with 3 bedroom apartments selling for over $2 million.

Apartment living

Photo: Flickr/Bernard Spragg

The story is very different in Brisbane: while house prices are still rising, the median apartment price is $367, 720.

Canberra’s apartments are also still affordable at a median price of $385, 825.

Building approvals have already started to reduce, with an oversupply of apartments now in Brisbane and Melbourne.

There were 6000 units built every year for the last 4 years in Melbourne, and yet 14% remain unoccupied.

While the price of homes in Melbourne rose 15.1% in 2016, units only went up 1.7%.

Will an apartment be right for your future?

Right now whether an apartment is affordable depends on which city you live in.

There’s another huge consideåration that’s bringing apartment prices down: whether an apartment is the right sort of accommodation, particularly if you’re planning to start a family.

While apartments are forecast to become more affordable in Melbourne, one-bedroom apartments have been built as small as 45m2 , and 2 beds in a 52m2 space - not much room if you’re looking to raise a family.

Sydney has regulations that require minimum floor space of 50m2 for one-bedroom and 70m2 for 2 bedrooms, and this is something the Victorian government will need to consider.

Relief from rising prices forecast for 2017

In 2017 median apartment prices are forecast to fall by 1.7% across Australia’s capital cities, with a 3.3% drop in Melbourne and 3.5% in Brisbane.

In fact, one economist is predicting that apartment prices could fall 10-15% over the next 1-2 years.

It’s projected that home prices will finally begin to be subdued in 2017, with units becoming more affordable as the available supply increases (NAB).

Even if property prices don’t fall, we’re expecting that price growth will slow as the rapid rate of development we’ve seen this in the last 4 years more than fills the demand for housing.

That's not the only consideration though. As property prices stabilise, low inflation rates mean there’s still a huge gap between the average wage and the price of properties in our cities.

Speak up about what you want now!

Assuming that you've diligently saved for years to build your deposit, you might struggle to find a property to buy that's going to be most suitable for your future.

While the supply of properties remains high, there’s little or no regulation in place, leaving developers to set prices and build properties as they see fit.

This has meant developers have been focused on building for foreign investors, without considering the needs of our local communities.

An apartment could be suitable for a young family, as Australia makes a necessary shift in inner city living styles.

For many, though, bringing up a family in an apartment is less than ideal, and they'll be looking to buy at least a small townhouse.

Perhaps this reflects the fact that apartments are being built with young families in mind, and more pressure needs to be put on developers to build practical housing stock for Australia's future.

If you're looking to buy in the area you live, it may pay to become active in your local council so future development includes the type of property that's right for your lifestyle.

How can I get into my first home?

If you feel like you’re locked out of the property market right now, it’s worth building a relationship with a mortgage broker.

Start a budget and savings plan, and consider investment options if you can’t afford to buy where you need to live right now.

There's definitely options you can take to start to build your equity now while you plan to take advantage of fairer property prices forecast in the coming years.

Rob Murdoch
Rob Murdoch

Rob's been in the banking industry for 11 years. For the last 6 years, he's been specifically providing premium mortgage brokering services. He uses his in depth product knowledge to connect clients with the right product at the lowest rate every time.

Rob holds a Diploma in Finance and Mortgage Broking Management, and is an individual member of the Finance Brokers Association of Australia Ltd. Before joining Positive Home Loans in 2013, he gained valuable experience with Westpac, Bank of Queensland and Mortgage Choice.

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