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It’s harder than ever for first home buyers to crack the market: Here’s why - featured image

It’s harder than ever for first home buyers to crack the market: Here’s why

It’s long been a struggle for First-home buyers to get onto Australia’s property market ladder, but after 12 interest rate rises, combined with a number of market factors, it’s harder than ever to break into the market.

Here are the 5 key headwinds facing first-home buyers in today’s market.

1. Property prices have outpaced wages growth…

The chart below from the Grattan Institute shows the stark mismatch between Australia’s house price growth and wages growth over the past 20 years.

From 2001 to September last year, house prices in Australia grew by over 400%, while the wage price index increased by 195%, Grattan Institute analysis reveals.

How Property Prices And Incomes Have Changed Over Time

And home values kept rising even as interest rates continued to rise through the start of the year, creating a dual challenge for the next cohort of home buyers.

CoreLogic and ANZ’s latest Housing Affordability report reveals that Australian home values are once again rising, with October marking an eighth consecutive increase in the CoreLogic Home Value Index (HVI).

In fact, property values around Australia have virtually made up all the value they lost in 2022.

In the near term, this will only increase metrics around the time needed to save a deposit, and portion of income required to service a mortgage.

2. It’s now taking longer to save a deposit…

A 20% deposit on the median home value in Australia currently represents 148% of median household income, compared with a historic five-year average of 136%, according to the CoreLogic/ANZ report.

Taking inflation into account, real incomes fell through the June quarter, meaning there is less left over for saving a deposit, which presents a particular challenge for first-home buyers.

Mortgage serviceability costs and the deposit hurdle are both on the rise across Australia

Serviceability Costs

Unlike homeowners who can benefit from gains in home values to put toward their next purchase, first-home buyers have to accumulate a deposit in an environment such as today where home price growth is outpacing growth in income.

The average amount of time needed to save a 20% deposit hit a record 10.8 years in the June quarter of 2022, compared to about six years in 2001.

Due to a drop in national median property values, it now takes on average 9.9 years to save for a deposit with an assumed annual savings rate of 15%.

3. And it’s harder to afford repayments…

This ‘deposit hurdle’ was the biggest affordability challenge throughout the 2010s and the chart above shows how this deposit hurdle challenge has changed relative to mortgage serviceability over time, the report explains.

Throughout the 2010s, interest rates moved lower post-GFC, which kept serviceability costs fairly steady, at an average of 34.5%.

But the deposit hurdle reached a record 10.8 years to save a 20% deposit in the June quarter of 2022 when housing values hit a record high, but rates had not yet risen to the point where mortgage costs were pushing 40% of median household income.

Now, first-home buyers who are able to clear the deposit hurdle and serviceability assessment must dedicate more of their income to housing costs, making it harder to afford the repayments.

The national estimate of median income required to service mortgage costs is now at a near-record high of 45.5% of income, the report reveals.

4. Meanwhile, rent is absorbing more of first-home buyers’ income…

Another headwind facing first-home buyers trying to get onto the property ladder is soaring rental prices.

Portion Of Income Required To Service Rent

The portion of income that renters now need to service their rent at the median level pushed to a record high in the June quarter, at 31.4%.

Combine high rental costs with other cost of living increases and limited wage growth and it's inevitable that there will be a slowdown in how quickly renters can build their deposit to buy.

This is also reflected in the household savings ratio derived from ABS data, which fell to 3.5% in the June quarter.

5. And if they can save enough, their borrowing capacity is very limited…

First-home buyers who have overcome the hurdles of building a deposit are then faced with the problem of securing financing for the remaining balance.

Home Ownership Affordability

The gap between the real borrowing capacity of an average Aussie earner versus real median dwelling prices has widened significantly over the past 20 years.

Real borrowing capacity is based on a full-time worker on the average wage, trying to take out a variable-rate loan for a 25-year term, and not spending more than 30 per cent of their income paying it off.

The chart above shows that as of July 2021, the real median dwelling value in Australia was $656,694, but the average borrowing capacity was about $400,000 – a difference of more than $250,000 which then needs to be accounted for in a larger deposit.

6. Which means home ownership has declined…

CoreLogic and ANZ have noted that first-home buyer activity has been declining fairly consistently since a peak in January 2021.

ABS housing finance data shows the number of monthly first-home buyer loan commitments over time and shows that first-home buyer activity often becomes concentrated under periods of government incentives.

Volume Of First Home Loans Secured

With interest rates forecast to reduce modestly from late 2024, buyers who can get into the market now, and service high mortgage costs in the short term, may benefit from lower mortgage rates in the medium term, and subsequent price gains.

Meanwhile, this same scenario will also make it more difficult for first-home buyers who are not able to get into the market over the next year.

ABS data also highlights that while first home buyer activity rises when market values bottom out each cycle, growth can be short-lived as the housing market upswings progress.

For example, in the past housing market upswing between October 2020 and April last year, first home buyer home loans started to fall after just four months of value increases, the report says.

This coincided with the curtailing of the HomeBuilder incentive, in addition to rising home values.

A similar trend was seen around the end of the temporary boost to the first home owner grant in 2009, where declines in first-home buyer activity may also have been influenced by a 15.9% rise in home values between February 2009 and June 2010.

The chart below shows monthly first-home buyer home loans secured during various periods of an upswing in the Australian housing market, which means that first-home buyer activity may also be affected by recent rises in home values.

Months Of Value Increases

But, there are ways for first-home buyers to reach their deposit quicker…

  1. Make use of government grants
    Government grants and stamp duty concessions available to first-home buyers can take some of the sting out of purchasing your first property.
    Some of these are conditional, depending on things like the age or value of the property so be sure to check your eligibility before factoring these into your budget.
  2. Move in with family or into a shared house
    If you have the option, moving back home with family can help you save on rent costs, freeing up more cash for your deposit.
    Alternatively moving into a shared house so you can split rent multiple ways will also afford you some big savings.
  3. Reassess your budget
    If you’re serious about saving for a deposit, a temporary reduction in luxury purchases where applicable is a great way to fast-track your savings.

And there is still opportunity for investors…

While first-home buyers might struggle to get onto the property ladder in the current market, I think there is still plenty of opportunity available for investors, whether new or seasoned.

Especially those with a long-term focus.

In fact, some first home buyers should consider becoming rentvestors – renting where they want to live but can’t afford to buy and investing where they can afford to buy.

You see…we are at the beginning of a new property cycle, something that doesn’t happen very often.

Not that I suggest you try and time the market- this is just too difficult, and in truth, you’ve missed the bottom which occurred in early 2023.

But if the market hands you an opportunity like this, why not take advantage of it?

Taking advantage of the upturn stage of a new property has created significant wealth for investors in the past.

While it might feel counterintuitive to buy at a time when there are so many mixed messages in the media, you can benefit from less competition, low consumer sentiment, minimal downside risk and minimal risk of oversupply.

About Leanne is a highly experienced Buyers Agent in the Brisbane Real Estate market. Leanne became a passionate lover of property in 2001. Since then, both professionally and personally, she has been involved in all aspects of property including purchasing, negotiating, renovating, and selling.

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