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Sydney housing affordability: why it’s so bad and one way to fix it

Right now, the average Sydney couple will never be able to save a deposit to buy a median-priced house according to finder.com.au Insights Manager Graham Cooke.

Everyone knows it’s a challenging environment in Sydney for first-time buyers right now – but how tough, exactly, is it?

We decided to find out how long it would take the average couple in Sydney to save a deposit for a median-priced house if the market behaviour we see today continued for the foreseeable future.

First, let’s take a look at how things stand right now.Sydney property market

The city’s house prices have been growing at just over 10% annually for the last five years, with a median house price today of close to $1 million (or more, depending on which numbers you believe).

Meanwhile, the average wage in NSW has grown by an average of only 2.4% annually over the same period, and currently sits at $82,706.

For this forecast, we imagined a couple both earning the median wage and saving hard for a deposit.

Our couple are putting a full quarter of their earnings straight into a savings account.

It’s worth noting here that rent and all other expenses would have to come out of the remaining 75% of gross income.

Wages are forecast to grow at 2.4% per year, with new tax brackets kicking in once income exceeds $87,000 and (eventually) $180,000.

First-time buyers need to strive for at least a 20% deposit, as expensive lender’s mortgage insurance (LMI) kicks in with deposits below this amount. 

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This means a buyer would need a deposit of $194,000 to buy the current median-priced house in Sydney. 

Based on the scenario outlined, it would take our couple just over five years to save this amount if their savings were earning 3% interest per annum (the current market average is slightly lower at 2.7%, though there are higher rates to be had).

However, if property prices continue to grow as they have done recently, the median property price will have increased to $1.43 million by the end of the fifth year, necessitating a deposit of $285,070.

At this point, our couple would still be 37% short of the required deposit.

The chart below depicts the percentage of deposit remaining to be saved each year over 30 years.

houseforecast

If they continue to save one-quarter of their income, our couple will start closing in on the required deposit around the tenth year.

However, at this stage they will need a cash injection of around $50,000 to close the remaining gap.

Without it, escalating house prices mean the required deposit soon starts to run away from them again.

If current market conditions remained in place indefinitely, our couple would never be able to save a deposit.

Of course, current market conditions will not remain in place indefinitely. interest rate

Our current low-interest environment is not here to stay long term, but it isn’t going away anytime soon.

While eight out of ten economists surveyed last month by finder are expecting the next cash rate movement to be in a positive direction, most of that group did not expect the change to come until 2018.

What can be done in the short term to combat this housing affordability problem?

Several solutions have been floated in the media including getting rid of negative gearing, further reducing stamp duty or increasing supply (an approach favoured by economists in finder’s RBA survey).

All have their supporters and their critics.

Just to add more complexity to the situation, here’s a new one – people with excellent rental repayment history should be recognised as less risky by lenders, and therefore allowed to take out loans at below 20% deposit without having to pay lender’s mortgage insurance.

If this was the case, and the required LVR was lowered to 15%, our couple would be able to purchase a house in the seventh year of saving. (There have been more extreme proposals to do this without any deposit at all, but that’s clearly a recipe for disaster.)

So – how will the superannuation savings scheme announced in the new budget change things? Home Finances

Unfortunately, not much.

With each person saving $5,000 per year for six years, the amount gained over standard saving would be $6,624 according to the government’s First Home Super Saver Scheme calculator.

A total gain of $13,248. A help, certainly, but a far cry from the $50,000 required to close the gap.

Of course, those with parents who can provide a significant chunk of the deposit or who are in a position to go guarantor will not have to worry, but comfortable housing should not be a luxury only for those who come from a comfortable background.

This just leads to a further divided society.

We need to break the chain.

Graham Cooke’s Insights Blog examines issues affecting the Australian consumer. It appears regularly on finder.com.au.
Detailed forecast numbers can be examined below.

Year
Combined post-tax earnings
Accumulated Savings
Median house price
Deposit required
Deposit remaining
LVR equivalent
1
$128,559
$32,667
$970,000
$194,000
83%
3%
2
$131,239
$67,008
$1,067,970
$213,594
69%
6%
3
$133,983
$103,091
$1,175,835
$235,167
56%
9%
4
$136,630
$140,945
$1,294,594
$258,919
46%
11%
5
$139,316
$180,632
$1,425,348
$285,070
37%
13%
6
$142,066
$222,225
$1,569,309
$313,862
29%
14%
7
$144,881
$265,798
$1,727,809
$345,562
23%
15%
8
$147,765
$311,430
$1,902,317
$380,463
18%
16%
9
$150,718
$359,200
$2,094,451
$418,890
14%
17%
10
$153,741
$409,191
$2,305,991
$461,198
11%
18%
11
$156,837
$461,489
$2,538,896
$507,779
9%
18%
12
$160,008
$516,184
$2,795,325
$559,065
8%
18%
13
$163,254
$573,367
$3,077,652
$615,530
7%
19%
14
$166,579
$633,134
$3,388,495
$677,699
7%
19%
15
$169,983
$695,584
$3,730,733
$746,147
7%
19%
16
$173,469
$760,819
$4,107,537
$821,507
7%
19%
17
$177,038
$828,946
$4,522,399
$904,480
8%
18%
18
$180,694
$900,073
$4,979,161
$995,832
10%
18%
19
$184,437
$974,315
$5,482,056
$1,096,411
11%
18%
20
$188,270
$1,051,789
$6,035,744
$1,207,149
13%
17%
21
$192,194
$1,132,617
$6,645,354
$1,329,071
15%
17%
22
$196,213
$1,216,924
$7,316,535
$1,463,307
17%
17%
23
$200,329
$1,304,842
$8,055,505
$1,611,101
19%
16%
24
$204,543
$1,396,504
$8,869,111
$1,773,822
21%
16%
25
$208,858
$1,492,051
$9,764,891
$1,952,978
24%
15%
26
$213,277
$1,591,627
$10,751,145
$2,150,229
26%
15%
27
$217,802
$1,695,381
$11,837,010
$2,367,402
28%
14%
28
$222,436
$1,803,469
$13,032,548
$2,606,510
31%
14%
29
$227,181
$1,916,050
$14,348,836
$2,869,767
33%
13%
30
$232,039
$2,033,289
$15,798,068
$3,159,614
36%
13%


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Apart from our regular team of experts, we frequently publish commentary from guest contributors who are authorities in their field.


'Sydney housing affordability: why it’s so bad and one way to fix it' have 3 comments

  1. Avatar for Property Update

    May 16, 2017 @ 8:33 am Jeff

    The biggest hurdle to entry into the property market is quite obviously a mathematical one.
    With a deposit of 20% plus another 5% for stamp duty and other costs now being the norm this makes it extremely difficult.
    My wife and I were lucky enough to buy our first home 11 years ago for $700,000 (pre GFC).
    We were able get a loan with a 5% deposit. We had to have LMI which I think was about $15,000 and was added to the loan.
    So we got into our first home for only 10% of its value ! (Including stamp duty and other costs)
    If we had had to have 25% to get in it definitely wouldn’t have happened ( just like now)
    The sooner everyone realises that the percentage of the cost of entry is the problem not “affordability” or “negative gearing” or “greedy investors” – the better off first home buyers will be.
    Maybe a special low deposit loan system with LMI etc backed by the government for first home buyers might just make it achievable as it did for us.

    Reply

  2. Avatar for Property Update

    May 16, 2017 @ 10:34 am Mike

    I think the point that needs to be made is that it’s better to fork up the LMI and get into the market sooner. As mentioned in the article if you did this and over the next 5 years the property went up $430,000 in value then I’m sure you would have been more then happy to pay the 20-25g LMI and get into the property market sooner than later. I did this exact thing with my first property and everyone told me to wait until I get a 20% deposit which would have taken me another few years. I chose to follow my instinct, put a 5% deposit down and get the LMI capitalized into my loan and two years later the property increased 20% ($100,000). So people have to have the realization that it’s better to get into the market sooner than later and in the long term you will be much better off!

    Reply

    • Avatar for Property Update

      May 17, 2017 @ 7:32 am Jeff

      This is exactly right !
      Most people ( especially first home buyers ) don’t realise that the mortgage is the most important part of the whole equation.
      The sooner you can lock in the price the better off you will be.
      Chasing a medium price of approx $1,000,000 when it is compounding at even 5% pa is way out reach of most people and totally impossible with the recent growth in Sydney.
      Sitting on the sidelines waiting for property to be affordable is the biggest mistake people have been making for generations.
      The property market has always been hard to get into – just ask your parents and their parents and I bet they all say the same thing.

      Reply


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