Why Buying Your First Home Is So Hard In Australia

Housing affordability, high house prices and rents are attracting plenty of media attention right now. The latest figures on house prices, mortgages, number of first time buyers and so on are dissected by journalists and commentators as if this is an issue of recent origin. In fact what we have here is a long-term structural problem that has been neglected for decades.

Picture: Getty Images/Mark Metcalfe

Back in 1982, the ABS Survey of Income and Housing revealed that 168,000 or 10% of home buyers spent more than 30% of their gross household income on housing costs. Nearly 30 years later in 2011 these numbers had soared to 640,000, equivalent to 21% of all home buyers.

The trends in housing cost burdens reflect rising real house prices. The history of house prices over this timeframe is one of booms in which real house prices escalate to higher levels than they peaked in the previous boom. Periods of house price stability punctuate these booms, and give household incomes some breathing space in which to catch up.

But at each peak in house prices, household incomes have fallen further behind. According to the same ABS data source, households in 1990 on average valued their homes at a multiple that was four times their average household income. By 2011 this multiple had climbed to nearly six times average household income.

A generational threat

It is therefore not surprising to find that young first time buyers are finding it increasingly difficult to purchase a home. As our first table shows, on a person basis the rate of home ownership in the prime 25 – 34 year age group has slumped from 56% in 1982 to only 34% in 2011. Delayed entry into home ownership is a factor, but it turns out that these declines have set in across all but the post-retirement age group. The "Australian dream" of home ownership is under threat.

Home ownership rate 1982-2011, in percentage terms

How have we reached this position? To be sure population growth, low interest rates, deregulation of mortgage markets and rising real incomes have helped fuel the demand for housing, and pushed up real house prices. But there are deep seated structural problems that contribute to an inflationary bias in land and property markets.

Fiscal concessions in the form of capital gains and land tax exemptions to home owners, negative gearing and concessionary capital gains tax for "mum and dad" investors, and asset test concessions to home owner retirees offer powerful incentives to accumulate wealth in housing assets. As a result, the supply side problems are not so much about a shortage of housing, but an inefficient distribution of the stock of housing.

According to the 2010 Household, Income and Labour Dynamics in Australia Survey, roughly 1 in 6 Australian households own two or more properties, and for 30% of these households the second property is a holiday home. Growing numbers of ageing "empty nester" households are deterred from downsizing and releasing housing equity by stamp duty, the taxation of alternative investments of the equity released, and the lack of suitable housing opportunities in the communities they would like to stay in.

Meanwhile according to the latest census more than 100,000 Australians are homeless, and many more than this are struggling to meet housing payments.

The supply issue

Back in the early 1980s these fiscal drivers did not matter so much, because there were ample greenfield sites on which new housing could be constructed. These sites still offered reasonable access to amenities and jobs. But such opportunities are drying up, and state governments have introduced curbs on urban expansion, as well as developer charges and fees that have increased the costs of construction on the urban fringe.

Adding to supply side problems are planning controls that impede higher density development in middle ring suburbs, as "insider" home owners understandably seek to protect the "leafy character" of their communities.

We are left with a problem that has wider ramifications because it has created a housing system saddled with growing indebtedness. In the 21 years illustrated in the chart below the average mortgage debt has soared relative to the average household incomes of mortgagors in all age groups.

Mean mortgage debt to income ratio

Moreover, the proportion of home owners with outstanding mortgage debt has increased, especially in the 55–64 year cohort that is typically approaching retirement (see chart below). Interest rates were much higher back in 1990 and so household incomes in 2011 can comfortably service loans that are larger relative to household income.

Percentage of home owners with a mortgage debt

Nevertheless repayment risks and investment risks (house values falling short of outstanding mortgage debt) loom more prominently, and for a larger number of precariously positioned households. These risks could test the resilience of local economies and the national economy.

The Australian housing system weathered the global financial crisis much better than did many of its counterparts in the developed world.

Does this suggest a resilience that we can bank on in the future? Federal and state governments might be well advised to introduce structural reforms to housing finance that strengthen that resilience.The Conversation

Gavin Wood is Professor of Housing at RMIT University. Rachel Ong is Principal Research Fellow, Bankwest Curtin Economics Centre at Curtin University.

This article was originally published on The Conversation.


This article has been updated since its original publication.


Comments

    It's not just buying the first home that's difficult.

    We're currently in the situation where we may need to consider moving to a slightly bigger house in the next 12 months. I took a look at the prices in our area (which you wouldn't say is an "expensive" area) and they were ridiculous. It's going to be extremely hard for us to afford to move especially considering we are a single income family.

    That's all well and good but the article neglects to mention the foreign investment elephant in the room. Ever since old KRudd opened up the laws there has been a flood of foreign cash in the property market that's not even funny anymore.

      Foreign investment is only one factor, and a factor that, as you have actually noted, is a symptom of a larger problem. And the problem is this:

      Does this suggest a resilience that we can bank on in the future? Federal and state governments might be well advised to introduce structural reforms to housing finance that strengthen that resilience.The Conversation

      This implies that the objective of government is to stabilise the economy and consider the interests of everyday Australians. But the reality is that, while this is and should be the objective of government, it is not the objective of our government. In fact, our politicians reaching up to the highest levels have categorically stated that they support the runaway housing prices because it benefits them personally.

      The problem is that our government has become so infested with corruption that we don't even see it as corrupt anymore. We don't bat an eye at comments like

      As someone who, along with the bank, owns a house in Sydney I do hope our housing prices are increasing Tony Abbot

      The problem is fundamentally that our government do not support decreasing real house prices. When you see board members of the RBA selling all their houses, that's when you know they've finally decided to do something about it and that interest rates are about to go up. Until then, don't hold your breath.

      Last edited 16/08/18 11:41 am

    My SO and I are in the process of building our first home. Given the current grants and incentives, this was the only way to get into the market with what savings we have. If not, we would be saving for another 2 or 3 years by which time prices likely would have gone up again.
    The downside is that we had to move to a much less desirable area on the outskirts of the outer suburbs to be able to do this.
    We have had to make a lot of sacrifices: Convenience, proximity to the city, giving up some hobbies and selling off one car.
    My biggest fear is that even after all of these sacrifices there might still be more that has to go to be able to afford the house.
    I think this is what worries most Gen Y first buyers. A lot of them highly value proximity to the city to make use of good public transport and lifestyle/culture and are not willing to sacrifice literally everything they love to own a home that is so far out of the city that public transport and community services are out of reach.

      Similar story here.

      My wife and I were tired of paying rent, so we looked in to buying a house. There was some crappy old places in bad neighbourhoods that we could potentially have purchased, but we were told they would go for more than they were listed for to investors.

      Eventually we came across some cheap land to the west of Brisbane and secured a small block that was still months from being fully developed (no streets, just a field).

      It's not close to the city at all, but it's not that far from my work and is in a growth area. There is stuff that would be nice to have closer, but that stuff is planned.

        We've done the same actually, our house in Augustine Heights is almost finished, getting a nice 4 bedroom place on 600m2 of land for the price of a 2 bedroom unit in everton park or herston etc. Granted we had our 20% saved already but now our mortgage is cheaper than what we can rent a similar place for in the area and loads cheaper than rent on a modern 4 bedroom closer to the city.

          Congrats - I'm not too far away at Redbank Plains.

            awesome, yeah its definitely going to a big growth area with all the infrastructure going in.

      I think this is what worries most Gen Y first buyers. A lot of them highly value proximity to the city to make use of good public transport and lifestyle/culture and are not willing to sacrifice literally everything they love to own a home that is so far out of the city that public transport and community services are out of reach.

      That's exactly why I haven't purchased a place for myself. Governments hate single guys like me, I don't own anything, I don't buy anything and I spend all my money on travel and not back into the Australian economy.

    50% of our wage goes on rent, and that is our post tax wage, and the kids are still sharing rooms :(

    My wife and I recently bought an apartment in the inner city about 9 months ago. It's a shoebox and was quite a bit out of our price range, but it was fairly priced for its size, (with a decent potential rental yield) and close to amenities and work. It took us almost 9-10 months of house-hunting to even find this place. I maintain the only reason we were able to buy is because of luck: the previous owners were getting divorced and needed money quick so we came to an agreed price took the plunge: and we struggled for the first few months.

    My wife has since moved on to another job that thankfully pays significantly more than her previous one. We're starting to look at another property (a house on a bigger plot of land in the suburbs) and we're literally getting laughed out of inspections when we make offers in the range of the asking price: and this is in non-premium suburbs in the outer fringes of Melbourne (35-45km from the city centre). Buying a second home right now will mean that we have to make a very major sacrifice on our current lifestyle (no going out for dinners, night-outs, holidays) but I fear not getting into the market now would mean that we'll never be able to afford a house which is an extremely scary thought. Our current place is nowhere near suitable for starting a family or even having a single kid. But at the time we figured having one small property was better than having no property at all and we desperately needed to get our foot in to the housing market.

    A few tips. Check out online lenders and credit unions. They don't have branches so they are not paying rent on prime locations, paying staff to man it etc. They are online only and have much better rates. One we looked at would only take on 80% of full loan, so you'll need to have payed off a good bit first.

    The other thing you can do is ask your bank for a discount. The worst thing that can happen is you will maintain the status quo. I was lucky in that my dad put down a property as insurance (forget the correct term) so we could get by without saving for a deposit. A few years later he rang the bank and said he wanted a better rate on his loans. They offered him one. He rejected it and said they could do better. They did. He then asked them to give us the same rate. They did.
    Proof that it can happen.

    What people need to do as has every other generation before them, is that you do have to move to the outer undesirable areas to buy a home. After a few years the area does change as people start raising families and the whole area then starts to become desirable.

    Trouble being many Gen Ys want to live in the inner city close to the live style they have acustom to. Sometimes you need to grow up!

      That wouldn't be problem if businesses weren't centralized into the inner city, or if public transport was feasible or we had the NBN or if put a cap on the population.

      I hear this argument come up a lot when talking about this but when my parents bought their first home, the outter suburbs (of Melbourne at least) where things were affordable was 10km out of the city. Those same properties are now 30km or more out of the city and are poorly serviced by public transport and basic infrastructure. Combine the increase of traffic, travel time, distance and the astronomical increase in petrol prices since then; the cost and hassle of simply "going to the outter suburbs" is much much higher than with previous generations (read: baby boomers).

      Couldn't agree more, the Entitled Generation as I like to think of them are not willing to sacrifice lifestyle in order to get what they want from life. My parents made huge sacrifices to get started out in the early 80s, they moved to a completely different state, lived well within their means, we drove to our holiday destinations which were camping or staying at the grandparents farm etc.

        You obviously didn't actually read the article, I'm guessing. Your last name isn't "Hockey", is it?

          No I'm just a young guy that has a good job and saved my money and lived well within my means. And I did whatever it took. Started out at 18 working commission only sales, read books every night on how to get better at my job and now have a 6 figure income that I have worked my way towards and a 20% deposit to get started. My evidence is anecdotal but so many mates aren't willing to do what I've done and then complain that they'll never own their own house but won't make any sacrefices. Took "safe" jobs, don't try to improve at them, spend too much on cars, clothes, eating out, cocktails etc.

          So maybe I did skim through this and then just threw my own opinion in based on my own success but so what, many young people can (and some do) learn a lot from what I've done to get what they want.

      there aren't enough jobs (period) to make it worthwhile moving far away. travelling for hours each way in shit traffic isn't justifiable.

      i've resigned to the fact that now, or anywhere in the near future, is not the right time to be buying a house.

      Last edited 12/06/15 1:06 pm

    Great article. This is the way it is, but I think Lifehacker can really make a difference and empower people with some knowledge on what they can do.

    As a followup, I'd love it if Lifehacker could examine the options open to first home buyers at this point. Things like, considering regional or less popular areas, gang-purchasing, or even whether it's worth it to buy versus to rent in the first place. Hell, what about the possibility of imitating the big kids and doing some family trust jiggery-pokery? If you want to start small and quickly, what about entrance into real estate investment through managed funds?

      Sage words from this guy three years ago with free article ideas for LH no less.

      He sure is well-spoken and level-headed. I bet he's handsome, too.

    anthonyp69:

    No. You are wrong. Its people from your generation with such short sightedness and greed that has lead to this problem (government policy included).

    It's quite simple maths, average house prices are increasing across the board, regardless of location, this increase in house prices is at a higher percentage than the increase in average wages.

    The average wage to average house price multiplier like the article notes above, used to be 4 times your wage was the cost of a house, now it is 6 times your wage. This is only going to increase.

    The only way to stop this is to increase supply, yes you could develop areas further out, but then jobs need to move there as well, and there just aren't good high paying jobs so far out from the city centre, thats why people want to live near the city for the most part.

    So please do remind us all how you were only earning 10,000 a year when you bought your house that cost 35,000. And that we are all just whingers who want to live in the city. When even looking at property 60k's from the city today costs 500,000+ and yet the average wage is around 75,000

      "The only way to stop this is to increase supply"

      Nope, economics 101 says the other way is to decrease demand. To decrease demand we need to stop negative gearing on existing properties, remove the capital gains tax concessions, tighten foreign buyers investing and stop SMSF from taking on property debt. You could probably throw in not allowing an existing house equity as capital for getting a loan.

      Take the speculative investors out of the market and we just might ease our way out of the property bubble.

    ^Agree with this! Not to mention buying your first place often means cutting down on the luxuries which a sub-set of younger generations seem to expect (Gen Y here btw, so complaining about my own generation). It seems to me that soo many people want their cake and their inner city house too...... @ 29, I am onto my second house, but got their by shaving down my expenses, rolling up my sleeves and working two jobs. Unlike others in my generation, I didn't go out 2-3 times a week, buy unnecessary cars, pay someone else to make my daily coffee or take regular overseas holidays and thanks to that commitment now own a house 10km s/e of Melbourne (LTVR 0.46%). For full disclosure, the 1st place was bought on my mid 5 figure income alone (2 bedroom apartment inner city Melbourne), and the second purchase (3 bedroom house) is now sustained by 2 incomes (I understand very well that not everyone has this luxury).

    I don't think the statistics necessarily support the foreign investment story. Over the past 10 years, foreign investment in the residential sector has remained at between 5-10% (see RBA June 2014).

    Personally, I think that it's certainly not a bad thing to purchase your first home - but I don't necessarily think it's an entitlement for any generation. Other countries in the world have almost zero young home owners (see Indonesia for a good example!)

    The fact is, with supply generating new dwellings at rate of around 200,000 per year (that accounts for about 4% of the population if you place two people in each on average) - you've got more bedrooms being added than net population growth including immigration. This, together with the fact that prices are reaching such unaffordable levels, leads me to conclude that prices will adjust in due course (maybe not today, maybe not even 1-2 years from now).

    For now, here's a tip. If you are renting - it doesn't cost the same as owning the equivalent property. Owning means paying Council rate, body corporate fees (depends), and water etc. It also means paying principle on the home loan. So if you're renting for $400 per week, owning the property might cost you closer to around $550 per week. So, what I'd say is that you should saving at least $150-$200 per week and potentially investing that so it can earn you a return.

    Source: I'm a licensed financial adviser - and all of the above is general in nature, yada yada...

      As a first home buyer your figures are extremely close to the real thing.

    I think it should be pointed out that buying your first home is not strictly the difficult part - it's buying your first home in the city that you want to buy it in. You can buy a 3 bedroom house in Shepparton for $150,000. Sure, you're a 2+ hour drive from Melbourne but it's still property that's very affordable in Australia. You just need to be willing to live in the regional towns.

    The one fact that is always missed in articles like these is wages growth compared to mortgage size. If you go back to the baby boomers buying in the 80s, homes were 30k-100k but at some point wage growth (inflation) pushes their salary beyond how much their mortgage is. Gen X and later will never see that growth, so the only way to pay off their primary home in the future is to leverage equity in their primary home, negative gear properties, and sell them off at hopefully a profit close to retirement that pays off the original loan, or continue to service the loan and downsize somewhere cheaper at a price that hopefully doesn't require a loan. But if we see another GFC (triggered by a housing collapse from foreclosures all at once) or the housing bubble burst, that debt may be transferred to their kids instead. What I think we will see in Australia is a slow take up of the Asian style of living, where multiple generations live under one roof.

    Look, I don't know what the issue is? The Honorable Joe Hockey told us that we need to get better jobs. Why is that so hard to understand? Unemployment doesn't exist, and we're all just passing the buck on what the problem is. It's us of course. Not the government, the money-lenders, the foreign investor....it's the people who are working hard for a living that just surpasses the bread-line.

    Sorry, I can't bring any more sarcasm to the table.

    and....how do you get back on board after your ex wife has stripped you of everything,cleaned out most of your super,then your supposed to pay child support and try and start again. No wonder guys flee the country..

    This problem has been an ongoing issue for so long and I doubt it will be solved anytime soon. The number of first time homebuyers renting their first house will continue to rise regardless of which year it is. Some would even have to succumb to desperate measures of sleeping in their self storage which is actually a crime.

    Yes, I agree The trends in housing cost burdens reflect rising real house prices. The history of house prices over this timeframe is one of booms in which real house prices escalate to higher levels than they peaked in the previous boom.

    Single, 34 years old, no debts, 120k savings, 70k income on average per annum, currently massive restructing at work and a mere 1.5 hours commute. All the property I can find is 600k+ with the risky off the plan purchases coming in at 525k+ if I want a new home, if I want an already built one its 490 to 550 on average plus stamp duty of around 20k. Can't really see myself buying a place any time soon.

    Reposted 3 years later and nothing's changed.

    How have we reached this position?

    Easy. Since the 1980s, wage growth has remained flat while cost of living has not.

      Since the 1980s, wage growth has remained flat

      Fake news...

    Why doesn't anybody question the premise that home ownership is desirable? I know renting isn't ideal but the laws have been progressively changing in favour of renters (keeping pets, putting nails in walls, etc. the usual reasons people cite for owning vs renting).

    There doesn't seem to be the same passion in arguing for more affordable rent.

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