THE time it takes a first homebuyer to save a 20 per cent deposit has blown out to eight years, according to a new report highlighting the deepening housing affordability crisis in Australia.
In the first quarter of 2017, Sydney’s median house price to income ratio reached 13.7, while a median-priced home in Melbourne will now take 10 full years worth of wages, according to research firm LF Economics.
The report, “Parental Guidance Not Recommended”, argues affordability in terms of the price to income and mortgage payments to income ratio are the highest on record. Mortgages issued today will consume a greater proportion of first homebuyers’ incomes over the lifetime of the loan than ever before.
It argues that despite record low interest rates, the rise in dwelling prices has more than offset that fall, and there will be “no future period” in which interest rates can be significantly cut to assist first homebuyers in maintaining mortgage repayments.
“Although interest rates were higher during the 1980s and 1990s, deposits and mortgage payments relative to income were smaller, resulting in more affordable housing for previous generations,” LF Economics founder Lindsay David writes.
“As deposits and mortgage payments are larger today, FHBs and other buyers will have to commit an increasingly large proportion of their lifetime incomes to mortgage payments in an environment of fleeting employment security and low nominal wage growth.
“Purchasing property amid Australia’s largest housing bubble on record (particularly when it bursts) carries significant risks via negative equity, unemployment, underemployment and even bankruptcy.”
Mr David warns that due to the difficulty saving for a deposit, parents are increasingly assuming “large, open-ended liabilities” to help their children enter the housing market, with informal loans and mortgage guarantees.
“This spreads the risks but does not reduce it; which extends the links in the chain of Ponzi finance,” he writes. “If FHBs experience difficulty in maintaining mortgage repayments and perhaps face foreclosure, asset-rich but income-poor parents will suffer financially.”
Mr David, who has previously called for a complete ban on interest-only lending, said governments and regulators had “neglected the welfare” of first homebuyers by providing grants and incentives such as stamp duty discounts which provide the “illusion of easy access to home ownership”, but simply inflate prices.
“While dwelling prices inflate, risks appear quite manageable but meeting mortgage repayments for decades thereafter is the most difficult task of all,” he writes.
The report comes a day after a warning from the Bank of International Settlements — the Swiss-based “central bank of central bankers” — that high debt burdens in countries including Australia could put the global economy at risk of recession.
BIS said several countries like Australia that were lucky enough to escape the GFC relatively unscathed had since taken on a lot more household debt, putting them at risk of a US-style mortgage default crisis if the amount of debt proves unsustainable.
At its June meeting, the Reserve Bank kept the official cash rate on hold for the ninth meeting in a row, amid growing signs the property market has peaked. House prices in Australia’s capital cities fell 1.1 per cent in May, led by declines in Sydney and Melbourne, according to CoreLogic.
