Housing affordability: Where’s the real issue?

Unless you’ve been living under a rock the last few years, you’ve probably heard that home ownership seems out of reach for the new generation of potential home buyers. There have been dozens, if not hundreds of articles that first home buyers just can’t get a break. Some people suggest that the reason why people can’t purchase a home is because they’re too busy spending money on luxury holidays or avo on toast. But is that really the reason that people can’t buy their first home or is there more to the story?

Income versus repayments

Let’s say that the average first home buyer is in their mid-late 20s or 30s, their income would be around $50 – $60,000 (depending of course on industry, some industries would earn significantly more, while others would earn less). That means that they could afford repayments of up to $4088 per month on a mortgage of $740,000 over 30 years, which is just over 50% of the couple’s income.

Won’t this create mortgage stress?

Here’s the thing that a lot of people don’t know. Mortgage stress is actually just a constructed idea. It’s not actually a hard and fast rule, nor is the minimum deposit. Naturally though, each borrower only has a certain borrowing capacity. For the couple in the example above, they can borrow up to $740,000 over 30 years.

Given their borrowing capacity, what homes are accessible to them?

Well basically, a couple can borrow up to $740,000 whereas a single on the same income can only borrow up to $726,000. That is because of the tax difference. A single will pay more tax on $120,000 than a couple on $60,000 each. The deposit remains the same regardless of income. It’s always based on the price of the house. For apartment buildings that is typically 20%, whereas borrowers can borrow up to 95% of the asking price for a house / townhouse. Apartments are a different story, with lenders requiring the apartment to be of a minimum size to be considered for a loan and a higher deposit being required.

How easy is it to save a deposit?

If we are talking about a property that’s selling for $740,000, the deposit required would be $148,000 to avoid lender’s mortgage insurance.

To buy a home in ten years, they would need to save $14,800 each year. This seems very doable when the average rent in Melbourne is $390 per week. That would leave a weekly after tax income of $1445 for the couple and $1254 for the single.

Would they have to make sacrifices?

With such a high weekly after tax income, the short answer is no because their income should be enough for a comfortable life style.

Where can they buy?

A quick search on Domain’s property app shows that there are more than 200 homes that are on offer for less than $740,000. That gives them a lot of choice in actual fact.

So is avocado on toast responsible for first home buyers not being able to buy their first home?

The short answer is no. With the minimum wage in Australia being $36,862 and the “real” average wage being around $60,000, it’s not avocado on toast that’s stopping people borrowing. It’s actually low wages that are the problem and a poor job market where there are loads of low paying jobs and plenty of extremely senior jobs, but very little in the middle.

That’s the real factor that’s holding people back from buying property, and until that changes, it’s very unlikely that first home buyers will be able to buy in Melbourne or Sydney.