The Truth about Housing Affordability in Australia

There is no doubt that home affordability is affecting new home buyers in the country. Core Logic recently released a report that gives an overview of housing costs in different parts of the nation. With the markets still sizzling in Sydney and Melbourne, people are finding it hard, if not impossible, to set foot on the property ladder. Let’s take a look at some of the data released in the report.

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What the Figures Say:

  • The proportion of household income that’s required to make a 20 percent deposit on a home is now 138.9 percent.
  • Despite low-income rates, a mortgage is taking away nearly the same household income as it used to in 2004.
  • The median dwelling price in Melbourne was $475,000 five years ago. It’s now $566,000 in 2016.
  • Although national dwelling prices have risen by 19 percent, household incomes have gone up by only 9.2 percent.

Factors Affecting Home Affordability

Lower mortgage rates have fuelled the demand for housing in some parts of Australia. This, in turn, has pushed home prices higher over the past five years. The next factor that affects home affordability is the proportion of household income that’s required to make a 20 percent deposit. In the current market scenario, new buyers are left with no other choice than to wait several years before being able to collect enough money to make that 20 percent deposit. And, as the prices go even higher, some new entrants remain locked out of the market for longer than expected.

Apart from the cost of houses and household income, government policies regarding land releases have an impact on housing affordability in Australia. Historically high levels of migration have also led to the rapid rise in home prices in cities like Melbourne. To top it all, investors account for over 55 percent of mortgage demand in these cities. They find the housing market less volatile in comparison to the equity and commodity market and, thus, prefer investing in houses to get the returns they’re after.

Affordability Measures

  • ·In Melbourne, 37.9 percent of household income is required to service an 80 percent Loan to Value Ratio mortgage. This percentage drops to 30.3 percent for Brisbane, and 33.0 percent for Adelaide.
  • ·There has been hardly any change in the proportion of household income that’s required to pay rent.
  • ·In Melbourne, renters spend 25.6% percent of their earnings to rent a home whereas in Brisbane renters spend 25.4 %.
  • ·Housing affordability pressures are the most prevalent in Sydney and Melbourne partly because these two cities make up nearly 40 percent of the national population.

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Affordability in Melbourne

  • ·According to data published by Core Logic, median house prices in Melbourne were around $566,000 by the end of the year 2016. Household incomes were $1524 per week.
  • ·The proportion of household income needed for a 20% home deposit is a high 142.8%, up from 93% in 2001.
  • ·First home buyers in Melbourne can expect to pay approximately $113,200 towards the 20 percent deposit.

Getting on the Property Ladder

Despite the high cost of housing in Melbourne, the real estate sector in this city has had quite a consistent capital growth pattern. If you invest in the right suburbs, particularly now with unrivalled low lending rates, your investment will pay off sooner or later. The key is to look for Melbourne’s most undervalued suburbs that are poised for gentrification. Certain regional cities like Geelong, located an hour’s drive away from Melbourne, are also performing well. Keep an eye out for these hotspots and research their growth prospects. You could also consider investing in units to get a foot in the door.

Investing in Units

New units have fewer ongoing maintenance issues and greater tenant demand. They’re much cheaper than houses, and investors get to write depreciation off as a tax deduction. Investors are encouraged to look for unique apartments nestled within smaller blocks as they have a higher resale value. If you look at suburbs in the northwest, you can expect to find units within the price range of $300,000 and $350,000. Most of these suburbs have excellent access to the city via public transport.

To sum it up, house prices remain highly inflated in most capital cities, but with a little bit of market research, you’ll be well able to buy your own piece of land in Australia.