Many people feel that breaking into the housing market is harder than it has ever been, and it seems that they are right. A recently completed analysis of household income and house price, performed by a former economist from the Reserve Bank of Australia has revealed that the gap between home prices and household income is now larger than it has ever been.
The CP Economics’ chief economist and managing director performed the research, which looked at each household’s average gross disposable income, from which he deducted the average rental income. This would be a true reflection of an average first time buyer’s personal financial circumstances. His calculations determined that the average buying couple has earnings of $107,000 per year between them. Unfortunately, it was found that the ratio of price over income for the average market in Australia was nothing short of depressing.
Ratio of Home Price Over Income
The ratio that was calculated represents the gap that exists between house prices and income. Never before has it been this high. The consequence of that is that it is becoming increasingly difficult, if not impossible, for people to raise the deposit required to purchase their first home. In fact, the majority of people who want to buy their first home will need to borrow from their parents and/or grandparents in order to be able to raise it.
A significant issue is that prospective first time home buyers would not likely be able to save money quickly enough as the price increases are becoming bigger all the time. House prices in Sydney, for instance, have risen by around 40% in the past three years. This means that if someone tries to save up for a deposit, they also have to increase their savings by 40%. Unfortunately, with interest rates being incredibly low at around 3%, saving as much as that is a near impossible endeavor.
Sydney and Melbourne Hit the Hardest
The housing market is now clearly divided between those who are able to buy, generally speaking with the help of the bank of mom and dad, and those who cannot buy. Different financial institutions, including First Home Buyers Australia, have looked into the issue as well and have come up with more sobering facts. For instance, most new home buyers now borrow 50% more than what they did just ten years ago.
This increase is consistent with the ever widening gap between house price and household income. Incomes are only increasing modestly, barely keeping up with inflation. House prices, on the other hand, and particularly in Melbourne and Sydney, are spiraling out of control. Twenty-five years ago, the average house price in places like Sydney and Melbourne was five times the average income for a young person in Australia. Now, it is 15 times. The cost of entry is incredibly high, and the interest rates are incredibly low, and this means that entering the housing market for the first time is just too difficult for many.
Current investors and borrowers love the low interest rates. However, those who want to save up so that they can buy their first home are suffering. The rates of income growth are also very low, and investors are getting some very good tax incentives so that they can buy numerous properties as investments. As a result, most prospective first time buyers have to look at what is now known as “rentvesting”. Alternatively, they have to turn to their parents, or they have to move to a completely different geographical location. First time buyers can also look into family pledge loans, which means that parents only have to guarantee a proportion of the mortgage, which is one other solution.
Is the End in Sight?
It is believed that the rate at which the market is growing is slowing down. However, that doesn’t mean it will suddenly become easy to buy a first home. The housing market in Sydney in particular is starting to slow down, and this means that, over the next few years, prices may finally start to decrease. At that point, first time buyers may find that it is easier to get on the housing ladder. However, it will continue to be difficult for quite some time. In fact, it is believed that the next five to ten years will continue to see incredibly high housing prices, both by international standards and by historical standards. That said, first time buyers do also have to consider the investment that they can make, in particular, thanks to the incredibly low interest rates in home loans.