When we talk about housing affordability we are really talking about two different things – deposit affordability and repayment affordability.
The deposit hurdle has increased steadily over time, and while it has come down over the past couple of years, thanks to lower house prices, it is still very high by historic measures.
The Government acknowledged this during the election campaign when it announced its First Home Deposit Scheme. Starting on 1 January next year, it will be available to buyers who have been able to save a deposit of at least 5 per cent and who earn up to $125,000 ($200,000 for a couple).
But with the scheme capped at 10,000 loans a year – about 10 per cent of the first home buyer market – it needs to be asked whether more could be done to help people get over the deposit hurdle.
Repayment affordability, or the mortgage servicing cost, has also come down, thanks to lower interest rates and falling prices. It is now below the average of the past 37 years, after being above average in 2016 and 2017.
Macquarie Equities has looked these trends in a new report on housing affordability, which says the improvement in repayment affordability over the past two years has sowed the seeds for a period of near-term dwelling price growth.
If house prices do pick up again it will be at the cost of a higher deposit hurdle, which as Macquarie points out is a much bigger constraint for first home buyers than for any other group in the market.
The deposit hurdle, measured as 20 per cent of the average priced dwelling as a proportion of mean household disposable income, is two and a half times higher than in the early 1980s. Another way of measuring it is to look at mean dwelling price as a multiple of mean household income.
Sydney has the highest deposit hurdle, with a dwelling price more than seven times income. Melbourne’s multiple is around six and Brisbane’s 5.5. Perth has the lowest deposit hurdle, at a multiple of less than five.
Measures of repayment affordability estimate the share of household income needed to meet required principal and interest repayments on a typical mortgage. Macquarie uses a discounted standard variable rate in its calculations.
Using a 25-year loan maturity and a 75 per cent loan-to-valuation ratio at origination, mortgage servicing cost is currently around 22 per cent of average household disposable income, which is just below the long-term average.
A survey commissioned by Teacher Mutual Bank and prepared by CoreData and PwC Australia found that 79 per cent of “key workers” (nurses, firefighters, teachers, paramedics, emergency workers) in Sydney and Melbourne believe that home ownership is not achievable for them.
One in four are looking to either move out of the major cities or change careers. The average wage of a key worker is $76,000.
With low interest rates, people can service a loan. But key workers find it hard to save the deposit.
The report estimates that it takes a single income key worker more than 12 years in Sydney and more than nine years in Melbourne to save a 20 per cent deposit. In Sydney’s “inner ring” (within a 10 kilometre radius of the CBD) it would take 28 years for a single income key worker to save a deposit.
The problem created by the deposit gap has a number of consequences, with 47 per cent of those surveyed working overtime (twice the proportion of the general population), 23 per cent moving in with family or friends to save, and 29 per cent delaying childbirth.
It also creates problems for the broader community, with fewer key workers living in parts of our biggest cities. “Allowing an exodus of key workers from these cities to go unaddressed will exacerbate the issue of service shortages as these cities continue to grow,” the report says.
PwC says some policies implemented in other countries have been effective, including the UK Key Worker Living Scheme, which substitutes a government funded equity loan for a deposit. The government loan is interest free for five years. This program assists about 8000 people a year.
The report puts forward a number of policy options. These include allowing key workers to deduct deposit costs, or borrowing costs, from taxable income. Deductible borrowings costs could include premiums for lenders mortgage insurance, loan application fees, conveyancing, property searches and valuations.
Another option is to allow key workers to offset deposit costs against stamp duty.